whether the respondentemployees are entitled to pension on completion of 15 years of service as per the State Bank of India Voluntary Retirement Scheme (for short, “the VRS framed in 2000”).
we are of the opinion that the employees who completed 15 years of service or more as on cutoff date were entitled to proportionate pension under SBI VRS to be computed as per SBI
Pension Fund Rules.
Let the benefits be extended to all such similar employees retired under VRS on completion of 15 years of service without requiring them to rush to the court.
However, considering the facts and circumstances, it would not be appropriate to burden the
bank with interest.
Let order be complied with and arrears be paid within three months, failing which amount to carry interest at the rate of 6 per cent per annum from the date of this order. The appeals are accordingly disposed of. No costs.
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.2463 OF 2015
ASSISTANT GENERAL MANAGER,
STATE BANK OF INDIA & ORS. … APPELLANTS
VERSUS
RADHEY SHYAM PANDEY … RESPONDENT
WITH
CIVIL APPEAL NOS.22872288 OF 2010
CIVIL APPEAL NOS.50355037 OF 2012
CIVIL APPEAL NO.10813 OF 2013
J U D G M E N T
ARUN MISHRA, J.
1. The question involved is whether the respondentemployees are
entitled to pension on completion of 15 years of service as per the
State Bank of India Voluntary Retirement Scheme (for short, “the VRS
framed in 2000”).
2. The matter has been referred to larger Bench due to conflict of
opinion between the Judges as to the admissibility of pension under
the VRS.
2
3. After obtaining approval of the Government of India, the Indian
Bank Association (IBA) evolved a Voluntary Retirement Scheme. The
Central Board of Directors of the State Bank of India (in short ‘the
SBI’) adopted and approved the scheme in its meeting held on
27.12.2000 for implementing the VRS for the employees of the bank
by retiring them on completion of 15 years of service with the benefit
provided in the scheme. The scheme had been drawn up, keeping in
view the guidelines issued by the IBA. “Memorandum” dated
26.12.2000 was submitted by the Deputy Managing Director and the
Corporate Development Officer for according approval to the proposals
contained in the Memorandum as also for adopting the scheme as
Annexure ‘B’ to the Memorandum.
4. The basis of Memorandum dated 26.12.2000, was the advice by
IBA vide letter dated 31.8.2000 in which it was pointed out that they
deliberated with the Government of India, Ministry of Finance
(Banking Division), at its meeting with the Finance Minister, with
Chief Executives of public sector banks on 13.6.2000. The human
resource and manpower planning in public sector banks were
reviewed, and a Committee was constituted to examine the issues
concerned to public sector banks and to suggest suitable remedial
measures. The Committee considered the economic reforms set in
3
motion in the year 1990, the high establishment cost and low
productivity in public sector banks. It was felt that the banks convert
their human resource into assets compatible with the business
strategies through a variety of measures. The data available indicated
that 43% of the employees in public sector banks were in the 46 + age
group, and only 12% were in the 2535 age group. It was felt that this
pattern has severe implications for the banks regarding mobility,
training, development of skills, and succession plans for higherlevel
positions. The workforce was in excess. In order to remedy the
situation, the Committee placed before the Government two schemes,
viz., Sabbatical Leave, and a Voluntary Retirement Scheme. The IBA
vide letter dated 13.7.2000 sought no objection from the Government
for circulating the schemes to the banks for consideration and
adoption by their Boards. The Government conveyed on 29.8.2000
that it did not have any objection for adopting and implementing the
scheme by the respective Board of Directors. It advised that the banks
may adopt these schemes for sabbatical leave and voluntary
retirement based on the essential features of the schemes given in the
annexure to the letter. The scheme provided eligibility for all
permanent employees with 15 years of service. It provided for amount
of ex gratia and other benefits accepted by the Government of India
which were to be provided (i) gratuity as per the Gratuity Act/service
4
gratuity, as the case may be; (ii) pension (including commuted value of
pension)/bank’s contribution towards provident fund; and (iii) leave
encashment as per rules.
5. After the Central Board of SBI approved the proposals contained
in the memorandum on 27.12.2000, a circular was issued on
29.12.2000 in which it was mentioned that the IBA advised that as the
Committee constituted by the Finance Ministry recommended
introduction of a VRS in order to rationalise the manpower, the
Government of India has no objection for adopting and implementing
the VRS. It was clearly stated in the Circular dated 29.12.2000 that
the Central Board of Directors accorded approval for adopting and
implementing the SBI voluntary Retirement Scheme drawn up,
“keeping in view the guidelines issued by the IBA." Copy of the scheme
was placed as Annexure B. The scheme was open from 15.1.2001 till
31.1.2001. Specimen applications and other related forms inter alia for
pension were also circulated, which formed part of the circular. The
circular also made it clear that gratuity, provident fund contribution
as per the Provident Fund Rules, pension in terms of the SBI
Employees’ Pension Fund Rules, leave encashment to be provided
beside the amount of ex gratia.
5
6. The heart and soul of the scheme were that benefits to be given
on completion of 15 years of service. The eligibility for benefits was
provided to those who had completed 15 years of service as on
31.12.2000.
7. The SBI submitted that it reserved a right under the scheme to
modify, amend or cancel it or any of the clauses and to give effect to it
from any date deemed fit. The Deputy Managing DirectorcumCDO
was the competent authority for the purpose. As specific queries were
raised, a clarification was issued by the Deputy Managing Director on
15.1.2001, in which about a query whether an employee on
completing 15 years of pensionable service as on the relevant date of
retirement, would be entitled to pensionary benefits, in response, para
6(c) of the scheme was reiterated, and it was also mentioned that as
per the existing rules, employees who had not completed 20 years of
pensionable service, were not eligible for pension.
8. The clarification issued by the Deputy General Manager was not
in the form of modification or amendment of the scheme. The Deputy
General Manager in clarification quoted the provisions and simply
stated the position of a rule that the pensionable service was 20 years.
The communication was clarificatory and did not have the effect of
modifying the SBI VRS scheme as approved and adopted.
6
9.(a) Radhey Shyam Pandey questioned the refusal of the bank to pay
pension, vide communication dated 26.9.2006 in the writ application
filed in the High Court at Allahabad. He retired on 31.3.2001 under
the SBI VRS. On 18.3.2001, the bank accepted the offer of the
employee to retire him voluntarily. He was aged 59 years three months
and had nine months service still to go before attaining the age of
superannuation. On 31.3.2001, when the VRS became effective, he
had put in 19 years, nine months, and 18 days of pensionable service.
He had to retire on completion of 60 years, and would have put in a
little more than 20 years of pensionable service.
(b) The High Court held that the case of the employee fell under the
Second Part of Rule 22(i)(a). He was in service of the bank on and after
11.11.1993 and completed ten years of pensionable service, and
further, he attained the age of 58 years before the date he retired. The
High Court opined that the clarification was not part of the VRS
scheme. The employee retired outside rule as per the contractual
retirement scheme. The contract had to prevail. In Pension Fund
Rules, Clause (a) in Rule 22(i) was inserted to give the employees the
benefit of pension after ten years of pensionable service even if they
had joined late. The High Court found that the matter was covered by
Rule 22(i)(a). The admissible benefit cannot be denied. If a contracting
7
party is entitled to take benefit of a permissible clause, then it cannot
be denied to him.
(c) In the Chairman, State Bank of India & Ors. v. Mihir Kumar Nandi
& Anr. (C.A. Nos. 50355037/2012), a Division Bench of the High
Court of Calcutta dismissing the intracourt appeal, affirmed the order
of the learned Single Judge and directed to make the payment of
pension. The employee was appointed on 21.5.1988. He opted for VRS
on 15.1.2001. The acceptance was conveyed on 17.3.2001 by which
he was informed that he would be relieved of his duties on 31.3.2001.
Vide letter dated 2.8.2001, the employee was granted a pension at the
rate of Rs.1024 per month. However, vide communication dated
30.8.2001, the pension payment order, together with payment of
commuted value, was stopped in view of the amendment of Rule 22 of
the Pension Fund Rules. Though the amendments in Pension Fund
Rules were made effective with effect from 31.3.2001, and the age of
retirement had been raised from 58 years to 60 years, w.e.f.
22.5.1998, this had necessitated increase in age for admission to
Pension Fund to 58 years specified in Rule 22(i)(a) of the Rules so that
the employees who have retired/are retiring on attaining the age of 60
years after completing ten years of pensionable service on or after
22.5.1998 are eligible for pension.
8
(d) The Central Board of the SBI in its meeting held on 30.1.2001
accorded approval to the amendment in Rules 8 and 22(i)(a) of the
Rules as set out in Annexure 1. The Trustees of the SBI Employees’
Pension Fund in their meeting on 30.10.2001 adopted the amended
rules. Consequently, a Circular was issued on 8.11.2001. The
amendment was given effect from 31.3.2001, the date on which it was
notified, though it was adopted by the Trustees of the SBI Trust
Pension Fund in October 2001.
(e) A Division Bench of the High Court held respondentemployee,
as per rules on 17.3.2001, the date on which his offer was accepted,
was eligible to get the pension. On 31.3.2001, the amended rules were
published, which took away the existing right to get the pension. In
VRS Scheme, it was mentioned that the pension would be payable in
accordance with the rules as on 31.3.2001. The employee had no
means of knowing about the future amendment of the Pension Rules,
which would be detrimental to his interest. If he had known the fact,
then he would not have opted for the scheme. The silence maintained
by the employer in such a situation amounted to a fraud on its part.
The High Court relied upon section 17 of the Contract Act and
Illustration (d) to section 19 of the Contract Act. The High Court
further held that it was the duty of the employer to disclose that there
would be a future amendment on the last date of their service by
9
which their right to pension would be taken away. The same cannot
but be said to be unfair and arbitrary. Thus, the High Court held that
action is violative of Article 14 of the Constitution of India. The
employee is entitled to the relief of pension along with interest.
10. Ramesh Prasad Nigam (supra) had joined the services in 1984 in
the clerical cadre and was confirmed on 2.3.1985. He had applied for
VRS, having completed 15 years of service and 57 years of age. The
clarification was internal circulation. It was not within the knowledge
of employees; as such, he was entitled to the pension.
11. (a) In C.A. Nos.228788/2010, M.P. Hallan joined the services of
the bank on 18.5.1981 as a clerk. The acceptance under VRS was
communicated on 17.3.2001. On 27.3.2001, he applied to withdraw
his request made under VRS as retirement was w.e.f. 31.3.2001. The
Bank declined application on 18.4.2001 on the ground that the last
date of withdrawal of the application was 15.2.2001. The employee
claimed pension under Pension Fund Rules in terms of SBI
Employees’ Pension Fund Rules (hereinafter referred to as ‘Pension
Rules’). By writing a letter on 12.4.2001, the claim of the employee for
withdrawal of application for voluntary retirement, pension, and leave
encashment was again declined on 4.7.2001. Thereafter, he filed a writ
petition in the High Court of Punjab & Haryana.
10
(b) The High Court rejected the claim concerning the withdrawal
from VRS. As the last date for withdrawal was over, and acceptance
had been communicated, however, considering Rule 22 of the Pension
Rules, the High Court opined that as the employee completed more
than 19 years and ten months of service on 31.3.2001, therefore, the
first part of clause one of Rule 22 is not applicable. Further, the third
part of clause (a) is not applicable as he has completed ten years of
service but not attained the age of 60 years. The case of the employee
was covered under the second part of clause (a) of Rule 22, which
enabled the member to get a pension if an employee in the service of
the bank on or after 1.11.1993, and completed ten years pensionable
service and attained 58 years age. The employee applied in terms of
the Pension Rules prevailing in January 2001. Alternatively, if an
employee was in service of the bank on or after 1.11.1993, having
completed ten years of pensionable service and on attaining the age of
58 years, shall be entitled to a pension. Thus, he fulfilled the
requirement of second part of clause (a) of Rule 22 as he was in
service of the bank on 1.11.1993 and completed ten years of
pensionable service, and the age of 58 years, therefore, in terms of
Rule 22, he was entitled to pension as well as leave encashment dues
along with interest at the rate of 9 percent per annum.
11
12. On behalf of the bank, it was submitted that VRS 2000
stipulated that the pension in terms of SBI Pension Fund Rules on the
relevant date, i.e., 31.3.2001, was to be provided. In other words, in
case the employee was entitled to a pension in terms of Pension Rules
and not otherwise. A provision was added in Rule 22(1) of the Pension
Rules in the year 1986, accordingly, the pension was to be granted in
all cases relating to voluntary retirement on completion of 20 years of
service. The employees opting for the SBIVRS would be governed only
by Rule 22(i)(c) as it falls under the category of voluntary retirement.
Under Rule 22(iii), a member who has been permitted to retire under
clause 22(i)(c) shall be entitled to a proportionate pension, which is on
completion of 20 years of pensionable service. Eligibility clause 3 has
nothing to do with the admissibility of the pension. It was further
submitted that the employees who completed ten years of pensionable
service and were 60 years of age were entitled to pension; while
employees under the VRS on completion of 15 years would not get
pension and for that 20 years' service was necessary, the submission
of employees that it would be discriminatory is based on incorrect
premise. There is no challenge to the SBI Pension Rules or SBIVRS.
The bank provided the pensionable service period of 10 years on
attaining the age of 60 years in terms of reservation policy. The bank
appoints late entrants like exservicemen who, after serving in Armed
12
Forces, join the bank and are left only with about ten years of service
before they attain the age of superannuation. It is to grant benefit to
such a particular category of employees that a period of 10 years on
attaining the age of superannuation of 60 years was provided in Rule
22(i)(a).
13. The appellants further submitted that 20 years' period is
provided in case of voluntary retirement to ensure that an employee
on whom the bank has spent a considerable amount during training,
works for a substantial period before he seeks retirement. It is a
uniform policy followed by the bank. Regulation 28 was amended in
2002 providing for 15 years of service. It applies to the employees who
are governed by the Bank Employees' Pension Regulations, 1995.
These regulations do not apply to SBI employees as the SBI Pension
Rules govern them. SBI employees are entitled to Provident Fund,
gratuity and pension in terms of the Rules on completion of 20 years
of service. Thus, there cannot be any comparison of SBI employees
with the employees of other nationalised banks. The clarification dated
11.01.2000 has also been relied on by the bank. Now more than 19
years have passed and to grant a pension to all those who have
retired, w.e.f. 1.4.2001 would cast a huge financial liability on the
bank.
13
14. It was submitted on behalf of the employees that the decision
rendered by the High Court is appropriate. No case for interference is
made out in appeals. The very essence of the VRS was the
admissibility of pension on completion of 15 years of service and other
benefits. Once the scheme was adopted and approved by the Central
Board of SBI, the clarification could not have been made to the
detriment of employees. The clarification did not have effect of the
amendment, modification, or cancellation of the VRS scheme as
approved and adopted by Board. The amendment in the Pension
Regulations of 1995 was carried out by other public sector banks with
retrospective effect in 2002, though the scheme was floated and
implemented in the year 20002001. However, the benefits were
extended on the strength of the VRS scheme even before amending the
Regulations of 1995. The SBI adopted the Scheme in toto and Pension
Rule 22 providing eligibility of 20 years applies only to those cases
where employees seek retirement in the ordinary course of completion
of 10 years or 20 years, as the case may be. The VRS was taken in the
specific scheme providing eligibility and benefits on completion of 15
years of service, and that constituted a concluded contract. It was not
open to the bank to alter the terms. In case the bank's submission is
accepted, it would lead to a situation that employees who have already
reached the age of superannuation, would have been entitled to take
14
VRS. The bank has misled the employees, and the action could not be
said to be fair. Once an offer was accepted and after that to amend the
rules or not to amend the rules till 31.3.2000 depended on exercise of
power by SBI which may have the effect to deprive the pension when
the option was not available even to withdraw the offer as it was the
last day of the employment. Rule 22 was amended, that too with
retrospective effect. Thus, the employees who joined service after
retirement from other services, have completed the age of 58 years and
were in employment as on 1.11.1993 were entitled to a pension. They
have also been deprived of the benefit of pension, which would have
been otherwise available to them. In case pension was not to be paid,
it was not a profitable bargain for them to forego pension only for ex
gratia benefit. It was incumbent upon the SBI to amend the Rule, in
case it was necessary to do so. Otherwise, also, the meaning of the
expression “pension” to be paid as per rules was that proportionate
pension to be awarded to the employees with 15 years’ service who
were eligible for benefits granted as specified in the circular and the
VRS scheme. The clarification issued on 11.1.2000 only pointed out
the provisions of the VRS scheme as well as the existing position of the
rule. It could not have effect to take away the benefit in any manner
which became available to the employees of obtaining the pension on
completion of 15 years of permanent pensionable service. On the one
15
hand, employees who served for ten years and attained the age of
superannuation were entitled to pension and to deprive the same to a
permanent employee who rendered the service for 15 years, would be
per se discriminatory, unfair and arbitrary. Once the scheme was
floated and approved, the bank being State within the purview of
Article 12 of the Constitution of India, it would not be permissible for
it to discriminate and act unfairly. The VRS constituted an
independent contract and was binding upon the bank. The benefits
could not have been taken away from eligible employees who accepted
VRS, which was implemented by the bank for its benefit to induct new
skills as well as to rationalise the workforce. Thus, appeals being
bereft of merit, deserve dismissal.
15. The main question is whether, under the scheme as approved
and adopted by the Central Board of SBI, the pension is admissible to
the employees on completion of 15 years of permanent service.
Connected question is whether employees have been denied benefit of
pension unfairly and arbitrarily contrary to the essential terms of the
scheme.
16. Firstly, it is necessary to consider the nature of the package,
which was accepted in the resolution by the Central Board of Directors
of SBI in its meeting dated 27.12.2000. As already mentioned, exercise
16
was done in order to rationalise the workforce as it was felt that banks
were overstaffed. The IBA advised the SBI regarding the issues
confronting the public sector banks. In the memorandum submitted to
the Central Board of Directors of SBI, the following facts were
mentioned as to the adoption of Scheme in right earnest and
requirement of manpower planning:
“The data available with IBA indicates that 43% of employees
in Public Sector Banks are in the 46+ age group, and only 12%
are in the 2535 age group. This pattern has serious
implications for the Banks with reference to mobility, training,
development of skills, and succession plans for higherlevel
positions. This, coupled with excess manpower wherever it
exists, would come in the way of induction of new skills and
proper career progression.
The Committee has recommended the introduction of a
Voluntary Retirement Scheme that would assist the Banks in
their effort to optimise their human resources and achieve a
balanced age and skills profile in keeping with their business
strategies. IBA has advised that the Government of India has
conveyed that they have no objection to the banks' placing
before their respective Boards of Director's proposals for
adopting and implementing the Voluntary Retirement Scheme.
It has been advised that Banks may adopt the scheme after
obtaining their Boards' approval and implement it in right
earnest.” (emphasis supplied)
"a) The high establishment costs of the Bank visàvis the
foreign banks and new private sector banks have been a
matter of concern. The percentage of staff expenses to total
expenses in the Bank is 21.85 against the percentage of 7.66
and 3.04 for foreign banks and new private sector banks,
respectively. Even if we compare it with other Public Sector
Banks, our ratio is adverse.
d) With the computerisation of accounting and other work at a
large number of branches, manpower, which was needed for
balancing of books, is now rendered surplus. This indicates an
imperative need to rationalize the manpower at these
branches. While we have already initiated steps for the
productive redeployment of staff at these branches through
shift banking and sevenday banking, there still exists scope
for improvement in this area. Most of these branches are
situated in metropolitan and urban centers. Incidentally, the
17
experience of other banks in respect of voluntary retirement
schemes shows that a maximum number of applications have
been received from these centers.
f) As against the average of 43% of employees in Public Sector
Banks in the 46+ age group, we have 47% of the employees in
this age group. Of this, 1/5th are in the age group of 56 and
above. To put it simply, 21,824 employees will reach the age of
superannuation and retire by March 2005.
In the light of the abovementioned factors, it will be seen
that the manpower of the Bank will undergo major changes in
the ensuing years in number and deployment. Further,
considering the variety of business the Bank undertakes, and
its special role in the banking sector, overemphasis on
quantitative parameters would be inappropriate. An approach
paper on Manpower Planning is placed at Annexure‘A’.
Considering the various aspects of Manpower Planning, we
are of the view that the Voluntary Retirement Scheme should
be employed as a moderate tool to rightsize the manpower in
State Bank of India."
In the light of aforesaid, it is clear that the VRS scheme was
devised as a tool to reduce overstaffing. The memorandum submitted
to the Central Board contained the following significant aspects:
“Keeping in view the above, the IBA guidelines and the
feedback received from other Banks, the draft ‘SBI Voluntary
Retirement Scheme (SBIVRS)’ is prepared and placed for
approval at Annexure‘B.'
It is proposed to introduce SBIVRS for employees who have
as on 31122000, completed 40 years of age or 15 years of
service as approved by the Government of India and conveyed
by IBA. In terms of the IBA scheme, the Banks’ Boards may
specify any other category as ineligible. We propose to exclude
the Watch and Ward staff as these positions cannot be
reduced. We also propose to exclude highly skilled and
qualified staff from the Scheme.
SBIVRS will be voluntary in nature. The decision to seek
retirement under the Scheme rests with the employee only.
The management will retain the discretion as to whether to
accept or not the request for voluntary retirement under the
Scheme. We have to ensure that while, on the one hand, our
Bank benefits by the rightsizing of the staff strength, on the
18
other, any sudden exodus of a very large number of staff does
not destabilise the normal operations of the Bank. Considering
the attractive features of the Scheme, in terms of exgratia
payment, etc., a large number of applications are expected.
However, the Bank will have to control the outflow according
to its requirements. Towards this end, it will be necessary to
retain the discretion with the management of the Bank to limit
the number of employees allowed to retire in each category of
staff to be covered under SBIVRS, and we propose to retain
such discretion."
(emphasis supplied)
It was proposed to introduce a VRS for employees who on
31.12.2000, completed 15 years of service as approved by the
Government of India and conveyed by IBA. So, it assumes significance
that what was approved and conveyed, in terms of the IBA scheme,
the Banks’ Boards were permitted to specify any other category as
ineligible. The SBI considering its requirement proposed to exclude the
Watch and Ward staff as these positions could not be reduced. It was
also proposed to exclude the highly skilled and qualified staff from the
scheme.
Funds outlay was also proposed in the memorandum submitted
to the Central Board as under:
“FUNDS OUTLAY
As per the estimate received from Bank's actuary, an outlay of
approximately Rs. 2100 crores would be required for the
implementation of SBIVRS if 10% of the employees opt for
retirement. The breakup being as under:
Exgratia Rs. 1300.00 crores
Leave encashment Rs. 180.00 crores
Additional Provision for Gratuity Rs. 140.00 crores
Additional Provision for Pension Rs. 480.00 crores
(These estimates may undergo a change on receipt of
19
clarification from Government of India as to the components of
‘Pay’ for the purpose of Exgratia)”
A provision was made for the pension. The bank reserved the
right to modify, amend or cancel any or all the clauses. The Deputy
Managing Director and CDO would be the competent authority.
Following is the relevant clause regarding modification of the scheme:
“MODIFICATION OF THE SCHEME
Bank reserves the right to modify, amend or cancel any or all
the clauses of the Scheme and to give effect thereto from any
date it may deem fit. The Dy. Managing Director and CDO
would be the Competent Authority for the purpose.”
The effective date of retirement was 31.3.2001. The relevant
clause is extracted hereunder:
“EFFECTIVE DATE OF RETIREMENT
While the SBIVRS will be open to employees from 15th January
2001 to 31st January 2001 (both days included), the retirement
under SBIVRS is proposed to be given effect from 31st March
2001."
17. The letter dated 31.8.2000 annexed to memorandum submitted
to the Central Board of the SBI is also of utmost significance in order
to understand what was accepted by the Central Board. The relevant
portion of the letter dated 31.8.2000 of IBA is extracted hereunder:
“Attention is invited to letter DO No. 11/1/99IR dated
22.05.2000, addressed to the Chief Executive of public sector
banks by the Government of India, Ministry of Finance
(Banking Division), wherein banks have been advised to carry
out detailed manpower planning in order to adopt measures to
have optimum human resource at various levels in keeping
with the business strategies and requirements of each bank.
At the meeting the Finance Minister had with Chief Executives
of public sector banks on 13th June 2000, the human resource
and manpower planning in public sector banks were
reviewed, and a Committee was constituted to examine the
issues confronting public sector banks in that regard and
20
suggest suitable remedial measures."
“In order to remedy this situation with the urgency that
circumstances demand, the Committee has placed before the
Government two schemes, viz., Sabbatical Leave and a
Voluntary Retirement Scheme that would assist the banks in
their effort to optimise their human resource and achieve a
balanced age and skills’ profile in keeping with their business
strategies. Salient features of the two schemes are given in the
Annexure.
IBA, vide its letter dated 13th July 2000, has sought no
objection from the Government for circulating the schemes to
the Banks for consideration and adoption by their Boards. The
Government have conveyed to us that they have no objection
to the banks' placing the two schemes before their respective
Board of Directors for adopting and implementing the above
schemes. It has been advised that the Banks may adopt these
schemes for sabbatical and voluntary retirement based on the
essential features of the schemes given in the Annexure, after
obtaining their Board’s approval and implement them in right
earnest.” (emphasis supplied)
“Banks are also requested to take special note of the following:
1. Section 10(10C) of the Income Tax Act read with Rule 2BA.
2. As per the amendments brought in by the Finance Act 2000,
so long as the bank complies with the rules framed under
Section 10(10C), prior approval from the Chief Commissioner
or Director General of Incometax, as the case may be, is not
required for VRS.
3. Incometax shall be deducted at source in respect of exgratia
exceeding Rs.5.00 lakhs or such other ceiling as may be
prescribed under the Incometax Act.
4. Only completed years of service will be reckoned for arriving at
the minimum eligible service. Subject to this, fraction of
service of six months and above will be reckoned as one year
for the purpose of calculating the exgratia.
5. While exercising discretion to decline applications for VRS or
to make exceptions in the case of employees categorised as
ineligible for VRS, the decision should not be discriminatory
among employees who are similarly placed and the reasons
therefor should be recorded.
6. The competent authority for accepting VRS for the various
categories/class of employee should be clearly laid down by
the Board of Directors.
21
7. Banks should ensure compliance with requirements under
labour legislations before giving effect to the Scheme.”
18. IBA’s letter dated 31.8.2000 makes clear the salient features of
the VRS scheme that all permanent employees with 15 years of service
were eligible to retire. Ineligible persons have also been specified. In
unqualified terms, it was mentioned in the annexures that such
employees would be entitled to the amount of ex gratia of 60 days’
salary for each completed year of service or salary for the number of
months service is left, whichever is less. Other benefits admissible
were gratuity, pension including the commuted value of pension,
bank's contribution towards provident fund, and leave encashment as
per rules. Thus, scheme was to grant pension to all such employees
who opted for VRS on completion of 15 years of service and other
benefits as specified in the scheme. The Government of India,
Ministry of Finance, Department of Economic Affairs, (Banking
Division), that it communicated approval vide letter dated 29.8.2000
to IBA, it was sent to the SBI also, the same is extracted hereunder:
“F. No. 11/1/99IR (Vol.II)
Government of India
Ministry of Finance
Department of Economic Affairs
(Banking Division)
New Delhi, dated the 29th August 2000
To
The Chairman
Indian Banks‘ Association
MUMBAI
22
Sub: Human Resource Management and Manpower Planning
in Public Sector BanksIntroduction of a Voluntary Retirement
Scheme/Scheme for Sabbatical Leave.
Sir,
I am directed to refer to IBA's letter No. PD/ACAP/GOVT/521
dated 13th July 2000 sending therewith a copy of the interim
report of the Committee on Human Resource Management in
Public Sector Banks and requesting for no objection from the
Government for circulating to banks Voluntary Retirement
Scheme and Scheme for granting Sabbatical Leave for
consideration and adoption by their Boards, and to say that
Government has no objection to the proposals contained
therein.
2. The draft circular letter sent by IBA has been slightly
modified. Copy of the modified draft is enclosed herewith.
3. It is requested that a copy of the circular issued to the
banks may please be sent to Banking Division for record.
Yours faithfully
Sd/ (U.P. SINGH)
DIRECTOR (IR)”
19. The agenda submitted on 27.12.2000 for consideration of the
Central Board of SBI along with resolution are extracted as under:
“AGENDA NO.3
Man Power Planning and SBI Voluntary Retirement Scheme
(SBI VRS)
Submitted Memorandum dated the 26th December 2000 by
the Deputy Managing Director & Corporate Development
Officer, recommending that for the reasons stated therein,
approval be accorded for the proposals contained in the
Memorandum as also for adopting the stated approach to
manpower planning and introduction SBIVRS in terms of the
provisions contained in the Scheme at Annexure ‘B‘ of the
Memorandum.
Copies of the Memorandum were placed before the Directors
present at the Meeting.
‘‘APPROVED”
(SEAL)
23
20. Annexure ‘B’ to the memorandum contained the VRS. The VRS
was prepared in view of the guidelines of the IBA. The amount of ex
gratia and other benefits specified in the scheme under clauses 5/ 6 of
the scheme are extracted hereunder:
“5. Amount of Exgratia:
The staff members whose request for retirement under SBIVRS
has been accepted by Competent Authority will be paid an
amount of exgratia of 60 days‘ salary (pay plus stagnation
increments plus dearness allowance) for each completed year
of service (for this purpose fraction of service of six months
and above will be taken as one year and accordingly service of
less than six months will not be counted) or salary for the
number of months service is left, whichever is less. Fraction of
a month, if any, will be ignored.
‘Relevant Date‘ means the date on which the employee ceases
to be in service of the Bank as a consequence of the
acceptance of the Bank as a consequence of the acceptance of
the request for voluntary retirement under the Scheme. For
the purpose of calculation of exgratia, 60 days‘ salary
mentioned in the Scheme is to be taken as equivalent to 2
months‘ salary (with reference to salary for the month in which
employee is relieved from service on Voluntary Retirement.
Income Tax shall be deducted at source in respect of exgratia
exceeding Rs. 5.00 lakhs or such other ceiling as may be
prescribed under the Income Tax Act on the relevant date.“
The benefits were as under:
“6. Other benefits
(a) Gratuity as payable under the extant instructions on the
relevant date.
(b) Provident Fund contribution as per State Bank of India
Employees‘ Provident Fund Rules as on relevant date.
(c) Pension in terms of State Bank of India Employees‘ Pension
Fund Rules on the relevant date (including commuted value of
pension).
(d) Encashment of balance of Privilege Leave, as applicable, on the
relevant date.
24
(e) Respective facilities extended to officers/others such as
retention of accommodation, telephone, car, continuation of
housing loan, etc. will be extended to officers. Others retiring
under SBIVRS as per present dispensations, at the discretion
of Competent Authority. However, in such cases of retention of
physical facilities, 50% of the amount of exgratia payable will
be released only after the employee surrenders the facility. No
interest, however, will be paid for the amount so withheld. All
other outstanding loans/advances will have to be repaid before
date of retirement under SBIVRS, failing which the amount of
exgratia and other terminal benefits payable to the employee
will be appropriated towards the outstanding loans/advances;
and the balance only will be payable to the employee.”
21. Most significantly, the scheme of the IBA, accepted by the Board
on 27.12.2000, was for providing pension on completion of 15 years of
service. The pension specified in clause 6 of scheme was to be worked
out in terms of the Pension Fund Rules including the commuted value
of the pension. It was not mentioned in the VRS adopted by the SBI
that the person on completion of 15 years would not be entitled to the
benefit of pension. On the other hand, proposal of IBA, as approved by
the Government of India, was accepted in toto by SBI. When gauged in
terms of the proposals of the IBA, the essential feature was that an
employee was entitled to get pension on completion of 15 years of
service. The meaning of the expression "pension” in terms of the rules
would be proportionate pension on completion of 15 years of service as
per the terms of calculation provided in Rule 23 of the Pension Rules.
VRS is an independent contract and the background in which it was
floated, pension on completion of 15 years of service was an essential
25
part of the scheme of VRS 2000, as approved by the Government and
floated by the IBA and adopted by all the Banks, and Pension Rules
were to be amended accordingly.
22. The Government of India suggested to the IBA to amend
Regulation 29 of the Regulations of 1995 so that the employees do not
lose the benefit of pension, the IBA may work out modalities and
suggest amendments, if any, required to be made in the Pension
Regulations to ensure that the employees get the benefit of pension.
The letter dated 5.9.2000 of Government of India is extracted
hereunder:
“F. No. 4/8/4/2000IR
Government of India,
Ministry of Finance,
Department of Economic Affairs
(Banking Division)
New Delhi, 592000
To
The Personnel Advisor,
Indian Banks’ Association,
Mumbai
Sub.: Amendment to Regulation 29 of the Pension Regulations.
Sir,
I am directed to refer to this Division's Letter No. 11/1/99 IR
dated 2982000, conveying the Government's no objection for
circulation of Voluntary Retirement Scheme in public sector
banks. The Scheme, inter alia, provides that employees with
15 years of service or 40 years of age shall be eligible to take
voluntary retirement under the Scheme. As per the provisions
contained in Regulation 29 of the Pension Regulations, an
employee can take voluntary retirement after 20 years of
qualifying service and thereafter becomes eligible for pension.
Thus, employees having rendered 15 years of service or
completing 40 years of age but not having completed 20 years
26
of service shall not be eligible for pensionary benefits on taking
voluntary retirement under the Scheme.
In order to ensure that such employees do not lose the benefit
of pension, IBA may work out modalities and suggest
amendments, if any, required to be made in the Pension
Regulations to ensure that these employees also get the benefit
of pension.
Yours faithfully,
sd/
(U.P. Singh)
Director (IR)”
23. SBI issued a circular on 10.1.2001 with respect to the
withdrawal of the application submitted under the scheme. It was
decided that the employee could withdraw the application on or before
15.2.2001 by making a written request.
24. Clarification was issued on 15.1.2001 to a query raised, whether
or not the employees on completing 15 years of pensionable service
would be entitled to pensionary benefits. Following is a relevant
portion:
“3. Whether or not the employees, completing 15 years of
pensionable service as on relevant date (date of retirement
under SBIVRS), will be entitled for pension benefits?
In this connection, we invite a reference to para 6(c) of the
Scheme forwarded under the cover of Staff Circular letter No.
CDO/81 dated 30/12/2000. The payment of pension to the
employee retiring under SBIVRS would be governed by State
Bank of India Employees Pension Fund Rules on the relevant
date (including commuted value of pension). However, as per
existing rules, employees who have not completed 20 years of
Pensionable Service are not eligible for pension.”
It is clear from answer that the staff circular dated 30.12.2000
was reiterated. Payment of pension to an employee retiring under VRS
would be governed by rules on the relevant date, i.e., 31.3.2001. At
27
the same time, the position of the existing rule was indicated that
those employees who had not completed 20 years of pensionable
service were not eligible for a pension. It was not clarified what was
the meaning and purport of para 6(c) of the scheme. It was not
mentioned that an employee would not be entitled to pension on 15
years of service as per the scheme approved by the Government of
India and floated by the IBA and adopted by the Central Board of SBI.
The above clarification being in form of opinion, could not be said to
have caused a modification, amendment, or cancellation of any of the
clauses of VRS or resolution passed by the Board, nor it was so stated.
It was necessary to state that on completion of 15 years of service,
employees would not be paid pension. The existing rule position was
known to everybody, whereas the scheme was framed for providing
pension on completion of 15 years of service.
25. Rule 22 of the Pension Rules of SBI as it existed up to 9.3.2001
and amended are extracted hereunder:
Existing Rule
“22(i) A member shall be entitled to a pension under these
rules on retiring from the Bank’s service
(a) After having completed 20 years' pensionable service provided
that he has attained the age of 50 years or if he is in the
service of the Bank on or after 01.11.93, after having
completed ten years pensionable service provided that he has
attained the age of 58 years.
(b) After having completed twenty years' irrespective of the age he
shall have attained if he shall satisfy the authority competent
to sanction his retirement by approved medical certificate or
28
otherwise that he is incapacitated for further active service;
(c) After having completed twenty years pensionable service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twentyfive years' pensionable service.“
Amended Rule
“22(i) A member shall be entitled to a pension under these
rules on retiring from the Bank’s service
(a) After having completed twenty years' pensionable service
provided that he has attained the age of fifty years or if he is in
the service of the Bank on or after 01.11.93, after having
completed 10 years, pensionable service provided that he has
attained the age of fiftyeight years or if he is in the service of
the bank on or after 22.05.1998. After having completed ten
years, pensionable service provided that he has attained the
age of sixty years.
(b) After having completed twenty years' pensionable service,
irrespective of the age he shall have attained if he shall satisfy
the authority competent to sanction his retirement by
approved medical certificate or otherwise that he is
incapacitated for further active service;
(c) After having completed twenty years pensionable service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twentyfive years' pensionable service."
26. It is clear from Rule 22 that pension is admissible to an
employee thus:
1) After having completed 20 years’ pensionable service provided
that he has attained the age of 50 years; or
2) If he is in the service of the Bank on or after 01.11.1993, after
having completed 10 years pensionable service provided that he
has attained the age of 50 years; or
3) If he is in the service of the Bank on or after 22.05.1998, after
having completed 10 years pensionable service provided that he
has attained the age of 60 years.
29
27. Rule 22(1)(c) was incorporated in the Pension Fund Rules w.e.f.
20.9.1986 when the bank decided inter alia to introduce VRS on
completion of 20 years of service. The unamended rule 22(i)(a)
provided the normal age of retirement to be 58 years. Thereafter, as
per the guidelines issued by the Government on 22.5.1998, the age of
retirement was increased from 58 to 60 years. Accordingly, Rule 22(i)
(a) was proposed to be amended on 30.1.2001, and instead of 58
years, the age of retirement of 60 years was to be incorporated. On
28.5.1998, the Executive Committee of the Central Board of SBI
pending amendment to the related service rules adopted the age of
retirement as 60 years. The amendment was notified on 31.3.2001
and approved by the Trustees of the SBI Employees’ Pension Fund on
30.10.2001.
28. Similar scheme of VRS concerning nationalised banks was
implemented according to the decision of the Government of India. In
Punjab & Sind Bank, it was to remain open from 1.12.2000 to
31.12.2000; Punjab National Bank: 1.11.2000 to 30.11.2000; Bank of
India: 15.11.2000 to 14.12.2000; Union Bank of India: 1.12.2000 to
31.12.2000; United Bank of India: 1.1.2001 to 31.1.2001. In SBI, the
said scheme was adopted by the Central Board on 27.12.2000.
30
29. The State Bank of India was constituted under the SBI Act,
1955. The nationalised banks were taken over in terms of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Under the Act of 1970, the Punjab National Bank (Employees) Pension
Regulations, 1995, were framed. Regulation 28, provided pension on
attaining the age of superannuation, and Regulation 29 provided
pension on voluntary retirement on completion of 20 years of
qualifying service. Regulation 29(5), applicable to the banks mentioned
above, provided that the qualifying service of an employee retiring
voluntarily under the Regulation shall be increased by a period not
exceeding five years, subject to the condition that the total qualifying
service rendered by such employee shall not exceed 33 years.
30. The VRS 2000 came up for consideration before this Court in
Bank of India & Ors. v. O.P. Swarnakar & Ors., (2003) 2 SCC 721 in
the context of Regulation 29(5) of Regulations, 1995. The Court held
that the scheme is contractual and provided for pensionary benefits on
completion of 15 years of service. The decision was followed in HEC
Voluntary Retd. Employees Welfare Society v. Heavy Engineering
Corporation Ltd., (2006) 3 SCC 708.
31. Due to introduction of Scheme, Regulation 28 of Regulations of
1995 was proposed to be amended. It was amended in the year 2002
31
with a retrospective effect from 1.9.2000. By way of amendment, a
proviso has been inserted in Regulation 28 thus:
“28. Superannuation pension.—Superannuation pension shall
be granted to an employee who has retired on his attaining the
age of superannuation specified in the Service Regulations or
Settlements.”
“Provided that pension shall also be granted to an employee
who opts to retire before attaining the age of superannuation,
but after having served for a minimum period of 15 years in
terms of any scheme that may be framed for the purpose by
the Bank’s Board with the concurrence of the Government.”
(emphasis supplied)
32. The employees who opted for VRS on completion of 15 years of
service within the specified period in 2000/2001, were given the
benefit of pension. The Regulations came to be amended in 2002 with
the retrospective effect. However, the benefit under Regulation 29(5)
was not extended to the optees/employees who completed 20 years of
service by adding 5 years of qualifying service. Regulations 29(1) and
29(5) applicable to the said banks are extracted hereunder:
“29. Pension on voluntary retirement.—(1) On or after the 1st
day of November 1993 at any time, after an employee has
completed twenty years of qualifying service he may, by giving
notice of not less than three months in writing to the
appointing authority retire from service:
Provided that this subregulation shall not apply to an
employee who is on deputation or on study leave abroad
unless after having been transferred or having returned to
India he has resumed charge of the post in India and has
served for a period of not less than one year:
Provided further that this subregulation shall not apply to
an employee who seeks retirement from service for being
absorbed permanently in an autonomous body or a public
sector undertaking or company or institution or body, whether
incorporated or not to which he is on deputation at the time of
seeking voluntary retirement:
32
Provided that this subregulation shall not apply to an
employee who is deemed to have retired in accordance with
clause (1) of Regulation 2.
x x x
(5) The qualifying service of an employee retiring voluntarily
under this Regulation shall be increased by a period not
exceeding five years, subject to the condition that the total
qualifying service rendered by such employee shall not in any
case exceed thirtythree years and it does not take him beyond
the date of superannuation.”
33. The scheme in question came up for consideration in O.P.
Swarnakar & Ors. (supra), in which SBI was one of appellants in C.A.
Nos.356165/2002, the appeals were decided by this Court by a
common judgment. It noted that reference to pension as per rules was
made for computation of pension, and the employees who had
completed 15 years of service were to be extended the benefit of VRS
2000 along with pension and other benefits. IBA wrote a letter dated
11.12.2000 to all public sector banks for amending Pension
Regulations, 1995. The IBA mentioned that pension was to be paid to
the employees as per VRS 2000. They would be eligible for prorata
pension; as such, Regulation 28 be amended. The employees who
applied for voluntary retirement after having rendered 15 years’
service, under a special/ad hoc scheme formulated with the specific
approval of the Government and the Board of Directors would be
eligible for prorata pension for the period of service rendered as if they
were to retire on attaining the age of superannuation on that date. The
letter made it clear that the Government of India approved the pension
33
to be given on completion of 15 years of service. The scheme was for
extending the benefit of pension to the employees retiring on
completion of 15 years of permanent service, and the Government of
India also desired that the IBA advised banks to make necessary
amendments to their pension regulations, as mentioned in the
Annexure. Thus, the essence of the VRS scheme was the benefit of
prorata pension as per the rules on completion of 15 years of
pensionable service.
34. It is apparent that the very fulcrum of the scheme was a felt
need for inducting new workforce, with adequate knowledge of new
skills such as modern technology, foreign exchange, venture capital, ecommerce, money management, etc. as pointed out by the Ministry of
Finance in its letter dated 22.5.2000. The banks were overstaffed and
for effective management and manpower planning, the desirability of
introducing VRS was felt in order to rationalise the workforce and
skill. Hence a Committee was constituted by the Central Government.
In pursuance of report of the Committee, a policy decision was taken
to frame the VRS. The scheme applied to employees who, on the date
of the application, completed 15 years of service. The employees
specified therein were otherwise not eligible to seek voluntary
retirement on completion of 15 years under the rules/regulations.
Under the scheme floated by the other banks, identical reliefs were
34
admissible, as in SBI VRS. The Scheme of Punjab National Bank is
extracted hereunder:
“7. x x x “Amount of ex gratia
An employee seeking voluntary retirement under the
Scheme will be entitled to the ex gratia amount mentioned
below in para (a) or (b), whichever is less:
(a) 60 days’ salary (pay plus stagnation increments plus
special pay plus dearness relief) for each completed year of
service;
OR
(b) salary for the number of months of service left;
Other benefits
An employee seeking voluntary retirement under the
Scheme will be eligible for the following benefits in addition to
the ex gratia amount mentioned in para 6 above of this
Scheme:
(i) Gratuity as per the Payment of Gratuity Act, 1972 or
gratuity payable under the Service Rules, as the case may be,
as per existing rules.
(ii)(a) Pension (including commuted value of pension) as per
PNB (Employees) Pension Regulations, 1995.
OR
(b) Bank’s contribution towards PF as per existing rules.
(iii) Leave encashment as per existing rules.”
(emphasis supplied)
35. The eligibility criteria in all the schemes, including SBI VRS,
clearly provided that employees who completed 15 years of service and
particular age shall be eligible to apply. The benefits to which they
were entitled, were culled out. In other banks, the pension was as per
Pension Regulation, 1995. Thus, on eligibility of an employee,
admissibility of the available reliefs in Scheme followed i.e., the
amount of ex gratia and other benefits, including pension, were to be
paid as provided in the scheme. Otherwise, there was no purpose of
retiring an employee with 15 years of service as they were not eligible
35
for retirement as per the rules before completion of 20 years of service
in all nationalised banks as well as SBI. A reference to the
admissibility of the pension as per rules/ regulations was made in all
the VRS to mean that proportionate pension shall be admissible as
provided in rules, this Court has noted it in O.P. Swarnakar (supra),
thus:
“49. An offer indisputably can be made to a group of persons
collectively which is capable of being accepted individually, but
the question which has to be posed and answered is as to
whether having regard to the service jurisprudence; the
principles of the Indian Contract Act would be applicable in
the instant case. It is the specific case of the “banks” that the
Schemes had been floated by way of contract. It does not have
any statutory flavour. Reference to the Pension Scheme framed
under the Regulations was made for computation of the
pension.”
(emphasis supplied)
36. Significantly in O.P. Swarnakar (supra), this Court observed that
employees must have proceeded to apply for VRS on the basis even
though they have merely completed 15 years of service, which was not
a qualifying service, under the Pension Regulations of Bank, they
would be entitled to benefits in terms of the VRS scheme. The Court
observed thus:
“89. Furthermore, a large number of employees have
withdrawn their offer only when a proviso was sought to be
added to Regulation 28 aforementioned. In terms of the
Scheme the employees, who expected to get benefits of subregulation (4) of Regulation 29 would be deprived therefrom. It
is not in this dispute that the qualifying period for receiving
pension was 20 years. Only upon completion of 20 years, in
terms of the statutory regulation contained in Regulation 29,
an employee could opt for voluntary retirement, and in terms
36
thereof, he would be entitled to the benefits specified therein.
The said Regulations had specifically been mentioned for the
purpose of computation, which would include invocation of
subregulation (4) of Regulation 29, providing for relaxation of
5 years towards the qualifying period. The employees must
have proceeded on the basis that despite the fact that they
have merely rendered 15 years of service, which was not a
qualifying service under the Regulations, they would be
entitled to the pensionary benefits in terms of the Scheme. By
introducing the proviso to Regulation 28 pension was sought
to be made pro rata in place of full pension.”
(emphasis supplied)
37. In O.P. Swarnakar & Ors. (supra), it was held that the scheme
was not a part of statutory regulations. It was in the realm of contract.
That being so, the Central Government did not need to place the same
before Parliament; and secondly, if the same was a regulation, the
layingdown rule is merely directory and not mandatory. This Court
relied upon the decisions in Jan Mohd. Noor Mohd. Bagban v. State of
Gujarat, AIR 1966 SC 385 and Atlas Cycle Industries Ltd. v. State of
Haryana; 1979 (2) SCC 196 and held that the scheme could not be
said to be bad in law, thus:
“124. Firstly, the Scheme is not a part of the statutory
regulation. It was in the realm of contract. That being, so it
was not necessary for the Central Government to place the
same before Parliament.
125. Secondly, even if the same was a regulation, the layingdown rule is merely a directory one and not mandatory.
126. In Jan Mohd. case, AIR 1966 SC 385, the law is stated in
the following terms: (AIR pp. 39495, para 18)
“18. Finally, the validity of the rules framed under Bombay
Act 22 of 1939 was canvassed. By Section 26(1) of the Bombay
Act, the State Government was authorised to make rules for
the purpose of carrying out the provisions of the Act. It was
provided by subsection (5) that the rules made under Section
26 shall be laid before each of the Houses of the Provincial
37
Legislature at the session thereof next following and shall be
liable to be modified or rescinded by a resolution in which both
Houses concur, and such rules shall, after notification in the
Official Gazette, be deemed to have been modified or rescinded
accordingly. It was urged by the petitioner that the rules
framed under Bombay Act 22 of 1939 were not placed before
the Legislative Assembly or the Legislative Council at the first
session, and therefore they had no legal validity. The rules
under Act 22 of 1939 were framed by the Provincial
Government of Bombay in 1941. At that time, there was no
Legislature in session, the Legislature having been suspended
during the emergency arising out of World War II. The session
of the Bombay Legislative Assembly was convened for the first
time after 1941 on 2051946, and that session was prorogued
on 2451946. The second session of the Bombay Legislative
Assembly was convened on 1571946, and that of the
Bombay Legislative Council on 391946 and the rules were
placed on the Assembly Table in the second session before the
Legislative Assembly on 291946 and before the Legislative
Council on 1391946. Section 26(5) of Bombay Act 22 of 1939
does not prescribe that the rules acquired validity only from
the date on which they were placed before the Houses of
Legislature. The rules are valid from the date on which they
are made under Section 26(1). It is true that the Legislature
has prescribed that the rules shall be placed before the Houses
of Legislature, but failure to place the rules before the Houses
of Legislature does not affect the validity of the rules, merely
because they have not been placed before the Houses of the
Legislature. Granting that the provisions of subsection (5) of
Section 26 by reason of the failure to place the rules before the
Houses of Legislature were violated, we are of the view that
subsection (5) of Section 26 having regard to the purposes for
which it is made, and in the context in which it occurs, cannot
be regarded as mandatory. The rules have been in operation
since the year 1941, and by virtue of Section 64 of Gujarat Act
20 of 1964, they continue to remain in operation."
127. In Atlas Cycle Industries' case, (1979) 2 SCC 196, the
same view has been reiterated.
128. We, therefore, are of the opinion that the Scheme in
question cannot be said to be bad in law.”
38. The Court concerning the provision of withdrawal held that the
relevant clause of the scheme created an enforceable right in case the
State Bank failed to adhere to its preferred policy.
38
39. In our opinion, the reference in the SBI VRS to the admissible
benefits, like pension shall be as per the pension rules, was for the
purpose of computation of pension. It is apparent from a reading of
the scheme that proportionate pension was admissible to employees
as noted in para 49 of O.P. Swarnakar & Ors. (supra). A similar
expression was used in the schemes of nationalised banks also. This
Court has noted expression in the scheme that pension as per rules to
mean for computation of pension. The formula for computation for a
pension is provided in Rule 23 of the SBI Pension Rules.
40. It is of utmost significance that the Central Board in its meeting
dated 27.12.2000 accorded approval “for the proposals contained in
the Memorandum.” A bare perusal of the memorandum makes it clear
that the letter of IBA dated 31.8.2000 was enclosed as part of the
memorandum submitted to the Central Board. In the memorandum, it
was mentioned "that the Government of India conveyed that they had
no objection to the banks' placing before their respective Boards of
Director's proposals for adopting and implementing the Voluntary
Retirement Scheme. It advised that Banks may ‘adopt’ the scheme
after obtaining their Boards' approval and implement it in ‘right
earnest’." The memorandum also contained that the employees who
completed 15 years of service were to be the beneficiaries of VRS as
approved by the Government of India and conveyed by the IBA. The
39
approval by Government of India and scheme, conveyed by IBA, was to
provide for the benefit of pension on completion of 15 years of service.
The same was an essential condition of the scheme. The Annexure,
which was part of the memorandum, provided inter alia the benefit of
pension, including the commuted value of pension without any rider of
completion of 20 years period of service. Once SBI accepted the
proposals contained in the memorandum, when we gauge the scheme
in the light of the subject matter of the memorandum which was
unconditionally approved, it became clear and beyond the pale of
doubt that in VRS (Annexure B) inasmuch as the expression to
provide the benefit of pension as per rules was only for providing the
proportionate pensionary benefit of the qualifying service on and above
15 years, rendered by an employee.
41. The IBA advised the banks for amending the rules. The
Government of India, Ministry of Finance, also issued a letter dated
5.9.2001 to the Bank to amend the rules. There was a proposal to
amend the rules. After the scheme was implemented in 2000, the
nationalised banks, including the Punjab National Bank, amended
their rules in 2002 with retrospective effect. However, the fact remains
the VRS schemes were implemented by banks governed by the
Banking Companies Act, 1970, by making payment of pension though
Regulation 28 of Regulation of 1995 provided for 20 years of qualifying
40
service at the relevant time. Once a particular scheme of VRS, based
on the recommendations of Committee formed by Government of
India, was formulated and floated by IBA. In all fairness, it was
required to be implemented in right earnest in that form in which it
was approved and adopted by the Board of Directors of SBI on
27.12.2000. In case the Board of Directors were of the opinion that the
scheme was not acceptable to them, they could have rejected it or
could have stated they reject the proposal for paying pension on
completion of 15 years of service which was the essence of a scheme
formed to reduce workforce of Bank and for achieving other objectives.
Nonetheless, on the contrary, resolution dated 27.12.2000 indicates
that the proposals of IBA/Government was approved unconditionally.
Thus, in case it was so necessary to amend the pension rules as done
by other banks, it was incumbent upon the State Bank of India to
amend its rules either after implementation of the scheme as was done
by other banks or before giving effect to VRS.
42. It is also significant to mention that SBI accepted the scheme as
approved by the Government and floated by IBA. In case SBI had
declined to accept or wanted to modify, it was necessary for it to take
approval of Government of India as to its scheme. As per section 49,
the Central Government has the power to make rules. Section 50 deals
with the power of Central Government to make regulations. Section
41
50(1) provides that the Central Board, after consultation with the
Reserve Bank of India and with the previous sanction of the Central
Government, can make Regulations. Under Section 50(2)(o), the
Regulations can be made by the Central Board with the previous
sanction of the Central Government with respect to superannuation
pension and other funds for the benefit of the employees of the State
Bank. Section 50(2)(o) reads:
“50. Power of Central Board to make regulations.—(1) The
Central Board may, after consultation with the Reserve Bank and
with the previous sanction of the Central Government [by
notification in the Official Gazette,] make regulations, not
inconsistent with this Act and the rules made thereunder, to
provide for all matters for which provision is expedient for the
purpose of giving effect to the provisions of this Act.
(2) In particular, and without prejudice to the generality of the
foregoing power, such regulations may provide for—
x x x
(o) the establishment and maintenance of superannuation
pension, provident or other funds for the benefit of the employees
of the State Bank or of the State Bank or of the dependents of
such employees or for the purposes of the State Bank, and the
granting of superannuation allowances, annuities and pensions
payable out of any such fund;]”
43. Thus, it is apparent that the Central Board of SBI could not have
framed a scheme different than the one approved by the Central
Government on its own, nor could have implemented it without
approval of the Central Government. In case it wanted to modify or
amend the scheme, as approved by the Government of India, it was
incumbent upon it to send its modified scheme to the Central
42
Government for approval. No scheme for VRS could have been framed
without approval of the Government of India. In fact, the Central
Board accepted the proposal of IBA, as approved by the Government of
India. In case SBI’s stand is accepted, its scheme would have been
valid as no modification could have been made without approval of the
Government of India. In fact, no such modification was made, as held
above.
44. Once it approved the Scheme SBI being an instrumentality of
State under Article 12, is bound by the principle of fairness and
representation made that it accepted the contents of memorandum
and the scheme floated by IBA and invited the applications based on
approving the memorandum which contained proposal of pension on
rendering 15 years of permanent pensionable service, it could not later
on wriggle out of its obligation taking a rigmarole by claiming shelter
of the Rules or by not amending the Rules or by issuing a clarification
which was fanciful, irrational and contrary to the spirit of the
resolution of the Board. It would amount to an unfair and
unreasonable action to deprive the employees of the benefit of pension
because of the decision taken by the Central Board of Directors.
45. SBI is bound by resolution of Central Board of Directors.
The Scheme was with the approval of the Government of India and
43
accepted, implemented by all the banks in true spirit except by SBI. It
cannot be permitted to act unfairly by virtue of having superior
bargaining power by issuing vague clarification to the detriment of the
economic interest of the employees. Clarification did not have the
effect of rewriting or superseding the resolution of the Central Board
nor effect of making modifications in the resolution passed by the
Central Board of the SBI.
46. The VRS scheme was not floated by the SBI on its own volition.
It was pursuant to an exercise that was undertaken by the IBA in view
of the recent developments of modern technology considering the age
group of the employees in the bank, the need to have a new skill, and
to rationalise the manpower; a decision was taken. It was decided at
the Government level to provide pension after completion of 15 years
of service as a special measure, the banks were bound to implement it
in that manner or not at all. The Central Board of Directors of the SBI
accepted the VRS proposal of Government and IBA without any
reservation of not providing pension along with other benefits, as
mandated in the VRS scheme. The action of the instrumentality of the
State cannot be violative of Article 14. It cannot be permitted to act
arbitrarily. Articles 15 and 16 provide for equality and provide for an
umbrella against discrimination.
44
47. Though the Deputy General Manager was authorised by the
Central Board of Directors to amend, modify or cancel the VRS. The
Rules were amended by other banks later in 2002. It was not stated in
answer to the query that under the VRS scheme, a person who has
rendered 15 years of qualifying service would not be entitled to a
pension. Nor it was so stated in resolution dated 27.12.2000 of the
Central Board of SBI. That apart, Deputy General Manager tried to
interpret VRS scheme in isolation without considering what was
approved by the Board. Not only the scheme but also the
memorandum have to be read together to understand resolution of
Board. Once the memorandum containing the IBAs proposal of
providing pension was approved in absolute terms, the clarification
could not be of any value to dilute the otherwise clear and
unambiguous resolution of the Board of Directors. The Deputy
General Manager did not have any such wide and arbitrary power to
defeat the claim of the employees for pension on completion of 15
years of permanent service, which was their right. The action of
D.G.M. could not be said to be in accordance with the resolution. The
pension was the essence of the scheme, depriving it could not be said
to be authorised, such action can only be termed as unfair and
unreasonable and patently violative of Articles 14, 16, and 21 of the
Constitution of India.
45
48. Yet another aspect which cannot be lost sight is that the bank
mentioned in the scheme that the benefit would be admissible as per
the rule which prevails on the appointed day, i.e., 31.3.2001. Thus, it
is apparent that when VRS scheme was floated, it was in
contemplation of amendment of rules which was suggested by the IBA
and the Government of India in its communication dated 5.9.2001 so
that employees were not deprived of the benefit of pension.
49. The question arises in case the bank accepts the proposal of
VRS, and does not alter its rules, can employees be deprived of the
benefit of pension in such an unconscionable manner over an event on
which they had no control. It would be nothing, but an outcome of
unfair and arbitrary act in case the SBI never intended to act upon the
scheme it ought not to have accepted it, and once it approved VRS, it
was incumbent upon it to amend its rule, if necessary, as was done by
other banks in 2002 after scheme worked out in the year 2000. Even
otherwise once it accepted the proposal of the Government of India, it
would be violative of provisions of Articles 14 and 16 to permit it to
wriggle out of its obligation under the guise that the bank did not
amend its rules or pension was not admissible as per existing rules,
mainly when the scheme provided for eligibility for pension on
completion of 15 years, that formed independent contract. If the bank
46
is permitted to get rid of the scheme due to Rule position, then the
scheme itself would become void and unenforceable. Bank cannot act
in a fanciful manner, particularly with respect to retirement under
VRS which was contractual and deny benefit of pension, a right
accrued to the employees for receiving the pension in view of the
memorandum and the resolution passed by the Central Board of
Directors adopting memorandum and the SBIVRS.
50. (a). The rights under contract cannot be taken away, and they
become enforceable by a court of law. Bank cannot be permitted to
make a representation and later on wriggle out of its obligation. It is
not permissible to make a “misrepresentation”. Under section 19 of
the Contract Act, when consent is obtained by coercion, fraud, or
‘misrepresentation,' the agreement is voidable at the option of the
aggrieved party. In Central Inland Water Transport Corporation Ltd. &
Anr. v. Brojo Nath Ganguly & Anr., (1986) 3 SCC 156, this Court
considered the contract of employment between the Central Inland
Water Transport Corporation and its employees and also the rules. In
that context, observed thus:
“75. Under Section 19 of the Indian Contract Act, when
consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused. It is not the
case of either of the contesting respondents that there was any
coercion brought to bear upon him or that any fraud or
misrepresentation had been practiced upon him. Under
Section 19A, when consent to an agreement is caused by
47
undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused and the court
may set aside any such contract either absolutely or if the
party who was entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as to the court
may seem just. Subsection (1) of Section 16 defines "Undue
influence" as follows:
“16. ‘Undue influence’ defined.—(1) A contract is said to be
induced by ‘undue influence’ where the relations subsisting
between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.”
The material provisions of subsection (2) of Section 16 are as
follows:
“(2) In particular and without prejudice to the generality of
the foregoing principle, a person is deemed to be in a position
to dominate the will of another—
(a) where he holds a real or apparent authority over the
other ....”
We need not trouble ourselves with the other sections of the
Indian Contract Act except Sections 23 and 24. Section 23
states that the consideration or object of an agreement is
lawful unless inter alia the court regards it as opposed to
public policy. This section further provides that every
agreement of which the object or consideration is unlawful is
void. Under Section 24, if any part of a single consideration for
one or more objects, or anyone or any part of any one of
several considerations for a single object is unlawful, the
agreement is void. The agreement is, however, not always void
in its entirety for it is well settled that if several distinct
promises are made for one and the same lawful consideration,
and one or more of them be such as the law will not enforce,
that will not of itself prevent the rest from being enforceable.
The general rule was stated by Willes, J., in Pickering v.
Ilfracombe Ry. Co. (1868) LR 3 CP 235 (at p. 250) as follows:
"The general rule is that, where you cannot sever the illegal
from the legal part of a covenant, the contract is altogether
void; but where you can sever them, whether the illegality be
created by statute or by the common law, you may reject the
bad part and retain the good."
(emphasis supplied)
(b). In Brojo Nath Ganguly (supra), this Court considered the concept
of unconscionable bargain and as to actions showing no regard for
conscience; irreconcilable with what is right or reasonable, observed
thus:
48
“76. Under which head would an unconscionable bargain fall?
If it falls under the head of undue influence, it would be
voidable but if it falls under the head of being opposed to
public policy, it would be void. No case of the type before us
appears to have fallen for decision under the law of contracts
before any court in India nor has any case on all fours of a
court in any other country been pointed out to us. The word
“unconscionable” is defined in the Shorter Oxford English
Dictionary, Third Edition, Volume II, page 2288, when used
with reference to actions, etc. as "showing no regard for
conscience; irreconcilable with what is right or reasonable." An
unconscionable bargain would, therefore, be one which is
irreconcilable with what is right or reasonable.”
(emphasis supplied)
(c). Chitty on Contracts was referred in Brojo Nath Ganguly (supra)
about the old ideas of freedom of contract in modern times, 25th Edn.,
Vol. 1, para 4, Chitty observed:
“79. In this connection, it is useful to note what Chitty has to
say about the old ideas of freedom of contract in modern
times. The relevant passages are to be found in Chitty on
Contracts, 25th Edn., Vol. I, in paragraph 4, and are as
follows:
"These ideas have to a large extent lost their appeal today.
'Freedom of contract,' it has been said, 'is a reasonable social
ideal only to the extent that equality of bargaining power
between contracting parties can be assumed, and no injury is
done to the economic interests of the community at large.'
Freedom of contract is of little value when one party has no
alternative between accepting a set of terms proposed by the
other or doing without the goods or services offered. Many
contracts entered into by public utility undertakings and
others take the form of a set of terms fixed in advance by one
party and not open to discussion by the other. These are called
'contracts d’adhesion’ by French lawyers. Traders frequently
contract, not on individually negotiated terms, but on those
contained in a standard form of contract settled by a trade
association. And the terms of an employee’s contract of
employment may be determined by agreement between his
trade union and his employer, or by a statutory scheme of
employment. Such transactions are nevertheless contracts
notwithstanding that freedom of contract is to a great extent
lacking.
Where freedom of contract is absent, the disadvantages
to consumers or members of the public have, to some extent,
been offset by administrative procedures for consultation, and
49
by legislation. Many statutes introduce terms into contracts
which the parties are forbidden to exclude, or declare that
certain provisions in a contract shall be void. And the courts
have developed a number of devices for refusing to implement
exemption clauses imposed by the economically stronger party
on the weaker, although they have not recognized in
themselves any general power (except by statute) to declare
broadly that an exemption clause will not be enforced unless it
is reasonable. Again, more recently, certain of the judges
appear to have recognized the possibility of relief from
contractual obligations on the ground of 'inequality of
bargaining power.'"
What the French call “contracts d’adhesion," the American call
"adhesion contracts" or "contracts of adhesion." An "adhesion
contract" is defined in Black’s Law Dictionary. 5th Edn., at
page 38, as follows:
“Adhesion contract.—Standardized contract form offered to
consumers of goods and services on essentially ‘take it or leave
it’ basis without affording consumer realistic opportunity to
bargain and under such conditions that consumer cannot
obtain desired product or services except by acquiescing in
form contract. Distinctive feature of adhesion contract is that
weaker party has no realistic choice as to its terms. Not every
such contract is unconscionable.”
80. The position under the American law is stated in
Reinstatement of the Law — Second as adopted and
promulgated by the American Law Institute, Volume II which
deals with the law of contracts, in Section 208 at page 107, as
follows:
Ҥ 208. Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the
time the contract is made a court may refuse to enforce the
contract, or may enforce the remainder of the contract without
the unconscionable term, or may so limit the application of
any unconscionable term as to avoid any unconscionable
result.”
In the Comments given under that section, it is stated at page
107:
“Like the obligation of good faith and fair dealing (§ 205),
the policy against unconscionable contracts or terms applies to
a wide variety of types of conduct. The determination that a
contract or term is or is not unconscionable is made in the
light of its setting, purpose and effect. Relevant factors include
weaknesses in the contracting process like those involved in
more specific rules as to contractual capacity, fraud and other
invalidating causes; the policy also overlaps with rules which
render particular bargains or terms unenforceable on grounds
of public policy. Policing against unconscionable contracts or
terms has sometimes been accomplished by adverse
construction of language, by manipulation of the rules of offer
50
and acceptance or by determinations that the clause is contrary
to public policy or to the dominant purpose of the contract.
Uniform Commercial Code § 2302 Comment 1 .... A bargain is
not unconscionable merely because the parties to it are
unequal in bargaining position, nor even because the
inequality results in an allocation of risks to the weaker party.
But gross inequality of bargaining power, together with terms
unreasonably favourable to the stronger party, may confirm
indications that the transaction involved elements of deception
or compulsion, or may show that the weaker party had no
meaningful choice, no real alternative, or did not in fact assent
or appear to assent to the unfair terms.”
(emphasis supplied)
There is a statute in the United States called the Universal
Commercial Code, which applies to contracts relating to sales
of goods. Though this statute is inapplicable to contracts not
involving sales of goods, it has proved very influential in what
is called in the United States, "nonsales" cases. It has many
times been used either by analogy or because it was felt to
embody a generally accepted social attitude of fairness going
beyond its statutory application to sales of goods. In the
Reporter's Note to said Section 208, it is stated at p. 112:
"It is to be emphasized that a contract of adhesion is not
unconscionable per se, and that all unconscionable contracts
are not contracts of adhesion. Nonetheless, the more
standardised the agreement and the less a party may bargain
meaningfully, the more susceptible the contract or a term will be
to a claim of unconscionability.”
(emphasis supplied)
The position has been thus summed up by John R. Peden in
‘The Law of Unjust Contracts’ published by Butterworths in
1982, at pages 2829:
“... Unconscionability represents the end of a cycle
commencing with the Aristotelian concept of justice and the
Roman law laesio enormis, which in turn formed the basis for
the medieval church’s concept of a just price and
condemnation of usury. These philosophies permeated the
exercise, during the seventeenth and eighteenth centuries, of
the Chancery court’s discretionary powers under which it
upset all kinds of unfair transactions. Subsequently the
movement towards economic individualism in the nineteenth
century hardened the exercise of these powers by emphasising
the freedom of the parties to make their own contract. While
the principle of pacta sunt servanda held dominance, the
consensual theory still recognized exceptions where one party
was overborne by a fiduciary, or entered a contract under
duress or as the result of fraud. However, these exceptions
were limited and had to be strictly proved.
It is suggested that the judicial and legislative trend during
the last 30 years in both civil and common law jurisdictions
has almost brought the wheel full circle. Both courts and
51
parliaments have provided greater protection for weaker
parties from harsh contracts. In several jurisdictions this
included a general power to grant relief from unconscionable
contracts, thereby providing a launching point from which the
courts have the opportunity to develop a modern doctrine of
unconscionability. American decisions on Article 2.302 of the
UCC have already gone some distance into this new arena....”
The expression “laesio enormis” used in the above passage
refers to “laesio ultra dimidium vel enormis” which in Roman
law meant the injury sustained by one of the parties to an
onerous contract when he had been overreached by the other
to the extent of more than onehalf of the value of the subjectmatter, as for example, when a vendor had not received half
the value of property sold, or the purchaser had paid more
than double value. The maxim “pacta sunt servanda" referred
to in the above passage, means "contracts are to be kept."
(emphasis supplied)
This Court held that due to inequality of bargaining power,
unreasonable terms, unreasonable favour to the stronger party may
involve an element of deception or compulsion, or may show that the
weaker party had no meaningful choice. The Court in Brojo Nath
Ganguly (supra) also observed that in the sphere of the law of
contract, the test of reasonableness or fairness has emerged. Even an
unreasonable clause cannot be enforced as that would be
unconscionable.
Here the reasonable construction in the matter is that the
pension is clearly admissible as per the resolution passed by the
Central Board of Directors of SBI, which is sought to be denied, it was
for SBI to amend Rules. Such an action would be unconscionable, and
courts cannot be said to be powerless in such a situation to enforce
the SBI VRS with an obligation to make payment of pension.
52
(d). This Court considered the enforcement of unreasonable
contracts and enforceability thereof in Brojo Nath Ganguly (supra)
thus:
“83. Yet another theory which has made its emergence in
recent years in the sphere of the law of contracts is the test of
reasonableness or fairness of a clause in a contract where
there is inequality of bargaining power. Lord Denning, MR,
appears to have been the propounder, and perhaps the
originator —at least in England, of this theory. In Gillespie
Brothers & Co. Ltd. v. Roy Bowles Transport Ltd., (1973) QB
400, where the question was whether an indemnity clause in a
contract, on its true construction, relieved the indemnifier
from liability arising to the indemnified from his own
negligence, Lord Denning said (at pages 415416):
“The time may come when this process of ‘construing’ the
contract can be pursued no further. The words are too clear to
permit of it. Are the courts then powerless? Are they to permit
the party to enforce his unreasonable clause, even when it is so
unreasonable, or applied so unreasonably, as to be
unconscionable? When it gets to this point, I would say, as I
said many years ago:
‘there is the vigilance of the common law which, while
allowing freedom of contract, watches to see that it is not
abused’: John Lee & Son (Grantham) Ltd. v. Railway Executive,
(1949) 2 All ER 581.
It will not allow a party to exempt himself from his liability at
common law when it would be quite unconscionable for him to
do so.”
(emphasis supplied)
In the above case, the Court of Appeal negatived the defense of
the indemnifier that the indemnity clause did not cover the
negligence of the indemnified. It was in Lloyds Bank Ltd. v.
Bundy (1974) 3 All ER 757 that Lord Denning first clearly
enunciated his theory of "inequality of bargaining power." He
began his discussion on this part of the case by stating (at
page 763) :
“There are cases in our books in which the courts will set aside
a contract, or a transfer of property, when the parties have not
met on equal terms, when the one is so strong in bargaining
power and the other so weak that, as a matter of common
fairness, it is not right that the strong should be allowed to push
the weak to the wall. Hitherto those exceptional cases have
been treated each as a separate category in itself. But I think
the time has come when we should seek to find a principle to
53
unite them. I put on one side contracts or transactions which
are voidable for fraud or misrepresentation or mistake. All
those are governed by settled principles. I go only to those
where there has been inequality of bargaining power, such as
to merit the intervention of the court.”
(emphasis supplied)
He then referred to various categories of cases and ultimately
deduced therefrom a general principle in these words (at page
765):
“Gathering all together, I would suggest that through all
these instances there runs a single thread. They rest on
‘inequality of bargaining power.' By virtue of it, the English law
gives relief to one who, without independent advice, enters into
a contract on terms which are very unfair or transfers property
for a consideration which is grossly inadequate, when his
bargaining power is grievously impaired by reason of his own
needs or desires, or by his own ignorance or infirmity, coupled
with undue influences or pressures brought to bear on him by
or for the benefit of the other. When I use the word 'undue,' I
do not mean to suggest that the principle depends on proof of
any wrongdoing. The one who stipulates for an unfair
advantage may be moved solely by his own selfinterest,
unconscious of the distress he is bringing to the other. I have
also avoided any reference to the will of the one being
‘dominated’ or ‘overcome’ by the other. One who is in extreme
need may knowingly consent to a most improvident bargain,
solely to relieve the straits in which he finds himself. Again, I do
not mean to suggest that every transaction is saved by
independent advice. But the absence of it may be fatal. With
these explanations, I hope this principle will be found to
reconcile the cases.”
(emphasis supplied)
(e). The Court clearly held that the contracts, which are the outcome
of misrepresentation, cannot be enforced, and inequality of bargaining
power merit the intervention of the court. In A. Schroeder Music
Publishing Co. Ltd. v. Macaulay (formerly Instone) (1974) 1 WLR 1308,
Lord Diplock made the following observations at pp. 131516 thus:
"84. …. "My Lords, the contract under consideration in this
appeal is one whereby the respondent accepted restrictions
upon the way in which he would exploit his earning power as a
songwriter for the next ten years. Because this can be
54
classified as a contract in restraint of trade the restrictions
that the respondent accepted fell within one of those limited
categories of contractual promises in respect of which the
courts still retain the power to relieve the promisor of his legal
duty to fulfill them. In order to determine whether this case is
one in which that power ought to be exercised, what your
Lordships have in fact been doing has been to assess the
relative bargaining power of the publisher and the songwriter
at the time the contract was made and to decide whether the
publisher had used his superior bargaining power to exact
from the songwriter promises that were unfairly onerous to
him. Your Lordships have not been concerned to inquire
whether the public have in fact been deprived of the fruit of the
song writer's talents by reason of the restrictions, nor to
assess the likelihood that they would be so deprived in the
future if the contract were permitted to run its full course.
It is, in my view, salutary to acknowledge that in refusing to
enforce provisions of a contract whereby one party agrees for
the benefit of the other party to exploit or to refrain from
exploiting his own earning power, the public policy which the
court is implementing is not some 19th century economic
theory about the benefit to the general public of freedom of
trade, but the protection of those whose bargaining power is
weak against being forced by those whose bargaining power is
stronger to enter into bargains that are unconscionable. Under
the influence of Bentham and of laissez faire the courts in the
19th century abandoned the practice of applying the public
policy against unconscionable bargains to contracts generally,
as they had formerly done to any contract considered to be
usurious; but the policy survived in its application to penalty
clauses and to relief against forfeiture and also to the special
category of contracts in restraint of trade. If one looks at the
reasoning of 19thcentury judges in cases about contracts in
restraint of trade one finds lip service paid to current economic
theories, but if one looks at what they said in the light of what
they did, one finds that they struck down a bargain if they
thought it was unconscionable as between the parties to it and
upheld it if they thought that it was not.
So I would hold that the question to be answered as respects
a contract in restraint of trade of the kind with which this
appeal is concerned is: ‘Was the bargain fair?’ The test of
fairness is, no doubt, whether the restrictions are both
reasonably necessary for the protection of the legitimate
interests of the promisee and commensurate with the benefits
secured to the promisor under the contract. For the purpose of
this test, all the provisions of the contract must be taken into
consideration.”
(f). A term which exempts the stronger party from his ordinary
common law liability should not be given effect except when it is
55
reasonable, as observed in Levison v. Patent Steam Carpet Co. Ltd.,
(1949) 2 All ER 581 at 584 relied upon in Brojo Nath Ganguly (supra)
thus:
“85. The observations of Lord Denning, M.R., in
Levison v. Patent Steam Carpet Co. Ltd. are also useful
and require to be quoted. These observations are as
follows (at page 79) :
"In such circumstances as here the Law Commission in
1975 recommended that a term which exempts the stronger
party from his ordinary common law liability should not be
given effect except when it is reasonable: see The Law
Commission and the Scottish Law Commission Report,
Exemption Clauses, Second Report (1975) (August 5, 1975),
Law Com. No. 69 (H.C. 605), pp. 62, 174; and there is a Bill
now before Parliament, which gives effect to the test of
reasonableness. This is a gratifying piece of law reform: but I
do not think we need wait for that Bill to be passed into law.
You never know what may happen to a Bill. Meanwhile, the
common law has its own principles ready to hand. In Gillespie
Bros. & Co. Ltd. v. Roy Bowles Transport Ltd. (1973) QB 400, I
suggested that an exemption or limitation clause should not be
given effect if it was unreasonable, or if it would be
unreasonable to apply it in the circumstances of the case. I see
no reason why this should not be applied today, at any rate in
contracts in standard forms where there is inequality of
bargaining power.”
(g). Courts have to construe the contracts according to the tenor. In
this regard, in Brojo Nath Ganguly (supra), the Court considered the
question thus:
“87. In Photo Production Ltd. v. Securicor Transport
Ltd. (1980) AC 827, a case before the Unfair Contract
Terms Act, 1977, was enacted, the House of Lords upheld
an exemption clause in a contract on the defendants'
printed form containing standard conditions. The
decision appears to proceed on the ground that the
parties were businessmen and did not possess unequal
bargaining power. The House of Lords did not, in that
case, reject the test of reasonableness or fairness of a
clause in a contract where the parties are not equal in
bargaining position. On the contrary, the speeches of
Lord Wilberforce, Lord Diplock, and Lord Scarman would
56
seem to show that the House of Lords in a fit case would
accept that test. Lord Wilberforce, in his speech, after
referring to the Unfair Contract Terms Act, 1977, said (at
page 843) :
“This Act applies to consumer contracts and those based
on standard terms and enables exception clauses to be applied
with regard to what is just and reasonable. It is significant that
Parliament refrained from legislating over the whole field of
contract. After this Act, in commercial matters generally, when
the parties are not of unequal bargaining power, and when
risks are normally borne by insurance, not only is the case for
judicial intervention undemonstrated, but there is everything
to be said, and this seems to have been Parliament’s intention,
for leaving the parties free to apportion the risks as they think
fit and for respecting their decisions.”
(emphasis supplied)
Lord Diplock said (at page 85051):
“Since the obligations implied by law in a commercial
contract are those which, by judicial consensus over the years
or by Parliament in passing a statute, have been regarded as
obligations which a reasonable businessman would realise that
he was accepting when he entered into a contract of a particular
kind, the court’s view of the reasonableness of any departure
from the implied obligations which would be involved in
construing the express words of an exclusion clause in one
sense that they are capable of bearing rather than another, is
a relevant consideration in deciding what meaning the words
were intended by the parties to bear.”
(emphasis supplied)
Lord Scarman, while agreeing with Lord Wilberforce, described
(at page 853) the action out of which the appeal before the
House had arisen as “a commercial dispute between parties
well able to look after themselves” and then added: “In such a
situation what the parties agreed (expressly or impliedly) is
what matters, and the duty of the courts is to construe their
contract according to its tenor."
88. As seen above, apart from judicial decisions, the United
States and the United Kingdom have statutorily recognised, at
least in certain areas of the law of contracts, that there can be
unreasonableness (or lack of fairness, if one prefers that
phrase) in a contract or a clause in a contract where there is
inequality of bargaining power between the parties although
arising out of circumstances not within their control or as a
result of situations not of their creation. Other legal systems
also permit judicial review of a contractual transaction entered
into in similar circumstances. For example, Section 138(2) of
the German Civil Code provides that a transaction is void
"when a person" exploits "the distressed situation,
inexperience, lack of judgmental ability, or grave weakness of
57
will of another to obtain the grant or promise of pecuniary
advantages ... which are obviously disproportionate to the
performance given in return". The position, according to the
French law, is very much the same."
(h). In Brojo Nath Ganguly (supra), it was pointed out what court
should do in such a matter thus:
“89. Should then our courts not advance with the times?
Should they still continue to cling to outmoded concepts
and outworn ideologies? Should we not adjust our
thinking caps to match the fashion of the day? Should all
jurisprudential development pass us by, leaving us
floundering in the sloughs of 19thcentury theories?
Should the strong be permitted to push the weak to the
wall? Should they be allowed to ride roughshod over the
weak? Should the courts sit back and watch supinely
while the strong trample underfoot the rights of the
weak? We have a Constitution for our country. Our
judges are bound by their oath to "uphold the
Constitution and the laws." The Constitution was enacted
to secure to all the citizens of this country social and
economic justice. Article 14 of the Constitution
guarantees to all persons equality before the law and the
equal protection of the laws. The principle deducible from
the above discussions on this part of the case is in
consonance with right and reason, intended to secure
social and economic justice and conforms to the mandate
of the great equality clause in Article 14. This principle is
that the courts will not enforce and will, when called
upon to do so, strike down an unfair and unreasonable
contract, or an unfair and unreasonable clause in a
contract, entered into between parties who are not equal
in bargaining power. It is difficult to give an exhaustive
list of all bargains of this type. No court can visualize the
different situations which can arise in the affairs of men.
One can only attempt to give some illustrations. For
instance, the above principle will apply where the
inequality of bargaining power is the result of the great
disparity in the economic strength of the contracting
parties. It will apply where the inequality is the result of
circumstances, whether of the creation of the parties or
not. It will apply to situations in which the weaker party
is in a position in which he can obtain goods or services
or means of livelihood only upon the terms imposed by
the stronger party or go without them. It will also apply
58
where a man has no choice, or rather no meaningful
choice, but to give his assent to a contract or to sign on
the dotted line in a prescribed or standard form or to
accept a set of rules as part of the contract, however
unfair, unreasonable and unconscionable a clause in
that contract or form or rules may be. This principle,
however, will not apply where the bargaining power of the
contracting parties is equal or almost equal. This
principle may not apply where both parties are
businessmen, and the contract is a commercial
transaction. In today’s complex world of giant
corporations with their vast infrastructural organizations
and with the State through its instrumentalities and
agencies entering into almost every branch of industry
and commerce, there can be myriad situations which
result in unfair and unreasonable bargains between
parties possessing wholly disproportionate and unequal
bargaining power. These cases can neither be
enumerated nor fully illustrated. The court must judge
each case on its own facts and circumstances.”
(i). The Court in Brojo Nath Ganguly (supra) held that the contract,
which affected a large number of persons if they are unconscionable,
unfair, and unreasonable, the contract is voidable. The court would
not compel each person with whom the party with superior bargaining
power had contracted to go to court to adjudge the contract voidable
and would result in a multiplicity of litigation. It observed:
“91. Is a contract of the type mentioned above to be adjudged
voidable or void? If it was induced by undue influence, then
under Section 19A of the Indian Contract Act, it would be
voidable. It is, however, rarely that contracts of the types to
which the principle formulated by us above applies are
induced by undue influence as defined by Section 16(1) of the
Indian Contract Act, even though at times they are between
parties one of whom holds a real or apparent authority over
the other. In the vast majority of cases, however, such
contracts are entered into by the weaker party under pressure
of circumstances, generally economic, which results in
inequality of bargaining power. Such contracts will not fall
within the four corners of the definition of “undue influence”
given in Section 16(1). Further, the majority of such contracts
are in a standard or prescribed form or consist of a set of
59
rules. They are not contracts between individuals containing
terms meant for those individuals alone. Contracts in
prescribed or standard forms or which embody a set of rules
as part of the contract are entered into by the party with
superior bargaining power with a large number of persons who
have far less bargaining power or no bargaining power at all.
Such contracts which affect a large number of persons or a
group or groups of persons, if they are unconscionable, unfair,
and unreasonable, are injurious to the public interest. To say
that such a contract is only voidable would be to compel each
person with whom the party with superior bargaining power
had contracted to go to court to have the contract adjudged
voidable. This would only result in multiplicity of litigation,
which no court should encourage and would also not be in the
public interest. Such a contract or such a clause in a contract
ought, therefore, to be adjudged void. While the law of
contracts in England is mostly judgemade, the law of
contracts in India is enacted in a statute, namely, the Indian
Contract Act, 1872. In order that such a contract should be
void, it must fall under one of the relevant sections of the
Indian Contract Act. The only relevant provision in the Indian
Contract Act, which can apply is Section 23, when it states
that "The consideration or object of an agreement is lawful,
unless ... the court regards it as ... opposed to public policy."
(j). The Court also considered the “public policy”. The same is not the
policy of a particular Government. It connotes some matter which
concerns the public good and the public interest. Action has to be
subservient to public policy. This Court in the context of Contract Act
and Public Policy made the following observations:
“92. The Indian Contract Act does not define the
expression "public policy" or "opposed to public policy."
From the very nature of things, the expressions "public
policy," "opposed to public policy," or "contrary to public
policy" are incapable of precise definition. Public policy,
however, is not the policy of a particular government. It
connotes some matter which concerns the public good
and the public interest. The concept of what is for the
public good or in the public interest or what would be
injurious or harmful to the public good or the public
interest has varied from time to time. As new concepts
take the place of old, transactions which were once
considered against public policy are now being upheld by
the courts, and similarly, where there has been a well
60
recognized head of public policy, the courts have not
shirked from extending it to new transactions and
changed circumstances and have at times not even
flinched from inventing a new head of public policy. There
are two schools of thought— "the narrow view" school
and "the broad view" school. According to the former,
courts cannot create new heads of public policy, whereas
the latter countenances judicial lawmaking in this area.
The adherents of "the narrow view" school would not
invalidate a contract on the ground of public policy
unless that particular ground had been wellestablished
by authorities. Hardly ever has the voice of the timorous
spoken more clearly and loudly than in these words of
Lord Davey in Janson v. Driefontein Consolidated Gold
Mines Ltd.: "Public policy is always an unsafe and
treacherous ground for legal decision." That was in the
year 1902. Seventyeight years earlier, Burrough, J., in
Richardson v. Mellish, (182434) All ER 258, described
public policy as "a very unruly horse, and when once you
get astride it you never know where it will carry you." The
Master of the Rolls, Lord Denning, however, was not a
man to shy away from unmanageable horses and in
words which conjure up before our eyes the picture of the
young Alexander the Great taming Bucephalus, he said
in Enderby Town Football Club Ltd. v. Football Assn. Ltd.
(1971) Ch 591: "With a good man in the saddle, the
unruly horse can be kept in control. It can jump over
obstacles." Had the timorous always held the field, not
only the doctrine of public policy but even the Common
Law or the principles of Equity would never have evolved.
Sir William Holdsworth in his "History of English Law,"
Volume III, page 55, has said:
"In fact, a body of law like the common law, which has
grown up gradually with the growth of the nation, necessarily
acquires some fixed principles, and if it is to maintain these
principles, it must be able, on the ground of public policy or
some other like ground, to suppress practices which, under
ever new disguises, seek to weaken or negative them."
It is thus clear that the principles governing public policy must
be and are capable, on proper occasion, of expansion or
modification. Practices which were considered perfectly normal
at one time have today become obnoxious and oppressive to
public conscience. If there is no head of public policy which
covers a case, then the court must in consonance with public
conscience and in keeping with public good and public interest
declare such practice to be opposed to public policy. Above all,
in deciding any case which may not be covered by authority,
our courts have before them the beacon light of the Preamble
to the Constitution. Lacking precedent, the court can always
61
be guided by that light and the principles underlying the
Fundamental Rights and the Directive Principles enshrined in
our Constitution.
93. The normal rule of Common Law has been that a party
who seeks to enforce an agreement which is opposed to public
policy will be nonsuited. The case of A. Schroeder Music
Publishing Co. Ltd. v. Macaulay (1974) 1 WLR 1308, however,
establishes that where a contract is vitiated as being contrary
to public policy, the party adversely affected by it can sue to
have it declared void. The case may be different, where the
purpose of the contract is illegal or immoral. In Kedar Nath
Motani v. Prahlad Rai, AIR 1960 SC 213, reversing the High
Court and restoring the decree passed by the trial court
declaring the appellants’ title to the lands in suit and directing
the respondents who were the appellants’ benamidars to
restore possession, this Court, after discussing the English
and Indian law on the subject, said: (at page 873) :
"The correct position in law, in our opinion, is that what
one has to see is whether the illegality goes so much to the
root of the matter that the plaintiff cannot bring his action
without relying upon the illegal transaction into which he had
entered. If the illegality be trivial or venial, as stated by
Williston and the plaintiff is not required to rest his case upon
that illegality, then public policy demands that the defendant
should not be allowed to take advantage of the position. A
strict view, of course, must be taken of the plaintiff's conduct,
and he should not be allowed to circumvent the illegality by
resorting to some subterfuge or by misstating the facts. If,
however, the matter is clear and the illegality is not required to
be pleaded or proved as part of the cause of action, and the
plaintiff recanted before the illegal purpose was achieved, then,
unless it be of such a gross nature as to outrage the
conscience of the court, the plea of the defendant should not
prevail."
The types of contracts to which the principle formulated by us
above applies are not contracts which are tainted with illegality
but are contracts which contain terms which are so unfair and
unreasonable that they shock the conscience of the court.
They are opposed to public policy and require to be adjudged
void.”
51. This Court also considered the law of contract and its
interpretation in changing times in Delhi Transport Corporation v.
D.T.C. Mazdoor Congress & Ors., (1991) Supp 1 SCC 600 thus:
62
“279. In paragraph 4 of Chitty on Contracts (25th edn., vol. 1)
it is stated that "freedom of contract is a reasonable social
ideal only to the extent that equality of bargaining power
between contracting parties can be assumed and no injury is
done to the economic interest of the community at large."
280. In Anson’s Law of Contract at pages 6 and 7 stated the
scope of freedom of contract in the changing circumstances
thus:
"Today the position is seen in a very different light. Freedom
of contract is a reasonable social ideal only to the extent that
equality of bargaining power between contracting parties can
be assumed, and no injury is done to the economic interests of
the community at large. In the more complicated social and
industrial conditions of a collectivist society, it has ceased to
have much idealistic attraction. It is now realised that
economic equality often does not exist in any real sense and
that individual interests have to be made to subserve those of
the community hence there has been a fundamental change
both in our social outlook and in the policy of the legislature
towards contract and the law today interferes at numerous
points with the freedom of the parties to make what contract
they like. The relation between employers and employed, for
example, have been regulated by statutes designed to ensure
that the employee’s condition of work are safe, that he is
properly protected against redundancy, and that he knows his
terms of service. The public has been protected against
economic pressure by such measures as the Rent Acts, the
Supply of Goods (Implied Terms) Act, the Consumer Credit
Act, and other similar enactments. These legislative provisions
will override any contrary terms which the parties may make
for themselves. Further, the legislature has intervened in the
Restrictive Trade Practices Act, 1956, and the Fair Trading Act,
1973 to promote competition in industry and to safeguard the
interests of consumers. This intervention is specially necessary
today when most contracts entered by ordinary people are not
the result of individual negotiation. It is not possible for a
private person to settle the terms of his agreement with a
British Railways Board or with a local electricity authority.”
The 'standard form' contract is the rule. He must either accept
the terms of this contract in toto or go without. Since,
however, it is not feasible to deprive oneself of such necessary
services, the individual is compelled to accept on those terms.
In view of this fact, it is quite clear that freedom of contract is
now largely an illusion."
52. (a). It has been emphasised in D.T.C. (supra) that the period of
contract is to be reasonable and the employee has a right to know the
63
conditions of work and he is properly protected against redundancy.
Approving decision in Central Inland Water Transport Corporation Ltd.
& Anr. v. Brojo Nath Ganguly & Anr. (1983) 3 SCC 156 Court held
thus:
“282. In Brojo Nath case (1986) 3 SCC 156, Madon, J.
elaborately considered the development of law relating to
unfair or unreasonable terms of the contract or clauses thereof
in extenso, and it is unnecessary for me to traverse the same
grounds once over. The learned Judge also considered the
arbitrary, unfair, and unbridled power on the anvil of
distributive justice or justness or fairness of the procedure
envisaged therein. The relevant case law in that regard was
dealt with in extenso in the light of the development of law in
the Supreme Court of United States of America and the House
of Lords in England and in the continental countries. To avoid
needless burden on the judgment, I do not repeat the same
reasoning. I entirely agree with the reasoning, and the
conclusions reached therein on all these aspects."
(b). This Court in D.T.C. (supra) with respect to the alteration of
Government contracts and the right of the State to impose
unconstitutional conditions, observed:
“283. The problem also could be broached from the angle
whether the State can impose unconstitutional conditions as
part of the contract or statute or rule etc. In (195960) 73
Harvard Law Review, in the Note under the caption
‘Unconstitutional Condition’ at pages 159596 it is postulated
that the State is devoid of power to impose unconstitutional
conditions in the contract that the power to withhold largesse
has been asserted by the State in four areas i.e. (1) regulating
the right to engage in certain activities; (2) administration of
government welfare programme; (3) government employment;
and (4) procurement of contracts. It was further adumbrated
at pages 160203 thus:
"The sovereign's constitutional authority to choose those with
whom it will contract for goods and services is, in effect, a
power to withhold the benefits to be derived from economic
dealings with the government. As government activity in the
economic sphere increases, the contracting power enables the
government to control many hitherto unregulated activities of
64
contracting parties through the imposition of conditions. Thus,
regarding the government, as a private entrepreneur, threatens
to impair constitutional rights. The government, unlike a
private individual, is limited in its ability to contract by the
Constitution. The federal contracting power is based upon the
Constitution's authorisation of these acts 'necessary and
proper' to the carrying out of the functions which it allocates to
the national government. Unless the objectives sought by
terms and conditions in government contracts requiring the
surrender of rights are constitutionally authorised, the
conditions must fall as ultra vires exercise of power.”
Again at page 1603, it is further emphasised thus:
“When conditions limit the economic benefits to be derived
from dealings with the government to those who forego the
exercise of constitutional rights, the exclusion of those
retaining their rights from participation in the enjoyment of
these benefits may be violative of the prohibition, implicit in
the due process clause of Fifth Amendment and explicit in the
equal protection clause of the Fourteenth Amendment against
unreasonable discrimination in the governmental bestow of
advantages. Finally, disabling those exercising certain rights
from participating in the advantages to be derived from
contractual relations with the government may be a form of
penalty lacking in due process. To avoid invalidation for any of
the above reasons, it must be shown that the conditions
imposed are necessary to secure the legitimate objectives of
the contract, ensure its effective use, or protect society from
the potential harm which may result from the contractual
relationship between the government and the individual.”
284. Professor Guido Calabresi of Yale University Law School
in his “Retroactivity, Paramount Power and Contractual
Changes” (196162) 71 Yale Law Journal 1191, stated that the
government can make contracts that are necessary and proper
for carrying out any of the specific clauses of the Constitution
or power to spend for general welfare. The Federal Government
has no power, inherent or sovereign, other than those
specifically or explicitly granted to it by the Constitution. At
page 1197, it is further stated thus:
“The government acts according to due process standards for
the due process clause is quite up to that task without the
rule. Alterations of government contracts are not desirable in a
free country even when they do not constitute a ‘taking’ of
property or impinge on questions of fundamental fairness of
the type comprehended in due process. The government may
make changes, but only if war or commerce require them and
not on the broader and more ephemeral grounds that the
general welfare would be served by the change. Any other rule
would allow the government to welch almost at will.”
x x x
65
286. In Brojo Nath case (supra, after elaborate consideration of
the doctrine of “reasonableness or fairness” of the terms and
conditions of the contract visavis the relative bargaining
power of the contracting parties this Court laid down that the
principles deducible from the discussion made therein is in
consonance with right or reason intended to secure socioeconomic justice and conform to mandate of the equality
clause in Article 14. The principle laid was that courts will not
enforce and will, when called upon to do so, strike down an
unfair and unreasonable contract or an unfair and
unreasonable clause in a contract, entered into between
parties who are not equal in bargaining power …. It will apply
to situations in which the weaker party is in a position in
which he can obtain goods or services or means of livelihood
only upon the terms imposed by the stronger party or go
without them. It will also apply where a man has no choice, or
rather no meaningful choice, but to give his assent to a
contract or to sign on the dotted line in a prescribed or
standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and unconscionable a
clause in that contract or form or rules may be. This principle,
however, will not apply where the bargaining power of the
contracting parties is equal or almost equal or where both
parties are businessmen, and the contract is a commercial
transaction.
287. In today’s complex world of giant corporations with their
vast infrastructural organisations the State through its
instrumentalities and agencies has been entering into almost
every branch of industry and commerce and field of service,
there can be myriad situations which result in unfair and
unreasonable bargains between parties possessing wholly
disproportionate and unequal bargaining power. These cases
can neither be enumerated nor fully illustrated. The court
must judge each case on its own facts and circumstances.”
(emphasis supplied)
The Court held that there can be myriad situations which result in
unfair and unreasonable bargains, which are the outcome of an
unequal bargaining power. Each case has to be seen on its own facts
and circumstances.
(c). In D.T.C. (supra), the Court also held that Article 14 sheds light
on public policy to curb arbitrariness thus:
66
“294. In Basheshar Nath v. CIT, AIR 1959 SC 149, S.R. Das,
C.J. held that Article 14 is founded on a sound public policy
recognised and valued in all States, and it admonishes the
State when it disregards the obligations imposed upon the
State.
295. In E.P. Royappa v. State of Tamil Nadu, (1974) 4 SCC 3,
Bhagwati, J. (as he then was) held that Article 14 is the genus
while Article 16 is a specie. Article 16 gives effect to the
doctrine of equality in all matters relating to public
employment. The basic principle which, therefore, informs
both Articles 14 and 16 is equality and inhibition against
discrimination. "Equality is a dynamic concept with many
aspects and dimensions, and it cannot be “cribbed, cabined
and confined” within traditional and doctrinaire limits. From a
positivistic point of view, equality is antithetical to
arbitrariness. In fact, equality and arbitrariness are sworn
enemies; one belongs to the rule of law in a republic while the
other, to the whim and caprice of an absolute monarch. Where
an act is arbitrary, it is implicit in it that it is unequal both
according to political logic and constitutional law and is
therefore violative of Article 14, and if it affects any matter
relating to public employment, it is also violative of Article 16.
Articles 14 and 16 strike at arbitrariness in State action and
ensure fairness and equality of treatment. In Maneka Gandhi
case (1978) 1 SCC 248, it was further held that the principle of
reasonableness, which legally as well as philosophically, is an
essential element of equality or nonarbitrariness pervades
Article 14 like a brooding omnipresence. In Ramana case
(1979) 3 SCC 489, it was held that it is merely a judicial
formula for determining whether the legislative or executive
action in question is arbitrary and therefore constituting
denial of equality. If the classification is not reasonable and
does not satisfy the two conditions, namely, rational relation
and nexus, the impugned legislative or executive action would
plainly be arbitrary, and the guarantees of equality under
Article 14 would be breached. Wherever, therefore, there is
arbitrariness in State action, whether it be of legislature or of
the executive or of an "authority" under Article 12, Article 14,
"immediately springs into action and strikes down such State
action." In fact, the concept of reasonableness and nonarbitrariness pervades the entire constitutional scheme and is
a golden thread which runs through the whole of the fabric of
the constitution.
302. Article 14 is the general principle, while Article 311(2) is
a special provision applicable to all civil services under the
State. Article 311(2) embodies the principles of natural justice,
but proviso to clause (2) of Article 311 excludes the operation
of principles of natural justice engrafted in Article 311(2) as an
exception in the given circumstances enumerated in three
67
clauses of the proviso to Article 311(2) of the Constitution.
Article 14 read with Articles 16(1), and 311 are to be
harmoniously interpreted that the proviso to Article 311(2)
excludes the application of the principles of natural justice as
an exception; and the applicability of Article 311(2) must,
therefore, be circumscribed to the civil services and be
construed accordingly. In respect of all other employees
covered by Article 12 of the Constitution, the dynamic role of
Article 14 and other relevant articles like Article 21 must be
allowed to have full play without any inhibition, unless the
statutory rules themselves, consistent with the mandate of
Articles 14, 16, 19 and 21 provide, expressly such an
exception.”
(emphasis supplied)
(d). Arbitrariness in State action whether of the legislature or the
executive or of an authority under Articles 12, 14 and 21 comes into
play to strike down such an action. The Court in D.T.C. (supra) held
thus:
“303. Article 19(1)(g) empowers every citizen the right to
avocation or profession etc. which includes right to be
continued in employment under the State unless the tenure is
validly terminated consistent with the scheme enshrined in the
fundamental rights of the Constitution. Therefore, if any
procedure is provided for deprivation of the right to
employment or right to the continued employment till the age
of superannuation as is a source to right to livelihood, such a
procedure must be just, fair and reasonable. This Court in
Fertilizer Corporation Kamgar Union (Regd.), Sindri v. Union of
India (1981) 1 SCC 568, held that Article 19(1)(g) confers a
broad and general right which is available to all persons to do
works of any particular kind and of their choice. Therefore,
whenever there is arbitrariness in State action — whether it be
of the legislature or of the executive or of an authority under
Article 12, Articles 14 and 21 spring into action and strikes
down such an action. The concept of reasonableness and nonarbitrariness pervades the entire constitutional spectrum and
is a golden thread which runs through the whole fabric of the
Constitution. Therefore, the provision of the statute, the
regulation or the rule which empowers an employer to
terminate the services of an employee whose service is of an
indefinite period till he attains the age of superannuation, by
serving a notice or pay in lieu thereof must be conformable to
the mandates of Articles 14, 19(1)(g) and 21 of the
Constitution. Otherwise, per se, it would be void. In Moti Ram
Deka case, AIR 1964 SC 600, Gajendragadkar, J. (as he then
68
was) after invalidating the Rules 149(3) and 148(3) under
Article 311(2) which are in pari materia with Regulation 9(b) of
the Regulations also considered their validity in the light of
Article 14 and held thus: (SCR p. 731)
“Therefore, we are satisfied that the challenge to the
validity of the impugned Rules on the ground that they
contravene Article 14 must also succeed.”
This was on the test of reasonable classification as the
principle then was applied. Subba Rao, J. (as he then was) in a
separate but concurring judgment, apart from invalidating the
rule under Article 311(2) also held that the rule infringed
Article 14 as well, though there is no elaborate discussion in
that regard. But, Das Gupta, J. considered elaborately on this
aspect and held: (SCR p. 770)
“Applying the principle laid down in the above case to the
present Rule, I find on the scrutiny of the Rule that it does not
lay down any principle or policy for guiding the exercise of
discretion by the authority who will terminate the service in
the matter of selection or classification. Arbitrary and
uncontrolled power is left in the authority to select at its will
any person against whom action will be taken. The rule thus
enables the authority concerned to discriminate between two
railway servants to both of whom Rule 148(3) equally applied
by taking action in one case and not taking it in the other. In
the absence of any guiding principle in the exercise of the
discretion by the authority, the Rule has, therefore, to be
struck down as contravening the requirements of Article 14 of
the Constitution."
308. In Ramana case (1979) 3 SCC 489, it has been held
that: (SCC p. 504, para 10)
“It is indeed unthinkable that in a democracy governed by
the rule of law, the executive government or any of its officers
should possess arbitrary power over the interests of the
individual.”
The procedure adopted should match with what justice
demands. History shows that it is always subtle and insidious
encroachments made ostensibly for a good cause that
imperceptibly but surely erode the foundations of liberty.”
(emphasis supplied)
(e). An employer cannot act in a manner that is in the negation of just,
fair, and reasonable procedure. The Court held:
“329. I am, therefore, inclined to hold that the courts,
though, have no power to amend the law by process of
interpretation but do have power to mend it so as to be in
69
conformity with the intendment of the legislature.
Doctrine of reading down is one of the principles of
interpretation of statute in that process. But when the
offending language used by the legislature is clear,
precise, and unambiguous, violating the relevant
provisions in the Constitution, resort cannot be had to
the doctrine of reading down to blow life into the void law
to save it from unconstitutionality or to confer
jurisdiction on the legislature. Similarly, it cannot be
taken aid of to emasculate the precise, explicit, clear and
unambiguous language to confer arbitrary, unbridled and
uncanalised power on an employer which is a negation to
just, fair and reasonable procedure envisaged under
Articles 14 and 21 of the Constitution and to direct the
authorities to record reasons, ( sic) unknown or
unintended procedure, in the manner argued by the
learned counsel for the appellants.” (emphasis supplied)
(f). In D.T.C. (supra) this Court also relied upon S.G. Jaisinghani v.
Union of India, AIR 1967 SC 1427 :
“331. x x x “In this context it is important to
emphasise that the absence of arbitrary power is the first
essential of the rule of law upon which our whole
constitutional system is based. In a system governed by
rule of law, discretion, when conferred upon executive
authorities, must be confined within defined limits. The
rule of law from this point of view means that decisions
should be made by the application of known principles
and rules and, in general, such decisions should be
predictable, and the citizen should know where he is. If a
decision is taken without any principle or without any
rule, it is unpredictable, and such a decision is the
antithesis of a decision taken in accordance with the rule
of law. (See Dicey: Law of the Constitution, 10th edn.,
Introduction cx.) ‘Law has reached its finest moments,'
stated Douglas, J. in United States v. Wunderlich 342 US
98, ‘when it has freed man from the unlimited discretion
of some ruler …. Where discretion is absolute, man has
always suffered.’ It is in this sense that the rule of law
may be said to be the sworn enemy of caprice. Discretion,
as Lord Mansfield stated it in classic terms in the case of
John Wilkes (1770) 4 Burr 2528, ‘means sound discretion
guided by law. It must be governed by rule, not by
humour: it must not be arbitrary, vague and fanciful’”.
(emphasis supplied)
70
(g). The Court emphasised that the decision has to be predictable
and it cannot be uncertain. The decision has to be taken by
application of known principles and rules. The exercise of power
cannot be whimsical or capricious. This Court in D.T.C. (supra) held:
“332. In an appropriate case where there is no sufficient
evidence available to inflict by way of disciplinary
measure, penalty of dismissal or removal from service
and to meet such a situation, it is not as if that the
authority is lacking any power to make rules or
regulations to give a notice of opportunity with the
grounds or the material on records on which it proposed
to take action, consider the objections and record reasons
on the basis of which it had taken action and
communicate the same. However, scanty the material
may be, it must form foundation. This minimal procedure
should be made part of the procedure lest the exercise of
the power is capable of abuse for good as well as for
whimsical or capricious purposes for reasons best known
to the authority and not germane for the purpose for
which the power was conferred. The action based on
recording reasoning without communication would
always be viewed with suspicion. Therefore, I hold that
conferment of power with wide discretion without any
guidelines, without any just, fair or reasonable procedure
is constitutionally anathema to Articles 14, 16(1), 19(1)(g)
and 21 of the Constitution. Doctrine of reading down
cannot be extended to such a situation.” (emphasis
supplied)
53. On the basis of aforesaid principles, it is apparent that once the
Central Board of Directors accepted the memorandum for making
payment of pension, in case it was not accepting the proposal in the
memorandum, it ought to have said clearly that it was not ready to
accept the proposals of the Government and the IBA and rejects the
same. Once it approved the proposals referred to in the memorandum,
71
which were on the basis of IBA's letter and Government of India's
decision it was bound to implement it in true letter and spirit. By
accepting the same, binding obligation was created upon the SBI to
make payment of pension on completion of 15 years of service. It
cannot invalidate its own decision by relying on fact it failed to amend
the rule, whereas other Banks did it later on with retrospective effect.
They cannot invalidate otherwise valid decision by virtue of exclusive
superior power to amend or not to amend the rule and act unfairly
and make the entire contract unreasonable based on
misrepresentation. It was open to the Board of Directors to reject the
proposal. Once it accepted the proposal to make payment of pension
on completion of 15 years of service as proposed in the memorandum,
though the scheme is tried to be interpreted by the SBI that pension
was to be admissible as provided in the rule that refers to
proportionate pension as noted by this Court in O.P. Swarnakar &
Ors., (supra), and what was decided by Government of India/IBA, was
not taken away rather adopted by the Central Board of Directors. The
scheme of contractual nature has to be read in the context and in the
backdrop of facts and what has been resolved by the Board of
Directors. There is no ambiguity with respect to the admissibility of
pension when the memorandum and the scheme are read together. In
case of ambiguity and even if two interpretations are possible in the
72
backdrop of facts of the case, one in favour of the employees has to be
adopted and socalled clarification dated 11.1.2000 even if considered
in the manner so as to deny the benefit of pension, has to be held to
be unenforceable, illegal and contrary to law.
54. It is apparent from the eligibility clause of the VRS scheme that
eligibility is provided for the employees having 15 years of pensionable
service and they will be entitled for benefits as provided in the scheme.
The eligibility clause, when read with clauses providing the benefit,
i.e., clauses 5 and 6 of the scheme, leaves no room for any doubt and
makes it clear that employees with 15 years of service were treated as
eligible to claim the benefit of the scheme floated by SBI. It was not
the provision in the VRS scheme that incumbents having completed
20 years of service would be entitled for pensionary benefits. The
scheme was carved out specially for attracting the employees by
providing pension and other benefits to eligible persons like ex gratia,
gratuity, pension and leave encashment. Deprivation of pension would
make them ineligible for the benefits and would run repugnant to the
eligibility clause.
55. The submission raised on behalf of the SBI that the draft scheme
nowhere stipulated that 15 years’ service would be the eligibility or
that on completion of 15 years' service, the incumbent would be
73
eligible for pension, is factually incorrect. It is apparent from the
material circumstances, documents, and correspondence that the
decision was taken at all levels including the one by the Central Board
of Directors of SBI, that the benefit of pension was to be given to the
employees on completion of 15 years of service. In that perspective,
vagueness of scheme of SBI, if any, can be of no advantage as it is
clear beyond the pale of doubt that pension was heart and soul of the
scheme with ex gratia on completion of 15 years of service. It is due to
the reason that the benefit was to be accorded to the incumbents
having completed 15 years of service, Regulation 28 as applicable to
other nationalised banks was proposed to be modified as reflected in
the letter of IBA dated 11.12.2000 and Government of India letter
dated 5.9.2000. Later on, the regulation was amended in 2002 after
the scheme had already been implemented in right earnest. There was
not even an iota of doubt that VRS was to give benefits to all eligible
employees having completed 15 years of service. It was apparent from
the letter dated 29.12.2000 of SBI that the guidelines of IBA were
approved by the Central Board of Directors in its meeting dated
27.12.2000. Para 2 of the letter dated 29.12.2000 of SBI Deputy
Managing DirectorcumSDO is extracted hereunder:
"2. Accordingly, the Central Board of Directors, in its
meeting held on 27.12.2000, has accorded approval for
adopting and implementing the Voluntary Retirement
Scheme for the employees of the Bank, namely "SBI
74
Voluntary Retirement Scheme (SBIVRS).” The Scheme
"SBIVRS" has been drawn up, keeping in view the
guidelines issued by IBA. A copy of the Scheme is placed
at Annexure ‘B’.”
(emphasis supplied)
56. As noted in O.P. Swarnakar & Ors., (supra), the case of bank
itself was that it was a contractual scheme. The expression "pension"
as per rules was only for the purpose of working out the proportionate
pension. It was clearly decided to open the scheme to employees who
have put in 15 years of service. It was not provided in the scheme that
the incumbent was required to render a pensionable service of 20
years as per the rules in order to acquire eligibility for the pension.
The submission made on behalf of SBI is too tenuous to be accepted.
It was observed in para 89 of O.P. Swarnakar & Ors., (supra) quoted
above that the employee must have proceeded on the basis of 15 years
of service then they were entitled to pensionary benefits.
The Court further observed in O.P. Swarnakar & Ors., (supra)
that the scheme is enforceable thus:
“92. However, the case of the State Bank of India stands
slightly on a different footing. Firstly, the State Bank of India
had not amended the Scheme. It, as noticed hereinbefore, even
permitted withdrawal of the applications after (sic by) 15th
February. The Scheme floated by the State Bank of India
contained a clause (clause 7) laying down the mode and
manner in which the application for voluntary retirement shall
be considered. The relevant clause, as referred to hereinbefore,
creates an enforceable right. In the event the State Bank failed
to adhere to its preferred policy, the same could have been
specifically enforced by a court of law. The same would,
therefore, amount to some consideration."
75
57. While construing a contract, the language and surrounding
circumstances of the overall scheme, memorandum and letters are to
be read conjointly to find out whether any departure made by the
Board of Directors in its Resolution dated 27.12.2000 is of pivotal
significance. In this case, the decision was taken by it of approval of
the IBA scheme as proposed. Its binding effect cannot be changed on
the basis what parties choose to say afterward, nor they can be
permitted to wriggle out. The contract is required to be read as a
whole. It is apparent on a bare reading that optees will be eligible for
proportionate pension under the Pension Regulations of the bank and
therefore, the bank bears the risk of lack of clarity, if any.
58. In Bank of India & Anr. v. K. Mohandas & Ors., (2009) 5 SCC 313
wherein several other banks were also parties, the question arose as to
the nature of VRS, 2000. The Court noted the objectives, the
amendment made in Regulation 28 in 2002, providing for 15 years of
service. The scheme was open in NovemberDecember, 2000 and in
Union Bank of India in January, 2001. The employees claimed that
those who completed 20 years of service, were entitled to the benefit of
provisions contained in Regulation 29(5) of Employees’ Pension
Regulations, 1995 applicable to the said banks. They claimed having
completed the qualifying service of 20 years under Regulation 29, were
entitled for 5 years’ increase in the service tenure subject to the
76
maximum of 33 years which was not given to them on the ground that
the benefit of VRS was available to incumbents having completed 15
years of service as provided in amended Regulation 28, and Regulation
29 was not applicable. This Court held that the benefit of VRS was
available to the employees having completed 15 years of service, but
the additional benefit which was available on completion of 20 years of
service was also admissible as provided in Regulation 29(5).
59. While considering the aforesaid similar scheme of VRS, this
Court observed with respect to the construction of the contract on the
basis of the import of the words. The intention of the parties must be
ascertained from the language they have used and considered in the
light of surrounding circumstances, and the meaning cannot be
changed by a course of conduct adopted by the parties in acting under
it. This Court in K. Mohandas (supra) held thus:
“28. The true construction of a contract must depend upon
the import of the words used and not upon what the parties
choose to say afterwards. Nor does subsequent conduct of the
parties in the performance of the contract affect the true effect
of the clear and unambiguous words used in the contract. The
intention of the parties must be ascertained from the language
they have used, considered in the light of the surrounding
circumstances and the object of the contract. The nature and
purpose of the contract is an important guide in ascertaining
the intention of the parties.
29. In Ottoman Bank of Nicosia v. Ohanes Chakarian, Lord
Wright made these weighty observations: (AIR p. 29)
“… that if the contract is clear and unambiguous, its true
effect cannot be changed merely by the course of conduct
adopted by the parties in acting under it.”
77
30. In Ganga Saran v. Firm Ram Charan Ram Gopal AIR 1952
SC 9, a fourJudge Bench of this Court stated: (AIR p. 11, para
6)
“6. … Since the true construction of an agreement must
depend upon the import of the words used and not upon what
the parties choose to say afterwards, it is unnecessary to refer
to what the parties have said about it.”
31. It is also a wellrecognised principle of construction of a
contract that it must be read as a whole in order to ascertain
the true meaning of its several clauses and the words of each
clause should be interpreted so as to bring them into harmony
with the other provisions if that interpretation does no violence
to the meaning of which they are naturally susceptible. (North
Eastern Railway Co. v. Lord Hastings, 1900 AC 260)”
60. With respect to lack of clarity in the scheme, this Court in K.
Mohandas (supra) relied on maxim verba chartarum fortius accipiuntur
contra proferentem to hold that banks who were responsible for
formulation of the terms in the contractual Scheme, bear the risk of
lack of clarity. Thus, the benefit has to be given to the employees by
making interpretation against the banks. The Court held :
“32. The fundamental position is that it is the banks who were
responsible for formulation of the terms in the contractual
Scheme that the optees of voluntary retirement under that
Scheme will be eligible to pension under the Pension
Regulations, 1995, and, therefore, they bear the risk of lack of
clarity, if any. It is a wellknown principle of construction of a
contract that if the terms applied by one party are unclear, an
interpretation against that party is preferred (verba chartarum
fortius accipiuntur contra proferentem).
33. What was, in respect of pension, the intention of the banks
at the time of bringing out VRS 2000? Was it not made
expressly clear therein that the employees seeking voluntary
retirement will be eligible for pension as per the Pension
Regulations? If the intention was not to give pension as
provided in Regulation 29 and particularly subregulation (5)
thereof, they could have said so in the Scheme itself. After all,
much thought had gone into the formulation of VRS 2000, and
78
it came to be framed after great deliberations. The only
provision that could have been in mind while providing for
pension as per the Pension Regulations was Regulation 29.
Obviously, the employees, too, had the benefit of Regulation
29(5) in mind when they offered for voluntary retirement as
admittedly Regulation 28, as was existing at that time, was not
applicable at all. None of Regulations 30 to 34 was attracted."
(emphasis supplied)
61. In K. Mohandas (supra) the Court considered the argument that
Regulation 28 would be applicable only for providing 15 years of
eligibility as provided by way of amendment of Regulation of 1995, and
held that as the banks are “State” within the meaning of Article 12, it
would be an arbitrary action on their part to deny the benefit of
section 29(5), and there has to be harmonious construction to the
scheme and Pension Regulations, thus:
“35. We are afraid; it would be unreasonable if amended
Regulation 28 is made applicable, which had not seen the light
of the day and which was not the intention of the banks when
the Scheme was framed. The banks in the present batch of
appeals are public sector banks and are "State" within the
meaning of Article 12 of the Constitution and their action even
in contractual matters has to be reasonable, lest, as observed
in O.P. Swarnakar (2003) 2 SCC 721, it must attract the wrath
of Article 14 of the Constitution.
36. Any interpretation of the terms of VRS 2000, although
contractual in nature, must meet the test of fairness. It has to
be construed in a manner that avoids arbitrariness and
unreasonableness on the part of the public sector banks who
brought out VRS 2000 with an objective of rightsizing their
manpower. The banks decided to shed surplus manpower. By
formulation of the special scheme (VRS 2000), the banks
intended to achieve their objective of rationalising their force
as they were overstaffed. The special Scheme was, thus,
oriented to lure the employees to go in for voluntary
retirement. In this background, the consideration that was to
pass between the parties assumes significance and a
harmonious construction to the Scheme, and the Pension
Regulations, therefore, has to be given.
79
37. The amendment to Regulation 28 can, at best, be said to
have been intended to cover the employees with 15 years of
service or more but less than 20 years of service. This
intention is reflected from the communication dated 592000
sent by the Government of India, Ministry of Finance,
Department of Economic Affairs (Banking Division) to the
Personnel Advisor, Indian Banks’ Association.”
(emphasis supplied)
It opined that the amendment to Regulation 28 of 1995
Regulation intended to cover 15 years of service, i.e., employees with
15 years of service who have not completed 20 years of service. A
similar action to amend the Rule was required to be taken by the SBI,
but it failed to take it after having floated a similar scheme. It kept it
uncertain what would be the position of the rule as on the appointed
date, i.e., 31.3.2001. Be that as it may. But it was crystal clear that
the incumbent with 15 years of service was eligible for the benefit as
provided in the scheme itself. The benefit clause has to be read with
the eligibility criteria. Once VRS was formulated and adopted by the
SBI in toto, it constituted a complete contractual package in itself.
62. As urged on behalf of SBI if section 23 of the Contract Act is
applied, then how it is helpful to the bank, is not understandable. In
case it is held that the very scheme was opposed to the law/rules, the
entire scheme would fall down. Once it adopted the scheme, invited
applications and the employees acted upon it and retired on the basis
of the scheme, they cannot be left in lurch. In case its submission is
accepted, the Scheme becomes violative of Section 23 of Contact Act,
80
the bank would have to suffer the consequences of striking down of
the very scheme and would be required to reinstate the employees and
to pay them the salary and other benefits. However, SBI accepted the
scheme, it was incumbent upon it to bring the rules in consonance
with the similar VRS scheme as was done by other banks. The SBI
accepted the scheme on 27.12.2000 without any ifs and buts. Thus,
the anomaly was the outcome of the bank's inaction to propose and
make amendment of rules. In such a scenario, the action of SBI is
violative of Articles 14, 16 and 21 of the Constitution. The situation
created by itself is not going to benefit the bank to lend support to
arbitrary action. The bank was bound to extend the benefits by
amending the rules, if necessary, to salvage the situation for itself.
Breach of law has been committed by the SBI itself, its action is
arbitrary and it cannot be permitted to take advantage of its own
wrong.
63. The pension cannot be dealt with arbitrarily and cannot be
denied in an unfair manner. The concept of pension was considered
in D.S. Nakara & Ors. v. Union of India, (1983) 1 SCC 305. The right to
a pension can be enforced through the court, it observed :
“20. The antequated notion of pension being a bounty, a
gratuitous payment depending upon the sweet will or grace of
the employer not claimable as a right and, therefore, no right
to pension can be enforced through Court has been swept
under the carpet by the decision of the Constitution Bench in
81
Deokinandan Prasad v. State of Bihar (1971) 2 SCC 330
wherein this Court authoritatively ruled that pension is a right
and the payment of it does not depend upon the discretion of
the Government but is governed by the rules and a
government servant coming within those rules is entitled to
claim pension. It was further held that the grant of pension
does not depend upon anyone’s discretion. It is only for the
purpose of quantifying the amount having regard to service
and other allied matters that it may be necessary for the
authority to pass an order to that effect but the right to receive
pension flows to the officer not because of any such order but
by virtue of the rules. This view was reaffirmed in State of
Punjab v. Iqbal Singh, (1976) 2 SCC 1.
22. In the course of transformation of society from feudal to
welfare and as socialistic thinking acquired respectability.
State obligation to provide security in old age, an escape from
undeserved want was recognised and as a first step pension
was treated not only as a reward for past service but with a
view to helping the employee to avoid destitution in old age.
The quid pro quo was that when the employee was physically
and mentally alert, he rendered unto master the best,
expecting him to look after him in the fall of life. A retirement
system, therefore, exists solely for the purpose of providing
benefits. In most of the plans of retirement benefits, everyone
who qualifies for normal retirement receives the same amount
(see Retirement Systems for Public Employees by Bleakney, p.
33).”
This Court observed that the principal aim of the socialist State
as envisaged in the Preamble is to eliminate inequality. The basic
framework of socialism is to provide security in the fall of life to the
working people and especially provides security from the cradle to the
grave when employees have rendered service in heydays of life, they
cannot be destituted in old age, by taking action in an arbitrary
manner and for omission to complete obligation assured one. Though
there cannot be estoppel against the law but when a bank had the
power to amend it, it cannot take shelter of its own inaction and SBI
82
ought to have followed the pursuit of other banks and was required to
act in a similar fair manner having accepted the scheme.
64. Resultantly, we are of the opinion that the employees who
completed 15 years of service or more as on cutoff date were entitled
to proportionate pension under SBI VRS to be computed as per SBI
Pension Fund Rules. Let the benefits be extended to all such similar
employees retired under VRS on completion of 15 years of service
without requiring them to rush to the court. However, considering the
facts and circumstances, it would not be appropriate to burden the
bank with interest. Let order be complied with and arrears be paid
within three months, failing which amount to carry interest at the rate
of 6 per cent per annum from the date of this order. The appeals are
accordingly disposed of. No costs.
…………………………J.
(Arun Mishra)
………………….……..J.
(M.R. Shah)
New Delhi; …….…………………..J.
March 2, 2020. (B.R. Gavai)
we are of the opinion that the employees who completed 15 years of service or more as on cutoff date were entitled to proportionate pension under SBI VRS to be computed as per SBI
Pension Fund Rules.
Let the benefits be extended to all such similar employees retired under VRS on completion of 15 years of service without requiring them to rush to the court.
However, considering the facts and circumstances, it would not be appropriate to burden the
bank with interest.
Let order be complied with and arrears be paid within three months, failing which amount to carry interest at the rate of 6 per cent per annum from the date of this order. The appeals are accordingly disposed of. No costs.
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.2463 OF 2015
ASSISTANT GENERAL MANAGER,
STATE BANK OF INDIA & ORS. … APPELLANTS
VERSUS
RADHEY SHYAM PANDEY … RESPONDENT
WITH
CIVIL APPEAL NOS.22872288 OF 2010
CIVIL APPEAL NOS.50355037 OF 2012
CIVIL APPEAL NO.10813 OF 2013
J U D G M E N T
ARUN MISHRA, J.
1. The question involved is whether the respondentemployees are
entitled to pension on completion of 15 years of service as per the
State Bank of India Voluntary Retirement Scheme (for short, “the VRS
framed in 2000”).
2. The matter has been referred to larger Bench due to conflict of
opinion between the Judges as to the admissibility of pension under
the VRS.
2
3. After obtaining approval of the Government of India, the Indian
Bank Association (IBA) evolved a Voluntary Retirement Scheme. The
Central Board of Directors of the State Bank of India (in short ‘the
SBI’) adopted and approved the scheme in its meeting held on
27.12.2000 for implementing the VRS for the employees of the bank
by retiring them on completion of 15 years of service with the benefit
provided in the scheme. The scheme had been drawn up, keeping in
view the guidelines issued by the IBA. “Memorandum” dated
26.12.2000 was submitted by the Deputy Managing Director and the
Corporate Development Officer for according approval to the proposals
contained in the Memorandum as also for adopting the scheme as
Annexure ‘B’ to the Memorandum.
4. The basis of Memorandum dated 26.12.2000, was the advice by
IBA vide letter dated 31.8.2000 in which it was pointed out that they
deliberated with the Government of India, Ministry of Finance
(Banking Division), at its meeting with the Finance Minister, with
Chief Executives of public sector banks on 13.6.2000. The human
resource and manpower planning in public sector banks were
reviewed, and a Committee was constituted to examine the issues
concerned to public sector banks and to suggest suitable remedial
measures. The Committee considered the economic reforms set in
3
motion in the year 1990, the high establishment cost and low
productivity in public sector banks. It was felt that the banks convert
their human resource into assets compatible with the business
strategies through a variety of measures. The data available indicated
that 43% of the employees in public sector banks were in the 46 + age
group, and only 12% were in the 2535 age group. It was felt that this
pattern has severe implications for the banks regarding mobility,
training, development of skills, and succession plans for higherlevel
positions. The workforce was in excess. In order to remedy the
situation, the Committee placed before the Government two schemes,
viz., Sabbatical Leave, and a Voluntary Retirement Scheme. The IBA
vide letter dated 13.7.2000 sought no objection from the Government
for circulating the schemes to the banks for consideration and
adoption by their Boards. The Government conveyed on 29.8.2000
that it did not have any objection for adopting and implementing the
scheme by the respective Board of Directors. It advised that the banks
may adopt these schemes for sabbatical leave and voluntary
retirement based on the essential features of the schemes given in the
annexure to the letter. The scheme provided eligibility for all
permanent employees with 15 years of service. It provided for amount
of ex gratia and other benefits accepted by the Government of India
which were to be provided (i) gratuity as per the Gratuity Act/service
4
gratuity, as the case may be; (ii) pension (including commuted value of
pension)/bank’s contribution towards provident fund; and (iii) leave
encashment as per rules.
5. After the Central Board of SBI approved the proposals contained
in the memorandum on 27.12.2000, a circular was issued on
29.12.2000 in which it was mentioned that the IBA advised that as the
Committee constituted by the Finance Ministry recommended
introduction of a VRS in order to rationalise the manpower, the
Government of India has no objection for adopting and implementing
the VRS. It was clearly stated in the Circular dated 29.12.2000 that
the Central Board of Directors accorded approval for adopting and
implementing the SBI voluntary Retirement Scheme drawn up,
“keeping in view the guidelines issued by the IBA." Copy of the scheme
was placed as Annexure B. The scheme was open from 15.1.2001 till
31.1.2001. Specimen applications and other related forms inter alia for
pension were also circulated, which formed part of the circular. The
circular also made it clear that gratuity, provident fund contribution
as per the Provident Fund Rules, pension in terms of the SBI
Employees’ Pension Fund Rules, leave encashment to be provided
beside the amount of ex gratia.
5
6. The heart and soul of the scheme were that benefits to be given
on completion of 15 years of service. The eligibility for benefits was
provided to those who had completed 15 years of service as on
31.12.2000.
7. The SBI submitted that it reserved a right under the scheme to
modify, amend or cancel it or any of the clauses and to give effect to it
from any date deemed fit. The Deputy Managing DirectorcumCDO
was the competent authority for the purpose. As specific queries were
raised, a clarification was issued by the Deputy Managing Director on
15.1.2001, in which about a query whether an employee on
completing 15 years of pensionable service as on the relevant date of
retirement, would be entitled to pensionary benefits, in response, para
6(c) of the scheme was reiterated, and it was also mentioned that as
per the existing rules, employees who had not completed 20 years of
pensionable service, were not eligible for pension.
8. The clarification issued by the Deputy General Manager was not
in the form of modification or amendment of the scheme. The Deputy
General Manager in clarification quoted the provisions and simply
stated the position of a rule that the pensionable service was 20 years.
The communication was clarificatory and did not have the effect of
modifying the SBI VRS scheme as approved and adopted.
6
9.(a) Radhey Shyam Pandey questioned the refusal of the bank to pay
pension, vide communication dated 26.9.2006 in the writ application
filed in the High Court at Allahabad. He retired on 31.3.2001 under
the SBI VRS. On 18.3.2001, the bank accepted the offer of the
employee to retire him voluntarily. He was aged 59 years three months
and had nine months service still to go before attaining the age of
superannuation. On 31.3.2001, when the VRS became effective, he
had put in 19 years, nine months, and 18 days of pensionable service.
He had to retire on completion of 60 years, and would have put in a
little more than 20 years of pensionable service.
(b) The High Court held that the case of the employee fell under the
Second Part of Rule 22(i)(a). He was in service of the bank on and after
11.11.1993 and completed ten years of pensionable service, and
further, he attained the age of 58 years before the date he retired. The
High Court opined that the clarification was not part of the VRS
scheme. The employee retired outside rule as per the contractual
retirement scheme. The contract had to prevail. In Pension Fund
Rules, Clause (a) in Rule 22(i) was inserted to give the employees the
benefit of pension after ten years of pensionable service even if they
had joined late. The High Court found that the matter was covered by
Rule 22(i)(a). The admissible benefit cannot be denied. If a contracting
7
party is entitled to take benefit of a permissible clause, then it cannot
be denied to him.
(c) In the Chairman, State Bank of India & Ors. v. Mihir Kumar Nandi
& Anr. (C.A. Nos. 50355037/2012), a Division Bench of the High
Court of Calcutta dismissing the intracourt appeal, affirmed the order
of the learned Single Judge and directed to make the payment of
pension. The employee was appointed on 21.5.1988. He opted for VRS
on 15.1.2001. The acceptance was conveyed on 17.3.2001 by which
he was informed that he would be relieved of his duties on 31.3.2001.
Vide letter dated 2.8.2001, the employee was granted a pension at the
rate of Rs.1024 per month. However, vide communication dated
30.8.2001, the pension payment order, together with payment of
commuted value, was stopped in view of the amendment of Rule 22 of
the Pension Fund Rules. Though the amendments in Pension Fund
Rules were made effective with effect from 31.3.2001, and the age of
retirement had been raised from 58 years to 60 years, w.e.f.
22.5.1998, this had necessitated increase in age for admission to
Pension Fund to 58 years specified in Rule 22(i)(a) of the Rules so that
the employees who have retired/are retiring on attaining the age of 60
years after completing ten years of pensionable service on or after
22.5.1998 are eligible for pension.
8
(d) The Central Board of the SBI in its meeting held on 30.1.2001
accorded approval to the amendment in Rules 8 and 22(i)(a) of the
Rules as set out in Annexure 1. The Trustees of the SBI Employees’
Pension Fund in their meeting on 30.10.2001 adopted the amended
rules. Consequently, a Circular was issued on 8.11.2001. The
amendment was given effect from 31.3.2001, the date on which it was
notified, though it was adopted by the Trustees of the SBI Trust
Pension Fund in October 2001.
(e) A Division Bench of the High Court held respondentemployee,
as per rules on 17.3.2001, the date on which his offer was accepted,
was eligible to get the pension. On 31.3.2001, the amended rules were
published, which took away the existing right to get the pension. In
VRS Scheme, it was mentioned that the pension would be payable in
accordance with the rules as on 31.3.2001. The employee had no
means of knowing about the future amendment of the Pension Rules,
which would be detrimental to his interest. If he had known the fact,
then he would not have opted for the scheme. The silence maintained
by the employer in such a situation amounted to a fraud on its part.
The High Court relied upon section 17 of the Contract Act and
Illustration (d) to section 19 of the Contract Act. The High Court
further held that it was the duty of the employer to disclose that there
would be a future amendment on the last date of their service by
9
which their right to pension would be taken away. The same cannot
but be said to be unfair and arbitrary. Thus, the High Court held that
action is violative of Article 14 of the Constitution of India. The
employee is entitled to the relief of pension along with interest.
10. Ramesh Prasad Nigam (supra) had joined the services in 1984 in
the clerical cadre and was confirmed on 2.3.1985. He had applied for
VRS, having completed 15 years of service and 57 years of age. The
clarification was internal circulation. It was not within the knowledge
of employees; as such, he was entitled to the pension.
11. (a) In C.A. Nos.228788/2010, M.P. Hallan joined the services of
the bank on 18.5.1981 as a clerk. The acceptance under VRS was
communicated on 17.3.2001. On 27.3.2001, he applied to withdraw
his request made under VRS as retirement was w.e.f. 31.3.2001. The
Bank declined application on 18.4.2001 on the ground that the last
date of withdrawal of the application was 15.2.2001. The employee
claimed pension under Pension Fund Rules in terms of SBI
Employees’ Pension Fund Rules (hereinafter referred to as ‘Pension
Rules’). By writing a letter on 12.4.2001, the claim of the employee for
withdrawal of application for voluntary retirement, pension, and leave
encashment was again declined on 4.7.2001. Thereafter, he filed a writ
petition in the High Court of Punjab & Haryana.
10
(b) The High Court rejected the claim concerning the withdrawal
from VRS. As the last date for withdrawal was over, and acceptance
had been communicated, however, considering Rule 22 of the Pension
Rules, the High Court opined that as the employee completed more
than 19 years and ten months of service on 31.3.2001, therefore, the
first part of clause one of Rule 22 is not applicable. Further, the third
part of clause (a) is not applicable as he has completed ten years of
service but not attained the age of 60 years. The case of the employee
was covered under the second part of clause (a) of Rule 22, which
enabled the member to get a pension if an employee in the service of
the bank on or after 1.11.1993, and completed ten years pensionable
service and attained 58 years age. The employee applied in terms of
the Pension Rules prevailing in January 2001. Alternatively, if an
employee was in service of the bank on or after 1.11.1993, having
completed ten years of pensionable service and on attaining the age of
58 years, shall be entitled to a pension. Thus, he fulfilled the
requirement of second part of clause (a) of Rule 22 as he was in
service of the bank on 1.11.1993 and completed ten years of
pensionable service, and the age of 58 years, therefore, in terms of
Rule 22, he was entitled to pension as well as leave encashment dues
along with interest at the rate of 9 percent per annum.
11
12. On behalf of the bank, it was submitted that VRS 2000
stipulated that the pension in terms of SBI Pension Fund Rules on the
relevant date, i.e., 31.3.2001, was to be provided. In other words, in
case the employee was entitled to a pension in terms of Pension Rules
and not otherwise. A provision was added in Rule 22(1) of the Pension
Rules in the year 1986, accordingly, the pension was to be granted in
all cases relating to voluntary retirement on completion of 20 years of
service. The employees opting for the SBIVRS would be governed only
by Rule 22(i)(c) as it falls under the category of voluntary retirement.
Under Rule 22(iii), a member who has been permitted to retire under
clause 22(i)(c) shall be entitled to a proportionate pension, which is on
completion of 20 years of pensionable service. Eligibility clause 3 has
nothing to do with the admissibility of the pension. It was further
submitted that the employees who completed ten years of pensionable
service and were 60 years of age were entitled to pension; while
employees under the VRS on completion of 15 years would not get
pension and for that 20 years' service was necessary, the submission
of employees that it would be discriminatory is based on incorrect
premise. There is no challenge to the SBI Pension Rules or SBIVRS.
The bank provided the pensionable service period of 10 years on
attaining the age of 60 years in terms of reservation policy. The bank
appoints late entrants like exservicemen who, after serving in Armed
12
Forces, join the bank and are left only with about ten years of service
before they attain the age of superannuation. It is to grant benefit to
such a particular category of employees that a period of 10 years on
attaining the age of superannuation of 60 years was provided in Rule
22(i)(a).
13. The appellants further submitted that 20 years' period is
provided in case of voluntary retirement to ensure that an employee
on whom the bank has spent a considerable amount during training,
works for a substantial period before he seeks retirement. It is a
uniform policy followed by the bank. Regulation 28 was amended in
2002 providing for 15 years of service. It applies to the employees who
are governed by the Bank Employees' Pension Regulations, 1995.
These regulations do not apply to SBI employees as the SBI Pension
Rules govern them. SBI employees are entitled to Provident Fund,
gratuity and pension in terms of the Rules on completion of 20 years
of service. Thus, there cannot be any comparison of SBI employees
with the employees of other nationalised banks. The clarification dated
11.01.2000 has also been relied on by the bank. Now more than 19
years have passed and to grant a pension to all those who have
retired, w.e.f. 1.4.2001 would cast a huge financial liability on the
bank.
13
14. It was submitted on behalf of the employees that the decision
rendered by the High Court is appropriate. No case for interference is
made out in appeals. The very essence of the VRS was the
admissibility of pension on completion of 15 years of service and other
benefits. Once the scheme was adopted and approved by the Central
Board of SBI, the clarification could not have been made to the
detriment of employees. The clarification did not have effect of the
amendment, modification, or cancellation of the VRS scheme as
approved and adopted by Board. The amendment in the Pension
Regulations of 1995 was carried out by other public sector banks with
retrospective effect in 2002, though the scheme was floated and
implemented in the year 20002001. However, the benefits were
extended on the strength of the VRS scheme even before amending the
Regulations of 1995. The SBI adopted the Scheme in toto and Pension
Rule 22 providing eligibility of 20 years applies only to those cases
where employees seek retirement in the ordinary course of completion
of 10 years or 20 years, as the case may be. The VRS was taken in the
specific scheme providing eligibility and benefits on completion of 15
years of service, and that constituted a concluded contract. It was not
open to the bank to alter the terms. In case the bank's submission is
accepted, it would lead to a situation that employees who have already
reached the age of superannuation, would have been entitled to take
14
VRS. The bank has misled the employees, and the action could not be
said to be fair. Once an offer was accepted and after that to amend the
rules or not to amend the rules till 31.3.2000 depended on exercise of
power by SBI which may have the effect to deprive the pension when
the option was not available even to withdraw the offer as it was the
last day of the employment. Rule 22 was amended, that too with
retrospective effect. Thus, the employees who joined service after
retirement from other services, have completed the age of 58 years and
were in employment as on 1.11.1993 were entitled to a pension. They
have also been deprived of the benefit of pension, which would have
been otherwise available to them. In case pension was not to be paid,
it was not a profitable bargain for them to forego pension only for ex
gratia benefit. It was incumbent upon the SBI to amend the Rule, in
case it was necessary to do so. Otherwise, also, the meaning of the
expression “pension” to be paid as per rules was that proportionate
pension to be awarded to the employees with 15 years’ service who
were eligible for benefits granted as specified in the circular and the
VRS scheme. The clarification issued on 11.1.2000 only pointed out
the provisions of the VRS scheme as well as the existing position of the
rule. It could not have effect to take away the benefit in any manner
which became available to the employees of obtaining the pension on
completion of 15 years of permanent pensionable service. On the one
15
hand, employees who served for ten years and attained the age of
superannuation were entitled to pension and to deprive the same to a
permanent employee who rendered the service for 15 years, would be
per se discriminatory, unfair and arbitrary. Once the scheme was
floated and approved, the bank being State within the purview of
Article 12 of the Constitution of India, it would not be permissible for
it to discriminate and act unfairly. The VRS constituted an
independent contract and was binding upon the bank. The benefits
could not have been taken away from eligible employees who accepted
VRS, which was implemented by the bank for its benefit to induct new
skills as well as to rationalise the workforce. Thus, appeals being
bereft of merit, deserve dismissal.
15. The main question is whether, under the scheme as approved
and adopted by the Central Board of SBI, the pension is admissible to
the employees on completion of 15 years of permanent service.
Connected question is whether employees have been denied benefit of
pension unfairly and arbitrarily contrary to the essential terms of the
scheme.
16. Firstly, it is necessary to consider the nature of the package,
which was accepted in the resolution by the Central Board of Directors
of SBI in its meeting dated 27.12.2000. As already mentioned, exercise
16
was done in order to rationalise the workforce as it was felt that banks
were overstaffed. The IBA advised the SBI regarding the issues
confronting the public sector banks. In the memorandum submitted to
the Central Board of Directors of SBI, the following facts were
mentioned as to the adoption of Scheme in right earnest and
requirement of manpower planning:
“The data available with IBA indicates that 43% of employees
in Public Sector Banks are in the 46+ age group, and only 12%
are in the 2535 age group. This pattern has serious
implications for the Banks with reference to mobility, training,
development of skills, and succession plans for higherlevel
positions. This, coupled with excess manpower wherever it
exists, would come in the way of induction of new skills and
proper career progression.
The Committee has recommended the introduction of a
Voluntary Retirement Scheme that would assist the Banks in
their effort to optimise their human resources and achieve a
balanced age and skills profile in keeping with their business
strategies. IBA has advised that the Government of India has
conveyed that they have no objection to the banks' placing
before their respective Boards of Director's proposals for
adopting and implementing the Voluntary Retirement Scheme.
It has been advised that Banks may adopt the scheme after
obtaining their Boards' approval and implement it in right
earnest.” (emphasis supplied)
"a) The high establishment costs of the Bank visàvis the
foreign banks and new private sector banks have been a
matter of concern. The percentage of staff expenses to total
expenses in the Bank is 21.85 against the percentage of 7.66
and 3.04 for foreign banks and new private sector banks,
respectively. Even if we compare it with other Public Sector
Banks, our ratio is adverse.
d) With the computerisation of accounting and other work at a
large number of branches, manpower, which was needed for
balancing of books, is now rendered surplus. This indicates an
imperative need to rationalize the manpower at these
branches. While we have already initiated steps for the
productive redeployment of staff at these branches through
shift banking and sevenday banking, there still exists scope
for improvement in this area. Most of these branches are
situated in metropolitan and urban centers. Incidentally, the
17
experience of other banks in respect of voluntary retirement
schemes shows that a maximum number of applications have
been received from these centers.
f) As against the average of 43% of employees in Public Sector
Banks in the 46+ age group, we have 47% of the employees in
this age group. Of this, 1/5th are in the age group of 56 and
above. To put it simply, 21,824 employees will reach the age of
superannuation and retire by March 2005.
In the light of the abovementioned factors, it will be seen
that the manpower of the Bank will undergo major changes in
the ensuing years in number and deployment. Further,
considering the variety of business the Bank undertakes, and
its special role in the banking sector, overemphasis on
quantitative parameters would be inappropriate. An approach
paper on Manpower Planning is placed at Annexure‘A’.
Considering the various aspects of Manpower Planning, we
are of the view that the Voluntary Retirement Scheme should
be employed as a moderate tool to rightsize the manpower in
State Bank of India."
In the light of aforesaid, it is clear that the VRS scheme was
devised as a tool to reduce overstaffing. The memorandum submitted
to the Central Board contained the following significant aspects:
“Keeping in view the above, the IBA guidelines and the
feedback received from other Banks, the draft ‘SBI Voluntary
Retirement Scheme (SBIVRS)’ is prepared and placed for
approval at Annexure‘B.'
It is proposed to introduce SBIVRS for employees who have
as on 31122000, completed 40 years of age or 15 years of
service as approved by the Government of India and conveyed
by IBA. In terms of the IBA scheme, the Banks’ Boards may
specify any other category as ineligible. We propose to exclude
the Watch and Ward staff as these positions cannot be
reduced. We also propose to exclude highly skilled and
qualified staff from the Scheme.
SBIVRS will be voluntary in nature. The decision to seek
retirement under the Scheme rests with the employee only.
The management will retain the discretion as to whether to
accept or not the request for voluntary retirement under the
Scheme. We have to ensure that while, on the one hand, our
Bank benefits by the rightsizing of the staff strength, on the
18
other, any sudden exodus of a very large number of staff does
not destabilise the normal operations of the Bank. Considering
the attractive features of the Scheme, in terms of exgratia
payment, etc., a large number of applications are expected.
However, the Bank will have to control the outflow according
to its requirements. Towards this end, it will be necessary to
retain the discretion with the management of the Bank to limit
the number of employees allowed to retire in each category of
staff to be covered under SBIVRS, and we propose to retain
such discretion."
(emphasis supplied)
It was proposed to introduce a VRS for employees who on
31.12.2000, completed 15 years of service as approved by the
Government of India and conveyed by IBA. So, it assumes significance
that what was approved and conveyed, in terms of the IBA scheme,
the Banks’ Boards were permitted to specify any other category as
ineligible. The SBI considering its requirement proposed to exclude the
Watch and Ward staff as these positions could not be reduced. It was
also proposed to exclude the highly skilled and qualified staff from the
scheme.
Funds outlay was also proposed in the memorandum submitted
to the Central Board as under:
“FUNDS OUTLAY
As per the estimate received from Bank's actuary, an outlay of
approximately Rs. 2100 crores would be required for the
implementation of SBIVRS if 10% of the employees opt for
retirement. The breakup being as under:
Exgratia Rs. 1300.00 crores
Leave encashment Rs. 180.00 crores
Additional Provision for Gratuity Rs. 140.00 crores
Additional Provision for Pension Rs. 480.00 crores
(These estimates may undergo a change on receipt of
19
clarification from Government of India as to the components of
‘Pay’ for the purpose of Exgratia)”
A provision was made for the pension. The bank reserved the
right to modify, amend or cancel any or all the clauses. The Deputy
Managing Director and CDO would be the competent authority.
Following is the relevant clause regarding modification of the scheme:
“MODIFICATION OF THE SCHEME
Bank reserves the right to modify, amend or cancel any or all
the clauses of the Scheme and to give effect thereto from any
date it may deem fit. The Dy. Managing Director and CDO
would be the Competent Authority for the purpose.”
The effective date of retirement was 31.3.2001. The relevant
clause is extracted hereunder:
“EFFECTIVE DATE OF RETIREMENT
While the SBIVRS will be open to employees from 15th January
2001 to 31st January 2001 (both days included), the retirement
under SBIVRS is proposed to be given effect from 31st March
2001."
17. The letter dated 31.8.2000 annexed to memorandum submitted
to the Central Board of the SBI is also of utmost significance in order
to understand what was accepted by the Central Board. The relevant
portion of the letter dated 31.8.2000 of IBA is extracted hereunder:
“Attention is invited to letter DO No. 11/1/99IR dated
22.05.2000, addressed to the Chief Executive of public sector
banks by the Government of India, Ministry of Finance
(Banking Division), wherein banks have been advised to carry
out detailed manpower planning in order to adopt measures to
have optimum human resource at various levels in keeping
with the business strategies and requirements of each bank.
At the meeting the Finance Minister had with Chief Executives
of public sector banks on 13th June 2000, the human resource
and manpower planning in public sector banks were
reviewed, and a Committee was constituted to examine the
issues confronting public sector banks in that regard and
20
suggest suitable remedial measures."
“In order to remedy this situation with the urgency that
circumstances demand, the Committee has placed before the
Government two schemes, viz., Sabbatical Leave and a
Voluntary Retirement Scheme that would assist the banks in
their effort to optimise their human resource and achieve a
balanced age and skills’ profile in keeping with their business
strategies. Salient features of the two schemes are given in the
Annexure.
IBA, vide its letter dated 13th July 2000, has sought no
objection from the Government for circulating the schemes to
the Banks for consideration and adoption by their Boards. The
Government have conveyed to us that they have no objection
to the banks' placing the two schemes before their respective
Board of Directors for adopting and implementing the above
schemes. It has been advised that the Banks may adopt these
schemes for sabbatical and voluntary retirement based on the
essential features of the schemes given in the Annexure, after
obtaining their Board’s approval and implement them in right
earnest.” (emphasis supplied)
“Banks are also requested to take special note of the following:
1. Section 10(10C) of the Income Tax Act read with Rule 2BA.
2. As per the amendments brought in by the Finance Act 2000,
so long as the bank complies with the rules framed under
Section 10(10C), prior approval from the Chief Commissioner
or Director General of Incometax, as the case may be, is not
required for VRS.
3. Incometax shall be deducted at source in respect of exgratia
exceeding Rs.5.00 lakhs or such other ceiling as may be
prescribed under the Incometax Act.
4. Only completed years of service will be reckoned for arriving at
the minimum eligible service. Subject to this, fraction of
service of six months and above will be reckoned as one year
for the purpose of calculating the exgratia.
5. While exercising discretion to decline applications for VRS or
to make exceptions in the case of employees categorised as
ineligible for VRS, the decision should not be discriminatory
among employees who are similarly placed and the reasons
therefor should be recorded.
6. The competent authority for accepting VRS for the various
categories/class of employee should be clearly laid down by
the Board of Directors.
21
7. Banks should ensure compliance with requirements under
labour legislations before giving effect to the Scheme.”
18. IBA’s letter dated 31.8.2000 makes clear the salient features of
the VRS scheme that all permanent employees with 15 years of service
were eligible to retire. Ineligible persons have also been specified. In
unqualified terms, it was mentioned in the annexures that such
employees would be entitled to the amount of ex gratia of 60 days’
salary for each completed year of service or salary for the number of
months service is left, whichever is less. Other benefits admissible
were gratuity, pension including the commuted value of pension,
bank's contribution towards provident fund, and leave encashment as
per rules. Thus, scheme was to grant pension to all such employees
who opted for VRS on completion of 15 years of service and other
benefits as specified in the scheme. The Government of India,
Ministry of Finance, Department of Economic Affairs, (Banking
Division), that it communicated approval vide letter dated 29.8.2000
to IBA, it was sent to the SBI also, the same is extracted hereunder:
“F. No. 11/1/99IR (Vol.II)
Government of India
Ministry of Finance
Department of Economic Affairs
(Banking Division)
New Delhi, dated the 29th August 2000
To
The Chairman
Indian Banks‘ Association
MUMBAI
22
Sub: Human Resource Management and Manpower Planning
in Public Sector BanksIntroduction of a Voluntary Retirement
Scheme/Scheme for Sabbatical Leave.
Sir,
I am directed to refer to IBA's letter No. PD/ACAP/GOVT/521
dated 13th July 2000 sending therewith a copy of the interim
report of the Committee on Human Resource Management in
Public Sector Banks and requesting for no objection from the
Government for circulating to banks Voluntary Retirement
Scheme and Scheme for granting Sabbatical Leave for
consideration and adoption by their Boards, and to say that
Government has no objection to the proposals contained
therein.
2. The draft circular letter sent by IBA has been slightly
modified. Copy of the modified draft is enclosed herewith.
3. It is requested that a copy of the circular issued to the
banks may please be sent to Banking Division for record.
Yours faithfully
Sd/ (U.P. SINGH)
DIRECTOR (IR)”
19. The agenda submitted on 27.12.2000 for consideration of the
Central Board of SBI along with resolution are extracted as under:
“AGENDA NO.3
Man Power Planning and SBI Voluntary Retirement Scheme
(SBI VRS)
Submitted Memorandum dated the 26th December 2000 by
the Deputy Managing Director & Corporate Development
Officer, recommending that for the reasons stated therein,
approval be accorded for the proposals contained in the
Memorandum as also for adopting the stated approach to
manpower planning and introduction SBIVRS in terms of the
provisions contained in the Scheme at Annexure ‘B‘ of the
Memorandum.
Copies of the Memorandum were placed before the Directors
present at the Meeting.
‘‘APPROVED”
(SEAL)
23
20. Annexure ‘B’ to the memorandum contained the VRS. The VRS
was prepared in view of the guidelines of the IBA. The amount of ex
gratia and other benefits specified in the scheme under clauses 5/ 6 of
the scheme are extracted hereunder:
“5. Amount of Exgratia:
The staff members whose request for retirement under SBIVRS
has been accepted by Competent Authority will be paid an
amount of exgratia of 60 days‘ salary (pay plus stagnation
increments plus dearness allowance) for each completed year
of service (for this purpose fraction of service of six months
and above will be taken as one year and accordingly service of
less than six months will not be counted) or salary for the
number of months service is left, whichever is less. Fraction of
a month, if any, will be ignored.
‘Relevant Date‘ means the date on which the employee ceases
to be in service of the Bank as a consequence of the
acceptance of the Bank as a consequence of the acceptance of
the request for voluntary retirement under the Scheme. For
the purpose of calculation of exgratia, 60 days‘ salary
mentioned in the Scheme is to be taken as equivalent to 2
months‘ salary (with reference to salary for the month in which
employee is relieved from service on Voluntary Retirement.
Income Tax shall be deducted at source in respect of exgratia
exceeding Rs. 5.00 lakhs or such other ceiling as may be
prescribed under the Income Tax Act on the relevant date.“
The benefits were as under:
“6. Other benefits
(a) Gratuity as payable under the extant instructions on the
relevant date.
(b) Provident Fund contribution as per State Bank of India
Employees‘ Provident Fund Rules as on relevant date.
(c) Pension in terms of State Bank of India Employees‘ Pension
Fund Rules on the relevant date (including commuted value of
pension).
(d) Encashment of balance of Privilege Leave, as applicable, on the
relevant date.
24
(e) Respective facilities extended to officers/others such as
retention of accommodation, telephone, car, continuation of
housing loan, etc. will be extended to officers. Others retiring
under SBIVRS as per present dispensations, at the discretion
of Competent Authority. However, in such cases of retention of
physical facilities, 50% of the amount of exgratia payable will
be released only after the employee surrenders the facility. No
interest, however, will be paid for the amount so withheld. All
other outstanding loans/advances will have to be repaid before
date of retirement under SBIVRS, failing which the amount of
exgratia and other terminal benefits payable to the employee
will be appropriated towards the outstanding loans/advances;
and the balance only will be payable to the employee.”
21. Most significantly, the scheme of the IBA, accepted by the Board
on 27.12.2000, was for providing pension on completion of 15 years of
service. The pension specified in clause 6 of scheme was to be worked
out in terms of the Pension Fund Rules including the commuted value
of the pension. It was not mentioned in the VRS adopted by the SBI
that the person on completion of 15 years would not be entitled to the
benefit of pension. On the other hand, proposal of IBA, as approved by
the Government of India, was accepted in toto by SBI. When gauged in
terms of the proposals of the IBA, the essential feature was that an
employee was entitled to get pension on completion of 15 years of
service. The meaning of the expression "pension” in terms of the rules
would be proportionate pension on completion of 15 years of service as
per the terms of calculation provided in Rule 23 of the Pension Rules.
VRS is an independent contract and the background in which it was
floated, pension on completion of 15 years of service was an essential
25
part of the scheme of VRS 2000, as approved by the Government and
floated by the IBA and adopted by all the Banks, and Pension Rules
were to be amended accordingly.
22. The Government of India suggested to the IBA to amend
Regulation 29 of the Regulations of 1995 so that the employees do not
lose the benefit of pension, the IBA may work out modalities and
suggest amendments, if any, required to be made in the Pension
Regulations to ensure that the employees get the benefit of pension.
The letter dated 5.9.2000 of Government of India is extracted
hereunder:
“F. No. 4/8/4/2000IR
Government of India,
Ministry of Finance,
Department of Economic Affairs
(Banking Division)
New Delhi, 592000
To
The Personnel Advisor,
Indian Banks’ Association,
Mumbai
Sub.: Amendment to Regulation 29 of the Pension Regulations.
Sir,
I am directed to refer to this Division's Letter No. 11/1/99 IR
dated 2982000, conveying the Government's no objection for
circulation of Voluntary Retirement Scheme in public sector
banks. The Scheme, inter alia, provides that employees with
15 years of service or 40 years of age shall be eligible to take
voluntary retirement under the Scheme. As per the provisions
contained in Regulation 29 of the Pension Regulations, an
employee can take voluntary retirement after 20 years of
qualifying service and thereafter becomes eligible for pension.
Thus, employees having rendered 15 years of service or
completing 40 years of age but not having completed 20 years
26
of service shall not be eligible for pensionary benefits on taking
voluntary retirement under the Scheme.
In order to ensure that such employees do not lose the benefit
of pension, IBA may work out modalities and suggest
amendments, if any, required to be made in the Pension
Regulations to ensure that these employees also get the benefit
of pension.
Yours faithfully,
sd/
(U.P. Singh)
Director (IR)”
23. SBI issued a circular on 10.1.2001 with respect to the
withdrawal of the application submitted under the scheme. It was
decided that the employee could withdraw the application on or before
15.2.2001 by making a written request.
24. Clarification was issued on 15.1.2001 to a query raised, whether
or not the employees on completing 15 years of pensionable service
would be entitled to pensionary benefits. Following is a relevant
portion:
“3. Whether or not the employees, completing 15 years of
pensionable service as on relevant date (date of retirement
under SBIVRS), will be entitled for pension benefits?
In this connection, we invite a reference to para 6(c) of the
Scheme forwarded under the cover of Staff Circular letter No.
CDO/81 dated 30/12/2000. The payment of pension to the
employee retiring under SBIVRS would be governed by State
Bank of India Employees Pension Fund Rules on the relevant
date (including commuted value of pension). However, as per
existing rules, employees who have not completed 20 years of
Pensionable Service are not eligible for pension.”
It is clear from answer that the staff circular dated 30.12.2000
was reiterated. Payment of pension to an employee retiring under VRS
would be governed by rules on the relevant date, i.e., 31.3.2001. At
27
the same time, the position of the existing rule was indicated that
those employees who had not completed 20 years of pensionable
service were not eligible for a pension. It was not clarified what was
the meaning and purport of para 6(c) of the scheme. It was not
mentioned that an employee would not be entitled to pension on 15
years of service as per the scheme approved by the Government of
India and floated by the IBA and adopted by the Central Board of SBI.
The above clarification being in form of opinion, could not be said to
have caused a modification, amendment, or cancellation of any of the
clauses of VRS or resolution passed by the Board, nor it was so stated.
It was necessary to state that on completion of 15 years of service,
employees would not be paid pension. The existing rule position was
known to everybody, whereas the scheme was framed for providing
pension on completion of 15 years of service.
25. Rule 22 of the Pension Rules of SBI as it existed up to 9.3.2001
and amended are extracted hereunder:
Existing Rule
“22(i) A member shall be entitled to a pension under these
rules on retiring from the Bank’s service
(a) After having completed 20 years' pensionable service provided
that he has attained the age of 50 years or if he is in the
service of the Bank on or after 01.11.93, after having
completed ten years pensionable service provided that he has
attained the age of 58 years.
(b) After having completed twenty years' irrespective of the age he
shall have attained if he shall satisfy the authority competent
to sanction his retirement by approved medical certificate or
28
otherwise that he is incapacitated for further active service;
(c) After having completed twenty years pensionable service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twentyfive years' pensionable service.“
Amended Rule
“22(i) A member shall be entitled to a pension under these
rules on retiring from the Bank’s service
(a) After having completed twenty years' pensionable service
provided that he has attained the age of fifty years or if he is in
the service of the Bank on or after 01.11.93, after having
completed 10 years, pensionable service provided that he has
attained the age of fiftyeight years or if he is in the service of
the bank on or after 22.05.1998. After having completed ten
years, pensionable service provided that he has attained the
age of sixty years.
(b) After having completed twenty years' pensionable service,
irrespective of the age he shall have attained if he shall satisfy
the authority competent to sanction his retirement by
approved medical certificate or otherwise that he is
incapacitated for further active service;
(c) After having completed twenty years pensionable service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twentyfive years' pensionable service."
26. It is clear from Rule 22 that pension is admissible to an
employee thus:
1) After having completed 20 years’ pensionable service provided
that he has attained the age of 50 years; or
2) If he is in the service of the Bank on or after 01.11.1993, after
having completed 10 years pensionable service provided that he
has attained the age of 50 years; or
3) If he is in the service of the Bank on or after 22.05.1998, after
having completed 10 years pensionable service provided that he
has attained the age of 60 years.
29
27. Rule 22(1)(c) was incorporated in the Pension Fund Rules w.e.f.
20.9.1986 when the bank decided inter alia to introduce VRS on
completion of 20 years of service. The unamended rule 22(i)(a)
provided the normal age of retirement to be 58 years. Thereafter, as
per the guidelines issued by the Government on 22.5.1998, the age of
retirement was increased from 58 to 60 years. Accordingly, Rule 22(i)
(a) was proposed to be amended on 30.1.2001, and instead of 58
years, the age of retirement of 60 years was to be incorporated. On
28.5.1998, the Executive Committee of the Central Board of SBI
pending amendment to the related service rules adopted the age of
retirement as 60 years. The amendment was notified on 31.3.2001
and approved by the Trustees of the SBI Employees’ Pension Fund on
30.10.2001.
28. Similar scheme of VRS concerning nationalised banks was
implemented according to the decision of the Government of India. In
Punjab & Sind Bank, it was to remain open from 1.12.2000 to
31.12.2000; Punjab National Bank: 1.11.2000 to 30.11.2000; Bank of
India: 15.11.2000 to 14.12.2000; Union Bank of India: 1.12.2000 to
31.12.2000; United Bank of India: 1.1.2001 to 31.1.2001. In SBI, the
said scheme was adopted by the Central Board on 27.12.2000.
30
29. The State Bank of India was constituted under the SBI Act,
1955. The nationalised banks were taken over in terms of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Under the Act of 1970, the Punjab National Bank (Employees) Pension
Regulations, 1995, were framed. Regulation 28, provided pension on
attaining the age of superannuation, and Regulation 29 provided
pension on voluntary retirement on completion of 20 years of
qualifying service. Regulation 29(5), applicable to the banks mentioned
above, provided that the qualifying service of an employee retiring
voluntarily under the Regulation shall be increased by a period not
exceeding five years, subject to the condition that the total qualifying
service rendered by such employee shall not exceed 33 years.
30. The VRS 2000 came up for consideration before this Court in
Bank of India & Ors. v. O.P. Swarnakar & Ors., (2003) 2 SCC 721 in
the context of Regulation 29(5) of Regulations, 1995. The Court held
that the scheme is contractual and provided for pensionary benefits on
completion of 15 years of service. The decision was followed in HEC
Voluntary Retd. Employees Welfare Society v. Heavy Engineering
Corporation Ltd., (2006) 3 SCC 708.
31. Due to introduction of Scheme, Regulation 28 of Regulations of
1995 was proposed to be amended. It was amended in the year 2002
31
with a retrospective effect from 1.9.2000. By way of amendment, a
proviso has been inserted in Regulation 28 thus:
“28. Superannuation pension.—Superannuation pension shall
be granted to an employee who has retired on his attaining the
age of superannuation specified in the Service Regulations or
Settlements.”
“Provided that pension shall also be granted to an employee
who opts to retire before attaining the age of superannuation,
but after having served for a minimum period of 15 years in
terms of any scheme that may be framed for the purpose by
the Bank’s Board with the concurrence of the Government.”
(emphasis supplied)
32. The employees who opted for VRS on completion of 15 years of
service within the specified period in 2000/2001, were given the
benefit of pension. The Regulations came to be amended in 2002 with
the retrospective effect. However, the benefit under Regulation 29(5)
was not extended to the optees/employees who completed 20 years of
service by adding 5 years of qualifying service. Regulations 29(1) and
29(5) applicable to the said banks are extracted hereunder:
“29. Pension on voluntary retirement.—(1) On or after the 1st
day of November 1993 at any time, after an employee has
completed twenty years of qualifying service he may, by giving
notice of not less than three months in writing to the
appointing authority retire from service:
Provided that this subregulation shall not apply to an
employee who is on deputation or on study leave abroad
unless after having been transferred or having returned to
India he has resumed charge of the post in India and has
served for a period of not less than one year:
Provided further that this subregulation shall not apply to
an employee who seeks retirement from service for being
absorbed permanently in an autonomous body or a public
sector undertaking or company or institution or body, whether
incorporated or not to which he is on deputation at the time of
seeking voluntary retirement:
32
Provided that this subregulation shall not apply to an
employee who is deemed to have retired in accordance with
clause (1) of Regulation 2.
x x x
(5) The qualifying service of an employee retiring voluntarily
under this Regulation shall be increased by a period not
exceeding five years, subject to the condition that the total
qualifying service rendered by such employee shall not in any
case exceed thirtythree years and it does not take him beyond
the date of superannuation.”
33. The scheme in question came up for consideration in O.P.
Swarnakar & Ors. (supra), in which SBI was one of appellants in C.A.
Nos.356165/2002, the appeals were decided by this Court by a
common judgment. It noted that reference to pension as per rules was
made for computation of pension, and the employees who had
completed 15 years of service were to be extended the benefit of VRS
2000 along with pension and other benefits. IBA wrote a letter dated
11.12.2000 to all public sector banks for amending Pension
Regulations, 1995. The IBA mentioned that pension was to be paid to
the employees as per VRS 2000. They would be eligible for prorata
pension; as such, Regulation 28 be amended. The employees who
applied for voluntary retirement after having rendered 15 years’
service, under a special/ad hoc scheme formulated with the specific
approval of the Government and the Board of Directors would be
eligible for prorata pension for the period of service rendered as if they
were to retire on attaining the age of superannuation on that date. The
letter made it clear that the Government of India approved the pension
33
to be given on completion of 15 years of service. The scheme was for
extending the benefit of pension to the employees retiring on
completion of 15 years of permanent service, and the Government of
India also desired that the IBA advised banks to make necessary
amendments to their pension regulations, as mentioned in the
Annexure. Thus, the essence of the VRS scheme was the benefit of
prorata pension as per the rules on completion of 15 years of
pensionable service.
34. It is apparent that the very fulcrum of the scheme was a felt
need for inducting new workforce, with adequate knowledge of new
skills such as modern technology, foreign exchange, venture capital, ecommerce, money management, etc. as pointed out by the Ministry of
Finance in its letter dated 22.5.2000. The banks were overstaffed and
for effective management and manpower planning, the desirability of
introducing VRS was felt in order to rationalise the workforce and
skill. Hence a Committee was constituted by the Central Government.
In pursuance of report of the Committee, a policy decision was taken
to frame the VRS. The scheme applied to employees who, on the date
of the application, completed 15 years of service. The employees
specified therein were otherwise not eligible to seek voluntary
retirement on completion of 15 years under the rules/regulations.
Under the scheme floated by the other banks, identical reliefs were
34
admissible, as in SBI VRS. The Scheme of Punjab National Bank is
extracted hereunder:
“7. x x x “Amount of ex gratia
An employee seeking voluntary retirement under the
Scheme will be entitled to the ex gratia amount mentioned
below in para (a) or (b), whichever is less:
(a) 60 days’ salary (pay plus stagnation increments plus
special pay plus dearness relief) for each completed year of
service;
OR
(b) salary for the number of months of service left;
Other benefits
An employee seeking voluntary retirement under the
Scheme will be eligible for the following benefits in addition to
the ex gratia amount mentioned in para 6 above of this
Scheme:
(i) Gratuity as per the Payment of Gratuity Act, 1972 or
gratuity payable under the Service Rules, as the case may be,
as per existing rules.
(ii)(a) Pension (including commuted value of pension) as per
PNB (Employees) Pension Regulations, 1995.
OR
(b) Bank’s contribution towards PF as per existing rules.
(iii) Leave encashment as per existing rules.”
(emphasis supplied)
35. The eligibility criteria in all the schemes, including SBI VRS,
clearly provided that employees who completed 15 years of service and
particular age shall be eligible to apply. The benefits to which they
were entitled, were culled out. In other banks, the pension was as per
Pension Regulation, 1995. Thus, on eligibility of an employee,
admissibility of the available reliefs in Scheme followed i.e., the
amount of ex gratia and other benefits, including pension, were to be
paid as provided in the scheme. Otherwise, there was no purpose of
retiring an employee with 15 years of service as they were not eligible
35
for retirement as per the rules before completion of 20 years of service
in all nationalised banks as well as SBI. A reference to the
admissibility of the pension as per rules/ regulations was made in all
the VRS to mean that proportionate pension shall be admissible as
provided in rules, this Court has noted it in O.P. Swarnakar (supra),
thus:
“49. An offer indisputably can be made to a group of persons
collectively which is capable of being accepted individually, but
the question which has to be posed and answered is as to
whether having regard to the service jurisprudence; the
principles of the Indian Contract Act would be applicable in
the instant case. It is the specific case of the “banks” that the
Schemes had been floated by way of contract. It does not have
any statutory flavour. Reference to the Pension Scheme framed
under the Regulations was made for computation of the
pension.”
(emphasis supplied)
36. Significantly in O.P. Swarnakar (supra), this Court observed that
employees must have proceeded to apply for VRS on the basis even
though they have merely completed 15 years of service, which was not
a qualifying service, under the Pension Regulations of Bank, they
would be entitled to benefits in terms of the VRS scheme. The Court
observed thus:
“89. Furthermore, a large number of employees have
withdrawn their offer only when a proviso was sought to be
added to Regulation 28 aforementioned. In terms of the
Scheme the employees, who expected to get benefits of subregulation (4) of Regulation 29 would be deprived therefrom. It
is not in this dispute that the qualifying period for receiving
pension was 20 years. Only upon completion of 20 years, in
terms of the statutory regulation contained in Regulation 29,
an employee could opt for voluntary retirement, and in terms
36
thereof, he would be entitled to the benefits specified therein.
The said Regulations had specifically been mentioned for the
purpose of computation, which would include invocation of
subregulation (4) of Regulation 29, providing for relaxation of
5 years towards the qualifying period. The employees must
have proceeded on the basis that despite the fact that they
have merely rendered 15 years of service, which was not a
qualifying service under the Regulations, they would be
entitled to the pensionary benefits in terms of the Scheme. By
introducing the proviso to Regulation 28 pension was sought
to be made pro rata in place of full pension.”
(emphasis supplied)
37. In O.P. Swarnakar & Ors. (supra), it was held that the scheme
was not a part of statutory regulations. It was in the realm of contract.
That being so, the Central Government did not need to place the same
before Parliament; and secondly, if the same was a regulation, the
layingdown rule is merely directory and not mandatory. This Court
relied upon the decisions in Jan Mohd. Noor Mohd. Bagban v. State of
Gujarat, AIR 1966 SC 385 and Atlas Cycle Industries Ltd. v. State of
Haryana; 1979 (2) SCC 196 and held that the scheme could not be
said to be bad in law, thus:
“124. Firstly, the Scheme is not a part of the statutory
regulation. It was in the realm of contract. That being, so it
was not necessary for the Central Government to place the
same before Parliament.
125. Secondly, even if the same was a regulation, the layingdown rule is merely a directory one and not mandatory.
126. In Jan Mohd. case, AIR 1966 SC 385, the law is stated in
the following terms: (AIR pp. 39495, para 18)
“18. Finally, the validity of the rules framed under Bombay
Act 22 of 1939 was canvassed. By Section 26(1) of the Bombay
Act, the State Government was authorised to make rules for
the purpose of carrying out the provisions of the Act. It was
provided by subsection (5) that the rules made under Section
26 shall be laid before each of the Houses of the Provincial
37
Legislature at the session thereof next following and shall be
liable to be modified or rescinded by a resolution in which both
Houses concur, and such rules shall, after notification in the
Official Gazette, be deemed to have been modified or rescinded
accordingly. It was urged by the petitioner that the rules
framed under Bombay Act 22 of 1939 were not placed before
the Legislative Assembly or the Legislative Council at the first
session, and therefore they had no legal validity. The rules
under Act 22 of 1939 were framed by the Provincial
Government of Bombay in 1941. At that time, there was no
Legislature in session, the Legislature having been suspended
during the emergency arising out of World War II. The session
of the Bombay Legislative Assembly was convened for the first
time after 1941 on 2051946, and that session was prorogued
on 2451946. The second session of the Bombay Legislative
Assembly was convened on 1571946, and that of the
Bombay Legislative Council on 391946 and the rules were
placed on the Assembly Table in the second session before the
Legislative Assembly on 291946 and before the Legislative
Council on 1391946. Section 26(5) of Bombay Act 22 of 1939
does not prescribe that the rules acquired validity only from
the date on which they were placed before the Houses of
Legislature. The rules are valid from the date on which they
are made under Section 26(1). It is true that the Legislature
has prescribed that the rules shall be placed before the Houses
of Legislature, but failure to place the rules before the Houses
of Legislature does not affect the validity of the rules, merely
because they have not been placed before the Houses of the
Legislature. Granting that the provisions of subsection (5) of
Section 26 by reason of the failure to place the rules before the
Houses of Legislature were violated, we are of the view that
subsection (5) of Section 26 having regard to the purposes for
which it is made, and in the context in which it occurs, cannot
be regarded as mandatory. The rules have been in operation
since the year 1941, and by virtue of Section 64 of Gujarat Act
20 of 1964, they continue to remain in operation."
127. In Atlas Cycle Industries' case, (1979) 2 SCC 196, the
same view has been reiterated.
128. We, therefore, are of the opinion that the Scheme in
question cannot be said to be bad in law.”
38. The Court concerning the provision of withdrawal held that the
relevant clause of the scheme created an enforceable right in case the
State Bank failed to adhere to its preferred policy.
38
39. In our opinion, the reference in the SBI VRS to the admissible
benefits, like pension shall be as per the pension rules, was for the
purpose of computation of pension. It is apparent from a reading of
the scheme that proportionate pension was admissible to employees
as noted in para 49 of O.P. Swarnakar & Ors. (supra). A similar
expression was used in the schemes of nationalised banks also. This
Court has noted expression in the scheme that pension as per rules to
mean for computation of pension. The formula for computation for a
pension is provided in Rule 23 of the SBI Pension Rules.
40. It is of utmost significance that the Central Board in its meeting
dated 27.12.2000 accorded approval “for the proposals contained in
the Memorandum.” A bare perusal of the memorandum makes it clear
that the letter of IBA dated 31.8.2000 was enclosed as part of the
memorandum submitted to the Central Board. In the memorandum, it
was mentioned "that the Government of India conveyed that they had
no objection to the banks' placing before their respective Boards of
Director's proposals for adopting and implementing the Voluntary
Retirement Scheme. It advised that Banks may ‘adopt’ the scheme
after obtaining their Boards' approval and implement it in ‘right
earnest’." The memorandum also contained that the employees who
completed 15 years of service were to be the beneficiaries of VRS as
approved by the Government of India and conveyed by the IBA. The
39
approval by Government of India and scheme, conveyed by IBA, was to
provide for the benefit of pension on completion of 15 years of service.
The same was an essential condition of the scheme. The Annexure,
which was part of the memorandum, provided inter alia the benefit of
pension, including the commuted value of pension without any rider of
completion of 20 years period of service. Once SBI accepted the
proposals contained in the memorandum, when we gauge the scheme
in the light of the subject matter of the memorandum which was
unconditionally approved, it became clear and beyond the pale of
doubt that in VRS (Annexure B) inasmuch as the expression to
provide the benefit of pension as per rules was only for providing the
proportionate pensionary benefit of the qualifying service on and above
15 years, rendered by an employee.
41. The IBA advised the banks for amending the rules. The
Government of India, Ministry of Finance, also issued a letter dated
5.9.2001 to the Bank to amend the rules. There was a proposal to
amend the rules. After the scheme was implemented in 2000, the
nationalised banks, including the Punjab National Bank, amended
their rules in 2002 with retrospective effect. However, the fact remains
the VRS schemes were implemented by banks governed by the
Banking Companies Act, 1970, by making payment of pension though
Regulation 28 of Regulation of 1995 provided for 20 years of qualifying
40
service at the relevant time. Once a particular scheme of VRS, based
on the recommendations of Committee formed by Government of
India, was formulated and floated by IBA. In all fairness, it was
required to be implemented in right earnest in that form in which it
was approved and adopted by the Board of Directors of SBI on
27.12.2000. In case the Board of Directors were of the opinion that the
scheme was not acceptable to them, they could have rejected it or
could have stated they reject the proposal for paying pension on
completion of 15 years of service which was the essence of a scheme
formed to reduce workforce of Bank and for achieving other objectives.
Nonetheless, on the contrary, resolution dated 27.12.2000 indicates
that the proposals of IBA/Government was approved unconditionally.
Thus, in case it was so necessary to amend the pension rules as done
by other banks, it was incumbent upon the State Bank of India to
amend its rules either after implementation of the scheme as was done
by other banks or before giving effect to VRS.
42. It is also significant to mention that SBI accepted the scheme as
approved by the Government and floated by IBA. In case SBI had
declined to accept or wanted to modify, it was necessary for it to take
approval of Government of India as to its scheme. As per section 49,
the Central Government has the power to make rules. Section 50 deals
with the power of Central Government to make regulations. Section
41
50(1) provides that the Central Board, after consultation with the
Reserve Bank of India and with the previous sanction of the Central
Government, can make Regulations. Under Section 50(2)(o), the
Regulations can be made by the Central Board with the previous
sanction of the Central Government with respect to superannuation
pension and other funds for the benefit of the employees of the State
Bank. Section 50(2)(o) reads:
“50. Power of Central Board to make regulations.—(1) The
Central Board may, after consultation with the Reserve Bank and
with the previous sanction of the Central Government [by
notification in the Official Gazette,] make regulations, not
inconsistent with this Act and the rules made thereunder, to
provide for all matters for which provision is expedient for the
purpose of giving effect to the provisions of this Act.
(2) In particular, and without prejudice to the generality of the
foregoing power, such regulations may provide for—
x x x
(o) the establishment and maintenance of superannuation
pension, provident or other funds for the benefit of the employees
of the State Bank or of the State Bank or of the dependents of
such employees or for the purposes of the State Bank, and the
granting of superannuation allowances, annuities and pensions
payable out of any such fund;]”
43. Thus, it is apparent that the Central Board of SBI could not have
framed a scheme different than the one approved by the Central
Government on its own, nor could have implemented it without
approval of the Central Government. In case it wanted to modify or
amend the scheme, as approved by the Government of India, it was
incumbent upon it to send its modified scheme to the Central
42
Government for approval. No scheme for VRS could have been framed
without approval of the Government of India. In fact, the Central
Board accepted the proposal of IBA, as approved by the Government of
India. In case SBI’s stand is accepted, its scheme would have been
valid as no modification could have been made without approval of the
Government of India. In fact, no such modification was made, as held
above.
44. Once it approved the Scheme SBI being an instrumentality of
State under Article 12, is bound by the principle of fairness and
representation made that it accepted the contents of memorandum
and the scheme floated by IBA and invited the applications based on
approving the memorandum which contained proposal of pension on
rendering 15 years of permanent pensionable service, it could not later
on wriggle out of its obligation taking a rigmarole by claiming shelter
of the Rules or by not amending the Rules or by issuing a clarification
which was fanciful, irrational and contrary to the spirit of the
resolution of the Board. It would amount to an unfair and
unreasonable action to deprive the employees of the benefit of pension
because of the decision taken by the Central Board of Directors.
45. SBI is bound by resolution of Central Board of Directors.
The Scheme was with the approval of the Government of India and
43
accepted, implemented by all the banks in true spirit except by SBI. It
cannot be permitted to act unfairly by virtue of having superior
bargaining power by issuing vague clarification to the detriment of the
economic interest of the employees. Clarification did not have the
effect of rewriting or superseding the resolution of the Central Board
nor effect of making modifications in the resolution passed by the
Central Board of the SBI.
46. The VRS scheme was not floated by the SBI on its own volition.
It was pursuant to an exercise that was undertaken by the IBA in view
of the recent developments of modern technology considering the age
group of the employees in the bank, the need to have a new skill, and
to rationalise the manpower; a decision was taken. It was decided at
the Government level to provide pension after completion of 15 years
of service as a special measure, the banks were bound to implement it
in that manner or not at all. The Central Board of Directors of the SBI
accepted the VRS proposal of Government and IBA without any
reservation of not providing pension along with other benefits, as
mandated in the VRS scheme. The action of the instrumentality of the
State cannot be violative of Article 14. It cannot be permitted to act
arbitrarily. Articles 15 and 16 provide for equality and provide for an
umbrella against discrimination.
44
47. Though the Deputy General Manager was authorised by the
Central Board of Directors to amend, modify or cancel the VRS. The
Rules were amended by other banks later in 2002. It was not stated in
answer to the query that under the VRS scheme, a person who has
rendered 15 years of qualifying service would not be entitled to a
pension. Nor it was so stated in resolution dated 27.12.2000 of the
Central Board of SBI. That apart, Deputy General Manager tried to
interpret VRS scheme in isolation without considering what was
approved by the Board. Not only the scheme but also the
memorandum have to be read together to understand resolution of
Board. Once the memorandum containing the IBAs proposal of
providing pension was approved in absolute terms, the clarification
could not be of any value to dilute the otherwise clear and
unambiguous resolution of the Board of Directors. The Deputy
General Manager did not have any such wide and arbitrary power to
defeat the claim of the employees for pension on completion of 15
years of permanent service, which was their right. The action of
D.G.M. could not be said to be in accordance with the resolution. The
pension was the essence of the scheme, depriving it could not be said
to be authorised, such action can only be termed as unfair and
unreasonable and patently violative of Articles 14, 16, and 21 of the
Constitution of India.
45
48. Yet another aspect which cannot be lost sight is that the bank
mentioned in the scheme that the benefit would be admissible as per
the rule which prevails on the appointed day, i.e., 31.3.2001. Thus, it
is apparent that when VRS scheme was floated, it was in
contemplation of amendment of rules which was suggested by the IBA
and the Government of India in its communication dated 5.9.2001 so
that employees were not deprived of the benefit of pension.
49. The question arises in case the bank accepts the proposal of
VRS, and does not alter its rules, can employees be deprived of the
benefit of pension in such an unconscionable manner over an event on
which they had no control. It would be nothing, but an outcome of
unfair and arbitrary act in case the SBI never intended to act upon the
scheme it ought not to have accepted it, and once it approved VRS, it
was incumbent upon it to amend its rule, if necessary, as was done by
other banks in 2002 after scheme worked out in the year 2000. Even
otherwise once it accepted the proposal of the Government of India, it
would be violative of provisions of Articles 14 and 16 to permit it to
wriggle out of its obligation under the guise that the bank did not
amend its rules or pension was not admissible as per existing rules,
mainly when the scheme provided for eligibility for pension on
completion of 15 years, that formed independent contract. If the bank
46
is permitted to get rid of the scheme due to Rule position, then the
scheme itself would become void and unenforceable. Bank cannot act
in a fanciful manner, particularly with respect to retirement under
VRS which was contractual and deny benefit of pension, a right
accrued to the employees for receiving the pension in view of the
memorandum and the resolution passed by the Central Board of
Directors adopting memorandum and the SBIVRS.
50. (a). The rights under contract cannot be taken away, and they
become enforceable by a court of law. Bank cannot be permitted to
make a representation and later on wriggle out of its obligation. It is
not permissible to make a “misrepresentation”. Under section 19 of
the Contract Act, when consent is obtained by coercion, fraud, or
‘misrepresentation,' the agreement is voidable at the option of the
aggrieved party. In Central Inland Water Transport Corporation Ltd. &
Anr. v. Brojo Nath Ganguly & Anr., (1986) 3 SCC 156, this Court
considered the contract of employment between the Central Inland
Water Transport Corporation and its employees and also the rules. In
that context, observed thus:
“75. Under Section 19 of the Indian Contract Act, when
consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused. It is not the
case of either of the contesting respondents that there was any
coercion brought to bear upon him or that any fraud or
misrepresentation had been practiced upon him. Under
Section 19A, when consent to an agreement is caused by
47
undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused and the court
may set aside any such contract either absolutely or if the
party who was entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as to the court
may seem just. Subsection (1) of Section 16 defines "Undue
influence" as follows:
“16. ‘Undue influence’ defined.—(1) A contract is said to be
induced by ‘undue influence’ where the relations subsisting
between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.”
The material provisions of subsection (2) of Section 16 are as
follows:
“(2) In particular and without prejudice to the generality of
the foregoing principle, a person is deemed to be in a position
to dominate the will of another—
(a) where he holds a real or apparent authority over the
other ....”
We need not trouble ourselves with the other sections of the
Indian Contract Act except Sections 23 and 24. Section 23
states that the consideration or object of an agreement is
lawful unless inter alia the court regards it as opposed to
public policy. This section further provides that every
agreement of which the object or consideration is unlawful is
void. Under Section 24, if any part of a single consideration for
one or more objects, or anyone or any part of any one of
several considerations for a single object is unlawful, the
agreement is void. The agreement is, however, not always void
in its entirety for it is well settled that if several distinct
promises are made for one and the same lawful consideration,
and one or more of them be such as the law will not enforce,
that will not of itself prevent the rest from being enforceable.
The general rule was stated by Willes, J., in Pickering v.
Ilfracombe Ry. Co. (1868) LR 3 CP 235 (at p. 250) as follows:
"The general rule is that, where you cannot sever the illegal
from the legal part of a covenant, the contract is altogether
void; but where you can sever them, whether the illegality be
created by statute or by the common law, you may reject the
bad part and retain the good."
(emphasis supplied)
(b). In Brojo Nath Ganguly (supra), this Court considered the concept
of unconscionable bargain and as to actions showing no regard for
conscience; irreconcilable with what is right or reasonable, observed
thus:
48
“76. Under which head would an unconscionable bargain fall?
If it falls under the head of undue influence, it would be
voidable but if it falls under the head of being opposed to
public policy, it would be void. No case of the type before us
appears to have fallen for decision under the law of contracts
before any court in India nor has any case on all fours of a
court in any other country been pointed out to us. The word
“unconscionable” is defined in the Shorter Oxford English
Dictionary, Third Edition, Volume II, page 2288, when used
with reference to actions, etc. as "showing no regard for
conscience; irreconcilable with what is right or reasonable." An
unconscionable bargain would, therefore, be one which is
irreconcilable with what is right or reasonable.”
(emphasis supplied)
(c). Chitty on Contracts was referred in Brojo Nath Ganguly (supra)
about the old ideas of freedom of contract in modern times, 25th Edn.,
Vol. 1, para 4, Chitty observed:
“79. In this connection, it is useful to note what Chitty has to
say about the old ideas of freedom of contract in modern
times. The relevant passages are to be found in Chitty on
Contracts, 25th Edn., Vol. I, in paragraph 4, and are as
follows:
"These ideas have to a large extent lost their appeal today.
'Freedom of contract,' it has been said, 'is a reasonable social
ideal only to the extent that equality of bargaining power
between contracting parties can be assumed, and no injury is
done to the economic interests of the community at large.'
Freedom of contract is of little value when one party has no
alternative between accepting a set of terms proposed by the
other or doing without the goods or services offered. Many
contracts entered into by public utility undertakings and
others take the form of a set of terms fixed in advance by one
party and not open to discussion by the other. These are called
'contracts d’adhesion’ by French lawyers. Traders frequently
contract, not on individually negotiated terms, but on those
contained in a standard form of contract settled by a trade
association. And the terms of an employee’s contract of
employment may be determined by agreement between his
trade union and his employer, or by a statutory scheme of
employment. Such transactions are nevertheless contracts
notwithstanding that freedom of contract is to a great extent
lacking.
Where freedom of contract is absent, the disadvantages
to consumers or members of the public have, to some extent,
been offset by administrative procedures for consultation, and
49
by legislation. Many statutes introduce terms into contracts
which the parties are forbidden to exclude, or declare that
certain provisions in a contract shall be void. And the courts
have developed a number of devices for refusing to implement
exemption clauses imposed by the economically stronger party
on the weaker, although they have not recognized in
themselves any general power (except by statute) to declare
broadly that an exemption clause will not be enforced unless it
is reasonable. Again, more recently, certain of the judges
appear to have recognized the possibility of relief from
contractual obligations on the ground of 'inequality of
bargaining power.'"
What the French call “contracts d’adhesion," the American call
"adhesion contracts" or "contracts of adhesion." An "adhesion
contract" is defined in Black’s Law Dictionary. 5th Edn., at
page 38, as follows:
“Adhesion contract.—Standardized contract form offered to
consumers of goods and services on essentially ‘take it or leave
it’ basis without affording consumer realistic opportunity to
bargain and under such conditions that consumer cannot
obtain desired product or services except by acquiescing in
form contract. Distinctive feature of adhesion contract is that
weaker party has no realistic choice as to its terms. Not every
such contract is unconscionable.”
80. The position under the American law is stated in
Reinstatement of the Law — Second as adopted and
promulgated by the American Law Institute, Volume II which
deals with the law of contracts, in Section 208 at page 107, as
follows:
Ҥ 208. Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the
time the contract is made a court may refuse to enforce the
contract, or may enforce the remainder of the contract without
the unconscionable term, or may so limit the application of
any unconscionable term as to avoid any unconscionable
result.”
In the Comments given under that section, it is stated at page
107:
“Like the obligation of good faith and fair dealing (§ 205),
the policy against unconscionable contracts or terms applies to
a wide variety of types of conduct. The determination that a
contract or term is or is not unconscionable is made in the
light of its setting, purpose and effect. Relevant factors include
weaknesses in the contracting process like those involved in
more specific rules as to contractual capacity, fraud and other
invalidating causes; the policy also overlaps with rules which
render particular bargains or terms unenforceable on grounds
of public policy. Policing against unconscionable contracts or
terms has sometimes been accomplished by adverse
construction of language, by manipulation of the rules of offer
50
and acceptance or by determinations that the clause is contrary
to public policy or to the dominant purpose of the contract.
Uniform Commercial Code § 2302 Comment 1 .... A bargain is
not unconscionable merely because the parties to it are
unequal in bargaining position, nor even because the
inequality results in an allocation of risks to the weaker party.
But gross inequality of bargaining power, together with terms
unreasonably favourable to the stronger party, may confirm
indications that the transaction involved elements of deception
or compulsion, or may show that the weaker party had no
meaningful choice, no real alternative, or did not in fact assent
or appear to assent to the unfair terms.”
(emphasis supplied)
There is a statute in the United States called the Universal
Commercial Code, which applies to contracts relating to sales
of goods. Though this statute is inapplicable to contracts not
involving sales of goods, it has proved very influential in what
is called in the United States, "nonsales" cases. It has many
times been used either by analogy or because it was felt to
embody a generally accepted social attitude of fairness going
beyond its statutory application to sales of goods. In the
Reporter's Note to said Section 208, it is stated at p. 112:
"It is to be emphasized that a contract of adhesion is not
unconscionable per se, and that all unconscionable contracts
are not contracts of adhesion. Nonetheless, the more
standardised the agreement and the less a party may bargain
meaningfully, the more susceptible the contract or a term will be
to a claim of unconscionability.”
(emphasis supplied)
The position has been thus summed up by John R. Peden in
‘The Law of Unjust Contracts’ published by Butterworths in
1982, at pages 2829:
“... Unconscionability represents the end of a cycle
commencing with the Aristotelian concept of justice and the
Roman law laesio enormis, which in turn formed the basis for
the medieval church’s concept of a just price and
condemnation of usury. These philosophies permeated the
exercise, during the seventeenth and eighteenth centuries, of
the Chancery court’s discretionary powers under which it
upset all kinds of unfair transactions. Subsequently the
movement towards economic individualism in the nineteenth
century hardened the exercise of these powers by emphasising
the freedom of the parties to make their own contract. While
the principle of pacta sunt servanda held dominance, the
consensual theory still recognized exceptions where one party
was overborne by a fiduciary, or entered a contract under
duress or as the result of fraud. However, these exceptions
were limited and had to be strictly proved.
It is suggested that the judicial and legislative trend during
the last 30 years in both civil and common law jurisdictions
has almost brought the wheel full circle. Both courts and
51
parliaments have provided greater protection for weaker
parties from harsh contracts. In several jurisdictions this
included a general power to grant relief from unconscionable
contracts, thereby providing a launching point from which the
courts have the opportunity to develop a modern doctrine of
unconscionability. American decisions on Article 2.302 of the
UCC have already gone some distance into this new arena....”
The expression “laesio enormis” used in the above passage
refers to “laesio ultra dimidium vel enormis” which in Roman
law meant the injury sustained by one of the parties to an
onerous contract when he had been overreached by the other
to the extent of more than onehalf of the value of the subjectmatter, as for example, when a vendor had not received half
the value of property sold, or the purchaser had paid more
than double value. The maxim “pacta sunt servanda" referred
to in the above passage, means "contracts are to be kept."
(emphasis supplied)
This Court held that due to inequality of bargaining power,
unreasonable terms, unreasonable favour to the stronger party may
involve an element of deception or compulsion, or may show that the
weaker party had no meaningful choice. The Court in Brojo Nath
Ganguly (supra) also observed that in the sphere of the law of
contract, the test of reasonableness or fairness has emerged. Even an
unreasonable clause cannot be enforced as that would be
unconscionable.
Here the reasonable construction in the matter is that the
pension is clearly admissible as per the resolution passed by the
Central Board of Directors of SBI, which is sought to be denied, it was
for SBI to amend Rules. Such an action would be unconscionable, and
courts cannot be said to be powerless in such a situation to enforce
the SBI VRS with an obligation to make payment of pension.
52
(d). This Court considered the enforcement of unreasonable
contracts and enforceability thereof in Brojo Nath Ganguly (supra)
thus:
“83. Yet another theory which has made its emergence in
recent years in the sphere of the law of contracts is the test of
reasonableness or fairness of a clause in a contract where
there is inequality of bargaining power. Lord Denning, MR,
appears to have been the propounder, and perhaps the
originator —at least in England, of this theory. In Gillespie
Brothers & Co. Ltd. v. Roy Bowles Transport Ltd., (1973) QB
400, where the question was whether an indemnity clause in a
contract, on its true construction, relieved the indemnifier
from liability arising to the indemnified from his own
negligence, Lord Denning said (at pages 415416):
“The time may come when this process of ‘construing’ the
contract can be pursued no further. The words are too clear to
permit of it. Are the courts then powerless? Are they to permit
the party to enforce his unreasonable clause, even when it is so
unreasonable, or applied so unreasonably, as to be
unconscionable? When it gets to this point, I would say, as I
said many years ago:
‘there is the vigilance of the common law which, while
allowing freedom of contract, watches to see that it is not
abused’: John Lee & Son (Grantham) Ltd. v. Railway Executive,
(1949) 2 All ER 581.
It will not allow a party to exempt himself from his liability at
common law when it would be quite unconscionable for him to
do so.”
(emphasis supplied)
In the above case, the Court of Appeal negatived the defense of
the indemnifier that the indemnity clause did not cover the
negligence of the indemnified. It was in Lloyds Bank Ltd. v.
Bundy (1974) 3 All ER 757 that Lord Denning first clearly
enunciated his theory of "inequality of bargaining power." He
began his discussion on this part of the case by stating (at
page 763) :
“There are cases in our books in which the courts will set aside
a contract, or a transfer of property, when the parties have not
met on equal terms, when the one is so strong in bargaining
power and the other so weak that, as a matter of common
fairness, it is not right that the strong should be allowed to push
the weak to the wall. Hitherto those exceptional cases have
been treated each as a separate category in itself. But I think
the time has come when we should seek to find a principle to
53
unite them. I put on one side contracts or transactions which
are voidable for fraud or misrepresentation or mistake. All
those are governed by settled principles. I go only to those
where there has been inequality of bargaining power, such as
to merit the intervention of the court.”
(emphasis supplied)
He then referred to various categories of cases and ultimately
deduced therefrom a general principle in these words (at page
765):
“Gathering all together, I would suggest that through all
these instances there runs a single thread. They rest on
‘inequality of bargaining power.' By virtue of it, the English law
gives relief to one who, without independent advice, enters into
a contract on terms which are very unfair or transfers property
for a consideration which is grossly inadequate, when his
bargaining power is grievously impaired by reason of his own
needs or desires, or by his own ignorance or infirmity, coupled
with undue influences or pressures brought to bear on him by
or for the benefit of the other. When I use the word 'undue,' I
do not mean to suggest that the principle depends on proof of
any wrongdoing. The one who stipulates for an unfair
advantage may be moved solely by his own selfinterest,
unconscious of the distress he is bringing to the other. I have
also avoided any reference to the will of the one being
‘dominated’ or ‘overcome’ by the other. One who is in extreme
need may knowingly consent to a most improvident bargain,
solely to relieve the straits in which he finds himself. Again, I do
not mean to suggest that every transaction is saved by
independent advice. But the absence of it may be fatal. With
these explanations, I hope this principle will be found to
reconcile the cases.”
(emphasis supplied)
(e). The Court clearly held that the contracts, which are the outcome
of misrepresentation, cannot be enforced, and inequality of bargaining
power merit the intervention of the court. In A. Schroeder Music
Publishing Co. Ltd. v. Macaulay (formerly Instone) (1974) 1 WLR 1308,
Lord Diplock made the following observations at pp. 131516 thus:
"84. …. "My Lords, the contract under consideration in this
appeal is one whereby the respondent accepted restrictions
upon the way in which he would exploit his earning power as a
songwriter for the next ten years. Because this can be
54
classified as a contract in restraint of trade the restrictions
that the respondent accepted fell within one of those limited
categories of contractual promises in respect of which the
courts still retain the power to relieve the promisor of his legal
duty to fulfill them. In order to determine whether this case is
one in which that power ought to be exercised, what your
Lordships have in fact been doing has been to assess the
relative bargaining power of the publisher and the songwriter
at the time the contract was made and to decide whether the
publisher had used his superior bargaining power to exact
from the songwriter promises that were unfairly onerous to
him. Your Lordships have not been concerned to inquire
whether the public have in fact been deprived of the fruit of the
song writer's talents by reason of the restrictions, nor to
assess the likelihood that they would be so deprived in the
future if the contract were permitted to run its full course.
It is, in my view, salutary to acknowledge that in refusing to
enforce provisions of a contract whereby one party agrees for
the benefit of the other party to exploit or to refrain from
exploiting his own earning power, the public policy which the
court is implementing is not some 19th century economic
theory about the benefit to the general public of freedom of
trade, but the protection of those whose bargaining power is
weak against being forced by those whose bargaining power is
stronger to enter into bargains that are unconscionable. Under
the influence of Bentham and of laissez faire the courts in the
19th century abandoned the practice of applying the public
policy against unconscionable bargains to contracts generally,
as they had formerly done to any contract considered to be
usurious; but the policy survived in its application to penalty
clauses and to relief against forfeiture and also to the special
category of contracts in restraint of trade. If one looks at the
reasoning of 19thcentury judges in cases about contracts in
restraint of trade one finds lip service paid to current economic
theories, but if one looks at what they said in the light of what
they did, one finds that they struck down a bargain if they
thought it was unconscionable as between the parties to it and
upheld it if they thought that it was not.
So I would hold that the question to be answered as respects
a contract in restraint of trade of the kind with which this
appeal is concerned is: ‘Was the bargain fair?’ The test of
fairness is, no doubt, whether the restrictions are both
reasonably necessary for the protection of the legitimate
interests of the promisee and commensurate with the benefits
secured to the promisor under the contract. For the purpose of
this test, all the provisions of the contract must be taken into
consideration.”
(f). A term which exempts the stronger party from his ordinary
common law liability should not be given effect except when it is
55
reasonable, as observed in Levison v. Patent Steam Carpet Co. Ltd.,
(1949) 2 All ER 581 at 584 relied upon in Brojo Nath Ganguly (supra)
thus:
“85. The observations of Lord Denning, M.R., in
Levison v. Patent Steam Carpet Co. Ltd. are also useful
and require to be quoted. These observations are as
follows (at page 79) :
"In such circumstances as here the Law Commission in
1975 recommended that a term which exempts the stronger
party from his ordinary common law liability should not be
given effect except when it is reasonable: see The Law
Commission and the Scottish Law Commission Report,
Exemption Clauses, Second Report (1975) (August 5, 1975),
Law Com. No. 69 (H.C. 605), pp. 62, 174; and there is a Bill
now before Parliament, which gives effect to the test of
reasonableness. This is a gratifying piece of law reform: but I
do not think we need wait for that Bill to be passed into law.
You never know what may happen to a Bill. Meanwhile, the
common law has its own principles ready to hand. In Gillespie
Bros. & Co. Ltd. v. Roy Bowles Transport Ltd. (1973) QB 400, I
suggested that an exemption or limitation clause should not be
given effect if it was unreasonable, or if it would be
unreasonable to apply it in the circumstances of the case. I see
no reason why this should not be applied today, at any rate in
contracts in standard forms where there is inequality of
bargaining power.”
(g). Courts have to construe the contracts according to the tenor. In
this regard, in Brojo Nath Ganguly (supra), the Court considered the
question thus:
“87. In Photo Production Ltd. v. Securicor Transport
Ltd. (1980) AC 827, a case before the Unfair Contract
Terms Act, 1977, was enacted, the House of Lords upheld
an exemption clause in a contract on the defendants'
printed form containing standard conditions. The
decision appears to proceed on the ground that the
parties were businessmen and did not possess unequal
bargaining power. The House of Lords did not, in that
case, reject the test of reasonableness or fairness of a
clause in a contract where the parties are not equal in
bargaining position. On the contrary, the speeches of
Lord Wilberforce, Lord Diplock, and Lord Scarman would
56
seem to show that the House of Lords in a fit case would
accept that test. Lord Wilberforce, in his speech, after
referring to the Unfair Contract Terms Act, 1977, said (at
page 843) :
“This Act applies to consumer contracts and those based
on standard terms and enables exception clauses to be applied
with regard to what is just and reasonable. It is significant that
Parliament refrained from legislating over the whole field of
contract. After this Act, in commercial matters generally, when
the parties are not of unequal bargaining power, and when
risks are normally borne by insurance, not only is the case for
judicial intervention undemonstrated, but there is everything
to be said, and this seems to have been Parliament’s intention,
for leaving the parties free to apportion the risks as they think
fit and for respecting their decisions.”
(emphasis supplied)
Lord Diplock said (at page 85051):
“Since the obligations implied by law in a commercial
contract are those which, by judicial consensus over the years
or by Parliament in passing a statute, have been regarded as
obligations which a reasonable businessman would realise that
he was accepting when he entered into a contract of a particular
kind, the court’s view of the reasonableness of any departure
from the implied obligations which would be involved in
construing the express words of an exclusion clause in one
sense that they are capable of bearing rather than another, is
a relevant consideration in deciding what meaning the words
were intended by the parties to bear.”
(emphasis supplied)
Lord Scarman, while agreeing with Lord Wilberforce, described
(at page 853) the action out of which the appeal before the
House had arisen as “a commercial dispute between parties
well able to look after themselves” and then added: “In such a
situation what the parties agreed (expressly or impliedly) is
what matters, and the duty of the courts is to construe their
contract according to its tenor."
88. As seen above, apart from judicial decisions, the United
States and the United Kingdom have statutorily recognised, at
least in certain areas of the law of contracts, that there can be
unreasonableness (or lack of fairness, if one prefers that
phrase) in a contract or a clause in a contract where there is
inequality of bargaining power between the parties although
arising out of circumstances not within their control or as a
result of situations not of their creation. Other legal systems
also permit judicial review of a contractual transaction entered
into in similar circumstances. For example, Section 138(2) of
the German Civil Code provides that a transaction is void
"when a person" exploits "the distressed situation,
inexperience, lack of judgmental ability, or grave weakness of
57
will of another to obtain the grant or promise of pecuniary
advantages ... which are obviously disproportionate to the
performance given in return". The position, according to the
French law, is very much the same."
(h). In Brojo Nath Ganguly (supra), it was pointed out what court
should do in such a matter thus:
“89. Should then our courts not advance with the times?
Should they still continue to cling to outmoded concepts
and outworn ideologies? Should we not adjust our
thinking caps to match the fashion of the day? Should all
jurisprudential development pass us by, leaving us
floundering in the sloughs of 19thcentury theories?
Should the strong be permitted to push the weak to the
wall? Should they be allowed to ride roughshod over the
weak? Should the courts sit back and watch supinely
while the strong trample underfoot the rights of the
weak? We have a Constitution for our country. Our
judges are bound by their oath to "uphold the
Constitution and the laws." The Constitution was enacted
to secure to all the citizens of this country social and
economic justice. Article 14 of the Constitution
guarantees to all persons equality before the law and the
equal protection of the laws. The principle deducible from
the above discussions on this part of the case is in
consonance with right and reason, intended to secure
social and economic justice and conforms to the mandate
of the great equality clause in Article 14. This principle is
that the courts will not enforce and will, when called
upon to do so, strike down an unfair and unreasonable
contract, or an unfair and unreasonable clause in a
contract, entered into between parties who are not equal
in bargaining power. It is difficult to give an exhaustive
list of all bargains of this type. No court can visualize the
different situations which can arise in the affairs of men.
One can only attempt to give some illustrations. For
instance, the above principle will apply where the
inequality of bargaining power is the result of the great
disparity in the economic strength of the contracting
parties. It will apply where the inequality is the result of
circumstances, whether of the creation of the parties or
not. It will apply to situations in which the weaker party
is in a position in which he can obtain goods or services
or means of livelihood only upon the terms imposed by
the stronger party or go without them. It will also apply
58
where a man has no choice, or rather no meaningful
choice, but to give his assent to a contract or to sign on
the dotted line in a prescribed or standard form or to
accept a set of rules as part of the contract, however
unfair, unreasonable and unconscionable a clause in
that contract or form or rules may be. This principle,
however, will not apply where the bargaining power of the
contracting parties is equal or almost equal. This
principle may not apply where both parties are
businessmen, and the contract is a commercial
transaction. In today’s complex world of giant
corporations with their vast infrastructural organizations
and with the State through its instrumentalities and
agencies entering into almost every branch of industry
and commerce, there can be myriad situations which
result in unfair and unreasonable bargains between
parties possessing wholly disproportionate and unequal
bargaining power. These cases can neither be
enumerated nor fully illustrated. The court must judge
each case on its own facts and circumstances.”
(i). The Court in Brojo Nath Ganguly (supra) held that the contract,
which affected a large number of persons if they are unconscionable,
unfair, and unreasonable, the contract is voidable. The court would
not compel each person with whom the party with superior bargaining
power had contracted to go to court to adjudge the contract voidable
and would result in a multiplicity of litigation. It observed:
“91. Is a contract of the type mentioned above to be adjudged
voidable or void? If it was induced by undue influence, then
under Section 19A of the Indian Contract Act, it would be
voidable. It is, however, rarely that contracts of the types to
which the principle formulated by us above applies are
induced by undue influence as defined by Section 16(1) of the
Indian Contract Act, even though at times they are between
parties one of whom holds a real or apparent authority over
the other. In the vast majority of cases, however, such
contracts are entered into by the weaker party under pressure
of circumstances, generally economic, which results in
inequality of bargaining power. Such contracts will not fall
within the four corners of the definition of “undue influence”
given in Section 16(1). Further, the majority of such contracts
are in a standard or prescribed form or consist of a set of
59
rules. They are not contracts between individuals containing
terms meant for those individuals alone. Contracts in
prescribed or standard forms or which embody a set of rules
as part of the contract are entered into by the party with
superior bargaining power with a large number of persons who
have far less bargaining power or no bargaining power at all.
Such contracts which affect a large number of persons or a
group or groups of persons, if they are unconscionable, unfair,
and unreasonable, are injurious to the public interest. To say
that such a contract is only voidable would be to compel each
person with whom the party with superior bargaining power
had contracted to go to court to have the contract adjudged
voidable. This would only result in multiplicity of litigation,
which no court should encourage and would also not be in the
public interest. Such a contract or such a clause in a contract
ought, therefore, to be adjudged void. While the law of
contracts in England is mostly judgemade, the law of
contracts in India is enacted in a statute, namely, the Indian
Contract Act, 1872. In order that such a contract should be
void, it must fall under one of the relevant sections of the
Indian Contract Act. The only relevant provision in the Indian
Contract Act, which can apply is Section 23, when it states
that "The consideration or object of an agreement is lawful,
unless ... the court regards it as ... opposed to public policy."
(j). The Court also considered the “public policy”. The same is not the
policy of a particular Government. It connotes some matter which
concerns the public good and the public interest. Action has to be
subservient to public policy. This Court in the context of Contract Act
and Public Policy made the following observations:
“92. The Indian Contract Act does not define the
expression "public policy" or "opposed to public policy."
From the very nature of things, the expressions "public
policy," "opposed to public policy," or "contrary to public
policy" are incapable of precise definition. Public policy,
however, is not the policy of a particular government. It
connotes some matter which concerns the public good
and the public interest. The concept of what is for the
public good or in the public interest or what would be
injurious or harmful to the public good or the public
interest has varied from time to time. As new concepts
take the place of old, transactions which were once
considered against public policy are now being upheld by
the courts, and similarly, where there has been a well
60
recognized head of public policy, the courts have not
shirked from extending it to new transactions and
changed circumstances and have at times not even
flinched from inventing a new head of public policy. There
are two schools of thought— "the narrow view" school
and "the broad view" school. According to the former,
courts cannot create new heads of public policy, whereas
the latter countenances judicial lawmaking in this area.
The adherents of "the narrow view" school would not
invalidate a contract on the ground of public policy
unless that particular ground had been wellestablished
by authorities. Hardly ever has the voice of the timorous
spoken more clearly and loudly than in these words of
Lord Davey in Janson v. Driefontein Consolidated Gold
Mines Ltd.: "Public policy is always an unsafe and
treacherous ground for legal decision." That was in the
year 1902. Seventyeight years earlier, Burrough, J., in
Richardson v. Mellish, (182434) All ER 258, described
public policy as "a very unruly horse, and when once you
get astride it you never know where it will carry you." The
Master of the Rolls, Lord Denning, however, was not a
man to shy away from unmanageable horses and in
words which conjure up before our eyes the picture of the
young Alexander the Great taming Bucephalus, he said
in Enderby Town Football Club Ltd. v. Football Assn. Ltd.
(1971) Ch 591: "With a good man in the saddle, the
unruly horse can be kept in control. It can jump over
obstacles." Had the timorous always held the field, not
only the doctrine of public policy but even the Common
Law or the principles of Equity would never have evolved.
Sir William Holdsworth in his "History of English Law,"
Volume III, page 55, has said:
"In fact, a body of law like the common law, which has
grown up gradually with the growth of the nation, necessarily
acquires some fixed principles, and if it is to maintain these
principles, it must be able, on the ground of public policy or
some other like ground, to suppress practices which, under
ever new disguises, seek to weaken or negative them."
It is thus clear that the principles governing public policy must
be and are capable, on proper occasion, of expansion or
modification. Practices which were considered perfectly normal
at one time have today become obnoxious and oppressive to
public conscience. If there is no head of public policy which
covers a case, then the court must in consonance with public
conscience and in keeping with public good and public interest
declare such practice to be opposed to public policy. Above all,
in deciding any case which may not be covered by authority,
our courts have before them the beacon light of the Preamble
to the Constitution. Lacking precedent, the court can always
61
be guided by that light and the principles underlying the
Fundamental Rights and the Directive Principles enshrined in
our Constitution.
93. The normal rule of Common Law has been that a party
who seeks to enforce an agreement which is opposed to public
policy will be nonsuited. The case of A. Schroeder Music
Publishing Co. Ltd. v. Macaulay (1974) 1 WLR 1308, however,
establishes that where a contract is vitiated as being contrary
to public policy, the party adversely affected by it can sue to
have it declared void. The case may be different, where the
purpose of the contract is illegal or immoral. In Kedar Nath
Motani v. Prahlad Rai, AIR 1960 SC 213, reversing the High
Court and restoring the decree passed by the trial court
declaring the appellants’ title to the lands in suit and directing
the respondents who were the appellants’ benamidars to
restore possession, this Court, after discussing the English
and Indian law on the subject, said: (at page 873) :
"The correct position in law, in our opinion, is that what
one has to see is whether the illegality goes so much to the
root of the matter that the plaintiff cannot bring his action
without relying upon the illegal transaction into which he had
entered. If the illegality be trivial or venial, as stated by
Williston and the plaintiff is not required to rest his case upon
that illegality, then public policy demands that the defendant
should not be allowed to take advantage of the position. A
strict view, of course, must be taken of the plaintiff's conduct,
and he should not be allowed to circumvent the illegality by
resorting to some subterfuge or by misstating the facts. If,
however, the matter is clear and the illegality is not required to
be pleaded or proved as part of the cause of action, and the
plaintiff recanted before the illegal purpose was achieved, then,
unless it be of such a gross nature as to outrage the
conscience of the court, the plea of the defendant should not
prevail."
The types of contracts to which the principle formulated by us
above applies are not contracts which are tainted with illegality
but are contracts which contain terms which are so unfair and
unreasonable that they shock the conscience of the court.
They are opposed to public policy and require to be adjudged
void.”
51. This Court also considered the law of contract and its
interpretation in changing times in Delhi Transport Corporation v.
D.T.C. Mazdoor Congress & Ors., (1991) Supp 1 SCC 600 thus:
62
“279. In paragraph 4 of Chitty on Contracts (25th edn., vol. 1)
it is stated that "freedom of contract is a reasonable social
ideal only to the extent that equality of bargaining power
between contracting parties can be assumed and no injury is
done to the economic interest of the community at large."
280. In Anson’s Law of Contract at pages 6 and 7 stated the
scope of freedom of contract in the changing circumstances
thus:
"Today the position is seen in a very different light. Freedom
of contract is a reasonable social ideal only to the extent that
equality of bargaining power between contracting parties can
be assumed, and no injury is done to the economic interests of
the community at large. In the more complicated social and
industrial conditions of a collectivist society, it has ceased to
have much idealistic attraction. It is now realised that
economic equality often does not exist in any real sense and
that individual interests have to be made to subserve those of
the community hence there has been a fundamental change
both in our social outlook and in the policy of the legislature
towards contract and the law today interferes at numerous
points with the freedom of the parties to make what contract
they like. The relation between employers and employed, for
example, have been regulated by statutes designed to ensure
that the employee’s condition of work are safe, that he is
properly protected against redundancy, and that he knows his
terms of service. The public has been protected against
economic pressure by such measures as the Rent Acts, the
Supply of Goods (Implied Terms) Act, the Consumer Credit
Act, and other similar enactments. These legislative provisions
will override any contrary terms which the parties may make
for themselves. Further, the legislature has intervened in the
Restrictive Trade Practices Act, 1956, and the Fair Trading Act,
1973 to promote competition in industry and to safeguard the
interests of consumers. This intervention is specially necessary
today when most contracts entered by ordinary people are not
the result of individual negotiation. It is not possible for a
private person to settle the terms of his agreement with a
British Railways Board or with a local electricity authority.”
The 'standard form' contract is the rule. He must either accept
the terms of this contract in toto or go without. Since,
however, it is not feasible to deprive oneself of such necessary
services, the individual is compelled to accept on those terms.
In view of this fact, it is quite clear that freedom of contract is
now largely an illusion."
52. (a). It has been emphasised in D.T.C. (supra) that the period of
contract is to be reasonable and the employee has a right to know the
63
conditions of work and he is properly protected against redundancy.
Approving decision in Central Inland Water Transport Corporation Ltd.
& Anr. v. Brojo Nath Ganguly & Anr. (1983) 3 SCC 156 Court held
thus:
“282. In Brojo Nath case (1986) 3 SCC 156, Madon, J.
elaborately considered the development of law relating to
unfair or unreasonable terms of the contract or clauses thereof
in extenso, and it is unnecessary for me to traverse the same
grounds once over. The learned Judge also considered the
arbitrary, unfair, and unbridled power on the anvil of
distributive justice or justness or fairness of the procedure
envisaged therein. The relevant case law in that regard was
dealt with in extenso in the light of the development of law in
the Supreme Court of United States of America and the House
of Lords in England and in the continental countries. To avoid
needless burden on the judgment, I do not repeat the same
reasoning. I entirely agree with the reasoning, and the
conclusions reached therein on all these aspects."
(b). This Court in D.T.C. (supra) with respect to the alteration of
Government contracts and the right of the State to impose
unconstitutional conditions, observed:
“283. The problem also could be broached from the angle
whether the State can impose unconstitutional conditions as
part of the contract or statute or rule etc. In (195960) 73
Harvard Law Review, in the Note under the caption
‘Unconstitutional Condition’ at pages 159596 it is postulated
that the State is devoid of power to impose unconstitutional
conditions in the contract that the power to withhold largesse
has been asserted by the State in four areas i.e. (1) regulating
the right to engage in certain activities; (2) administration of
government welfare programme; (3) government employment;
and (4) procurement of contracts. It was further adumbrated
at pages 160203 thus:
"The sovereign's constitutional authority to choose those with
whom it will contract for goods and services is, in effect, a
power to withhold the benefits to be derived from economic
dealings with the government. As government activity in the
economic sphere increases, the contracting power enables the
government to control many hitherto unregulated activities of
64
contracting parties through the imposition of conditions. Thus,
regarding the government, as a private entrepreneur, threatens
to impair constitutional rights. The government, unlike a
private individual, is limited in its ability to contract by the
Constitution. The federal contracting power is based upon the
Constitution's authorisation of these acts 'necessary and
proper' to the carrying out of the functions which it allocates to
the national government. Unless the objectives sought by
terms and conditions in government contracts requiring the
surrender of rights are constitutionally authorised, the
conditions must fall as ultra vires exercise of power.”
Again at page 1603, it is further emphasised thus:
“When conditions limit the economic benefits to be derived
from dealings with the government to those who forego the
exercise of constitutional rights, the exclusion of those
retaining their rights from participation in the enjoyment of
these benefits may be violative of the prohibition, implicit in
the due process clause of Fifth Amendment and explicit in the
equal protection clause of the Fourteenth Amendment against
unreasonable discrimination in the governmental bestow of
advantages. Finally, disabling those exercising certain rights
from participating in the advantages to be derived from
contractual relations with the government may be a form of
penalty lacking in due process. To avoid invalidation for any of
the above reasons, it must be shown that the conditions
imposed are necessary to secure the legitimate objectives of
the contract, ensure its effective use, or protect society from
the potential harm which may result from the contractual
relationship between the government and the individual.”
284. Professor Guido Calabresi of Yale University Law School
in his “Retroactivity, Paramount Power and Contractual
Changes” (196162) 71 Yale Law Journal 1191, stated that the
government can make contracts that are necessary and proper
for carrying out any of the specific clauses of the Constitution
or power to spend for general welfare. The Federal Government
has no power, inherent or sovereign, other than those
specifically or explicitly granted to it by the Constitution. At
page 1197, it is further stated thus:
“The government acts according to due process standards for
the due process clause is quite up to that task without the
rule. Alterations of government contracts are not desirable in a
free country even when they do not constitute a ‘taking’ of
property or impinge on questions of fundamental fairness of
the type comprehended in due process. The government may
make changes, but only if war or commerce require them and
not on the broader and more ephemeral grounds that the
general welfare would be served by the change. Any other rule
would allow the government to welch almost at will.”
x x x
65
286. In Brojo Nath case (supra, after elaborate consideration of
the doctrine of “reasonableness or fairness” of the terms and
conditions of the contract visavis the relative bargaining
power of the contracting parties this Court laid down that the
principles deducible from the discussion made therein is in
consonance with right or reason intended to secure socioeconomic justice and conform to mandate of the equality
clause in Article 14. The principle laid was that courts will not
enforce and will, when called upon to do so, strike down an
unfair and unreasonable contract or an unfair and
unreasonable clause in a contract, entered into between
parties who are not equal in bargaining power …. It will apply
to situations in which the weaker party is in a position in
which he can obtain goods or services or means of livelihood
only upon the terms imposed by the stronger party or go
without them. It will also apply where a man has no choice, or
rather no meaningful choice, but to give his assent to a
contract or to sign on the dotted line in a prescribed or
standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and unconscionable a
clause in that contract or form or rules may be. This principle,
however, will not apply where the bargaining power of the
contracting parties is equal or almost equal or where both
parties are businessmen, and the contract is a commercial
transaction.
287. In today’s complex world of giant corporations with their
vast infrastructural organisations the State through its
instrumentalities and agencies has been entering into almost
every branch of industry and commerce and field of service,
there can be myriad situations which result in unfair and
unreasonable bargains between parties possessing wholly
disproportionate and unequal bargaining power. These cases
can neither be enumerated nor fully illustrated. The court
must judge each case on its own facts and circumstances.”
(emphasis supplied)
The Court held that there can be myriad situations which result in
unfair and unreasonable bargains, which are the outcome of an
unequal bargaining power. Each case has to be seen on its own facts
and circumstances.
(c). In D.T.C. (supra), the Court also held that Article 14 sheds light
on public policy to curb arbitrariness thus:
66
“294. In Basheshar Nath v. CIT, AIR 1959 SC 149, S.R. Das,
C.J. held that Article 14 is founded on a sound public policy
recognised and valued in all States, and it admonishes the
State when it disregards the obligations imposed upon the
State.
295. In E.P. Royappa v. State of Tamil Nadu, (1974) 4 SCC 3,
Bhagwati, J. (as he then was) held that Article 14 is the genus
while Article 16 is a specie. Article 16 gives effect to the
doctrine of equality in all matters relating to public
employment. The basic principle which, therefore, informs
both Articles 14 and 16 is equality and inhibition against
discrimination. "Equality is a dynamic concept with many
aspects and dimensions, and it cannot be “cribbed, cabined
and confined” within traditional and doctrinaire limits. From a
positivistic point of view, equality is antithetical to
arbitrariness. In fact, equality and arbitrariness are sworn
enemies; one belongs to the rule of law in a republic while the
other, to the whim and caprice of an absolute monarch. Where
an act is arbitrary, it is implicit in it that it is unequal both
according to political logic and constitutional law and is
therefore violative of Article 14, and if it affects any matter
relating to public employment, it is also violative of Article 16.
Articles 14 and 16 strike at arbitrariness in State action and
ensure fairness and equality of treatment. In Maneka Gandhi
case (1978) 1 SCC 248, it was further held that the principle of
reasonableness, which legally as well as philosophically, is an
essential element of equality or nonarbitrariness pervades
Article 14 like a brooding omnipresence. In Ramana case
(1979) 3 SCC 489, it was held that it is merely a judicial
formula for determining whether the legislative or executive
action in question is arbitrary and therefore constituting
denial of equality. If the classification is not reasonable and
does not satisfy the two conditions, namely, rational relation
and nexus, the impugned legislative or executive action would
plainly be arbitrary, and the guarantees of equality under
Article 14 would be breached. Wherever, therefore, there is
arbitrariness in State action, whether it be of legislature or of
the executive or of an "authority" under Article 12, Article 14,
"immediately springs into action and strikes down such State
action." In fact, the concept of reasonableness and nonarbitrariness pervades the entire constitutional scheme and is
a golden thread which runs through the whole of the fabric of
the constitution.
302. Article 14 is the general principle, while Article 311(2) is
a special provision applicable to all civil services under the
State. Article 311(2) embodies the principles of natural justice,
but proviso to clause (2) of Article 311 excludes the operation
of principles of natural justice engrafted in Article 311(2) as an
exception in the given circumstances enumerated in three
67
clauses of the proviso to Article 311(2) of the Constitution.
Article 14 read with Articles 16(1), and 311 are to be
harmoniously interpreted that the proviso to Article 311(2)
excludes the application of the principles of natural justice as
an exception; and the applicability of Article 311(2) must,
therefore, be circumscribed to the civil services and be
construed accordingly. In respect of all other employees
covered by Article 12 of the Constitution, the dynamic role of
Article 14 and other relevant articles like Article 21 must be
allowed to have full play without any inhibition, unless the
statutory rules themselves, consistent with the mandate of
Articles 14, 16, 19 and 21 provide, expressly such an
exception.”
(emphasis supplied)
(d). Arbitrariness in State action whether of the legislature or the
executive or of an authority under Articles 12, 14 and 21 comes into
play to strike down such an action. The Court in D.T.C. (supra) held
thus:
“303. Article 19(1)(g) empowers every citizen the right to
avocation or profession etc. which includes right to be
continued in employment under the State unless the tenure is
validly terminated consistent with the scheme enshrined in the
fundamental rights of the Constitution. Therefore, if any
procedure is provided for deprivation of the right to
employment or right to the continued employment till the age
of superannuation as is a source to right to livelihood, such a
procedure must be just, fair and reasonable. This Court in
Fertilizer Corporation Kamgar Union (Regd.), Sindri v. Union of
India (1981) 1 SCC 568, held that Article 19(1)(g) confers a
broad and general right which is available to all persons to do
works of any particular kind and of their choice. Therefore,
whenever there is arbitrariness in State action — whether it be
of the legislature or of the executive or of an authority under
Article 12, Articles 14 and 21 spring into action and strikes
down such an action. The concept of reasonableness and nonarbitrariness pervades the entire constitutional spectrum and
is a golden thread which runs through the whole fabric of the
Constitution. Therefore, the provision of the statute, the
regulation or the rule which empowers an employer to
terminate the services of an employee whose service is of an
indefinite period till he attains the age of superannuation, by
serving a notice or pay in lieu thereof must be conformable to
the mandates of Articles 14, 19(1)(g) and 21 of the
Constitution. Otherwise, per se, it would be void. In Moti Ram
Deka case, AIR 1964 SC 600, Gajendragadkar, J. (as he then
68
was) after invalidating the Rules 149(3) and 148(3) under
Article 311(2) which are in pari materia with Regulation 9(b) of
the Regulations also considered their validity in the light of
Article 14 and held thus: (SCR p. 731)
“Therefore, we are satisfied that the challenge to the
validity of the impugned Rules on the ground that they
contravene Article 14 must also succeed.”
This was on the test of reasonable classification as the
principle then was applied. Subba Rao, J. (as he then was) in a
separate but concurring judgment, apart from invalidating the
rule under Article 311(2) also held that the rule infringed
Article 14 as well, though there is no elaborate discussion in
that regard. But, Das Gupta, J. considered elaborately on this
aspect and held: (SCR p. 770)
“Applying the principle laid down in the above case to the
present Rule, I find on the scrutiny of the Rule that it does not
lay down any principle or policy for guiding the exercise of
discretion by the authority who will terminate the service in
the matter of selection or classification. Arbitrary and
uncontrolled power is left in the authority to select at its will
any person against whom action will be taken. The rule thus
enables the authority concerned to discriminate between two
railway servants to both of whom Rule 148(3) equally applied
by taking action in one case and not taking it in the other. In
the absence of any guiding principle in the exercise of the
discretion by the authority, the Rule has, therefore, to be
struck down as contravening the requirements of Article 14 of
the Constitution."
308. In Ramana case (1979) 3 SCC 489, it has been held
that: (SCC p. 504, para 10)
“It is indeed unthinkable that in a democracy governed by
the rule of law, the executive government or any of its officers
should possess arbitrary power over the interests of the
individual.”
The procedure adopted should match with what justice
demands. History shows that it is always subtle and insidious
encroachments made ostensibly for a good cause that
imperceptibly but surely erode the foundations of liberty.”
(emphasis supplied)
(e). An employer cannot act in a manner that is in the negation of just,
fair, and reasonable procedure. The Court held:
“329. I am, therefore, inclined to hold that the courts,
though, have no power to amend the law by process of
interpretation but do have power to mend it so as to be in
69
conformity with the intendment of the legislature.
Doctrine of reading down is one of the principles of
interpretation of statute in that process. But when the
offending language used by the legislature is clear,
precise, and unambiguous, violating the relevant
provisions in the Constitution, resort cannot be had to
the doctrine of reading down to blow life into the void law
to save it from unconstitutionality or to confer
jurisdiction on the legislature. Similarly, it cannot be
taken aid of to emasculate the precise, explicit, clear and
unambiguous language to confer arbitrary, unbridled and
uncanalised power on an employer which is a negation to
just, fair and reasonable procedure envisaged under
Articles 14 and 21 of the Constitution and to direct the
authorities to record reasons, ( sic) unknown or
unintended procedure, in the manner argued by the
learned counsel for the appellants.” (emphasis supplied)
(f). In D.T.C. (supra) this Court also relied upon S.G. Jaisinghani v.
Union of India, AIR 1967 SC 1427 :
“331. x x x “In this context it is important to
emphasise that the absence of arbitrary power is the first
essential of the rule of law upon which our whole
constitutional system is based. In a system governed by
rule of law, discretion, when conferred upon executive
authorities, must be confined within defined limits. The
rule of law from this point of view means that decisions
should be made by the application of known principles
and rules and, in general, such decisions should be
predictable, and the citizen should know where he is. If a
decision is taken without any principle or without any
rule, it is unpredictable, and such a decision is the
antithesis of a decision taken in accordance with the rule
of law. (See Dicey: Law of the Constitution, 10th edn.,
Introduction cx.) ‘Law has reached its finest moments,'
stated Douglas, J. in United States v. Wunderlich 342 US
98, ‘when it has freed man from the unlimited discretion
of some ruler …. Where discretion is absolute, man has
always suffered.’ It is in this sense that the rule of law
may be said to be the sworn enemy of caprice. Discretion,
as Lord Mansfield stated it in classic terms in the case of
John Wilkes (1770) 4 Burr 2528, ‘means sound discretion
guided by law. It must be governed by rule, not by
humour: it must not be arbitrary, vague and fanciful’”.
(emphasis supplied)
70
(g). The Court emphasised that the decision has to be predictable
and it cannot be uncertain. The decision has to be taken by
application of known principles and rules. The exercise of power
cannot be whimsical or capricious. This Court in D.T.C. (supra) held:
“332. In an appropriate case where there is no sufficient
evidence available to inflict by way of disciplinary
measure, penalty of dismissal or removal from service
and to meet such a situation, it is not as if that the
authority is lacking any power to make rules or
regulations to give a notice of opportunity with the
grounds or the material on records on which it proposed
to take action, consider the objections and record reasons
on the basis of which it had taken action and
communicate the same. However, scanty the material
may be, it must form foundation. This minimal procedure
should be made part of the procedure lest the exercise of
the power is capable of abuse for good as well as for
whimsical or capricious purposes for reasons best known
to the authority and not germane for the purpose for
which the power was conferred. The action based on
recording reasoning without communication would
always be viewed with suspicion. Therefore, I hold that
conferment of power with wide discretion without any
guidelines, without any just, fair or reasonable procedure
is constitutionally anathema to Articles 14, 16(1), 19(1)(g)
and 21 of the Constitution. Doctrine of reading down
cannot be extended to such a situation.” (emphasis
supplied)
53. On the basis of aforesaid principles, it is apparent that once the
Central Board of Directors accepted the memorandum for making
payment of pension, in case it was not accepting the proposal in the
memorandum, it ought to have said clearly that it was not ready to
accept the proposals of the Government and the IBA and rejects the
same. Once it approved the proposals referred to in the memorandum,
71
which were on the basis of IBA's letter and Government of India's
decision it was bound to implement it in true letter and spirit. By
accepting the same, binding obligation was created upon the SBI to
make payment of pension on completion of 15 years of service. It
cannot invalidate its own decision by relying on fact it failed to amend
the rule, whereas other Banks did it later on with retrospective effect.
They cannot invalidate otherwise valid decision by virtue of exclusive
superior power to amend or not to amend the rule and act unfairly
and make the entire contract unreasonable based on
misrepresentation. It was open to the Board of Directors to reject the
proposal. Once it accepted the proposal to make payment of pension
on completion of 15 years of service as proposed in the memorandum,
though the scheme is tried to be interpreted by the SBI that pension
was to be admissible as provided in the rule that refers to
proportionate pension as noted by this Court in O.P. Swarnakar &
Ors., (supra), and what was decided by Government of India/IBA, was
not taken away rather adopted by the Central Board of Directors. The
scheme of contractual nature has to be read in the context and in the
backdrop of facts and what has been resolved by the Board of
Directors. There is no ambiguity with respect to the admissibility of
pension when the memorandum and the scheme are read together. In
case of ambiguity and even if two interpretations are possible in the
72
backdrop of facts of the case, one in favour of the employees has to be
adopted and socalled clarification dated 11.1.2000 even if considered
in the manner so as to deny the benefit of pension, has to be held to
be unenforceable, illegal and contrary to law.
54. It is apparent from the eligibility clause of the VRS scheme that
eligibility is provided for the employees having 15 years of pensionable
service and they will be entitled for benefits as provided in the scheme.
The eligibility clause, when read with clauses providing the benefit,
i.e., clauses 5 and 6 of the scheme, leaves no room for any doubt and
makes it clear that employees with 15 years of service were treated as
eligible to claim the benefit of the scheme floated by SBI. It was not
the provision in the VRS scheme that incumbents having completed
20 years of service would be entitled for pensionary benefits. The
scheme was carved out specially for attracting the employees by
providing pension and other benefits to eligible persons like ex gratia,
gratuity, pension and leave encashment. Deprivation of pension would
make them ineligible for the benefits and would run repugnant to the
eligibility clause.
55. The submission raised on behalf of the SBI that the draft scheme
nowhere stipulated that 15 years’ service would be the eligibility or
that on completion of 15 years' service, the incumbent would be
73
eligible for pension, is factually incorrect. It is apparent from the
material circumstances, documents, and correspondence that the
decision was taken at all levels including the one by the Central Board
of Directors of SBI, that the benefit of pension was to be given to the
employees on completion of 15 years of service. In that perspective,
vagueness of scheme of SBI, if any, can be of no advantage as it is
clear beyond the pale of doubt that pension was heart and soul of the
scheme with ex gratia on completion of 15 years of service. It is due to
the reason that the benefit was to be accorded to the incumbents
having completed 15 years of service, Regulation 28 as applicable to
other nationalised banks was proposed to be modified as reflected in
the letter of IBA dated 11.12.2000 and Government of India letter
dated 5.9.2000. Later on, the regulation was amended in 2002 after
the scheme had already been implemented in right earnest. There was
not even an iota of doubt that VRS was to give benefits to all eligible
employees having completed 15 years of service. It was apparent from
the letter dated 29.12.2000 of SBI that the guidelines of IBA were
approved by the Central Board of Directors in its meeting dated
27.12.2000. Para 2 of the letter dated 29.12.2000 of SBI Deputy
Managing DirectorcumSDO is extracted hereunder:
"2. Accordingly, the Central Board of Directors, in its
meeting held on 27.12.2000, has accorded approval for
adopting and implementing the Voluntary Retirement
Scheme for the employees of the Bank, namely "SBI
74
Voluntary Retirement Scheme (SBIVRS).” The Scheme
"SBIVRS" has been drawn up, keeping in view the
guidelines issued by IBA. A copy of the Scheme is placed
at Annexure ‘B’.”
(emphasis supplied)
56. As noted in O.P. Swarnakar & Ors., (supra), the case of bank
itself was that it was a contractual scheme. The expression "pension"
as per rules was only for the purpose of working out the proportionate
pension. It was clearly decided to open the scheme to employees who
have put in 15 years of service. It was not provided in the scheme that
the incumbent was required to render a pensionable service of 20
years as per the rules in order to acquire eligibility for the pension.
The submission made on behalf of SBI is too tenuous to be accepted.
It was observed in para 89 of O.P. Swarnakar & Ors., (supra) quoted
above that the employee must have proceeded on the basis of 15 years
of service then they were entitled to pensionary benefits.
The Court further observed in O.P. Swarnakar & Ors., (supra)
that the scheme is enforceable thus:
“92. However, the case of the State Bank of India stands
slightly on a different footing. Firstly, the State Bank of India
had not amended the Scheme. It, as noticed hereinbefore, even
permitted withdrawal of the applications after (sic by) 15th
February. The Scheme floated by the State Bank of India
contained a clause (clause 7) laying down the mode and
manner in which the application for voluntary retirement shall
be considered. The relevant clause, as referred to hereinbefore,
creates an enforceable right. In the event the State Bank failed
to adhere to its preferred policy, the same could have been
specifically enforced by a court of law. The same would,
therefore, amount to some consideration."
75
57. While construing a contract, the language and surrounding
circumstances of the overall scheme, memorandum and letters are to
be read conjointly to find out whether any departure made by the
Board of Directors in its Resolution dated 27.12.2000 is of pivotal
significance. In this case, the decision was taken by it of approval of
the IBA scheme as proposed. Its binding effect cannot be changed on
the basis what parties choose to say afterward, nor they can be
permitted to wriggle out. The contract is required to be read as a
whole. It is apparent on a bare reading that optees will be eligible for
proportionate pension under the Pension Regulations of the bank and
therefore, the bank bears the risk of lack of clarity, if any.
58. In Bank of India & Anr. v. K. Mohandas & Ors., (2009) 5 SCC 313
wherein several other banks were also parties, the question arose as to
the nature of VRS, 2000. The Court noted the objectives, the
amendment made in Regulation 28 in 2002, providing for 15 years of
service. The scheme was open in NovemberDecember, 2000 and in
Union Bank of India in January, 2001. The employees claimed that
those who completed 20 years of service, were entitled to the benefit of
provisions contained in Regulation 29(5) of Employees’ Pension
Regulations, 1995 applicable to the said banks. They claimed having
completed the qualifying service of 20 years under Regulation 29, were
entitled for 5 years’ increase in the service tenure subject to the
76
maximum of 33 years which was not given to them on the ground that
the benefit of VRS was available to incumbents having completed 15
years of service as provided in amended Regulation 28, and Regulation
29 was not applicable. This Court held that the benefit of VRS was
available to the employees having completed 15 years of service, but
the additional benefit which was available on completion of 20 years of
service was also admissible as provided in Regulation 29(5).
59. While considering the aforesaid similar scheme of VRS, this
Court observed with respect to the construction of the contract on the
basis of the import of the words. The intention of the parties must be
ascertained from the language they have used and considered in the
light of surrounding circumstances, and the meaning cannot be
changed by a course of conduct adopted by the parties in acting under
it. This Court in K. Mohandas (supra) held thus:
“28. The true construction of a contract must depend upon
the import of the words used and not upon what the parties
choose to say afterwards. Nor does subsequent conduct of the
parties in the performance of the contract affect the true effect
of the clear and unambiguous words used in the contract. The
intention of the parties must be ascertained from the language
they have used, considered in the light of the surrounding
circumstances and the object of the contract. The nature and
purpose of the contract is an important guide in ascertaining
the intention of the parties.
29. In Ottoman Bank of Nicosia v. Ohanes Chakarian, Lord
Wright made these weighty observations: (AIR p. 29)
“… that if the contract is clear and unambiguous, its true
effect cannot be changed merely by the course of conduct
adopted by the parties in acting under it.”
77
30. In Ganga Saran v. Firm Ram Charan Ram Gopal AIR 1952
SC 9, a fourJudge Bench of this Court stated: (AIR p. 11, para
6)
“6. … Since the true construction of an agreement must
depend upon the import of the words used and not upon what
the parties choose to say afterwards, it is unnecessary to refer
to what the parties have said about it.”
31. It is also a wellrecognised principle of construction of a
contract that it must be read as a whole in order to ascertain
the true meaning of its several clauses and the words of each
clause should be interpreted so as to bring them into harmony
with the other provisions if that interpretation does no violence
to the meaning of which they are naturally susceptible. (North
Eastern Railway Co. v. Lord Hastings, 1900 AC 260)”
60. With respect to lack of clarity in the scheme, this Court in K.
Mohandas (supra) relied on maxim verba chartarum fortius accipiuntur
contra proferentem to hold that banks who were responsible for
formulation of the terms in the contractual Scheme, bear the risk of
lack of clarity. Thus, the benefit has to be given to the employees by
making interpretation against the banks. The Court held :
“32. The fundamental position is that it is the banks who were
responsible for formulation of the terms in the contractual
Scheme that the optees of voluntary retirement under that
Scheme will be eligible to pension under the Pension
Regulations, 1995, and, therefore, they bear the risk of lack of
clarity, if any. It is a wellknown principle of construction of a
contract that if the terms applied by one party are unclear, an
interpretation against that party is preferred (verba chartarum
fortius accipiuntur contra proferentem).
33. What was, in respect of pension, the intention of the banks
at the time of bringing out VRS 2000? Was it not made
expressly clear therein that the employees seeking voluntary
retirement will be eligible for pension as per the Pension
Regulations? If the intention was not to give pension as
provided in Regulation 29 and particularly subregulation (5)
thereof, they could have said so in the Scheme itself. After all,
much thought had gone into the formulation of VRS 2000, and
78
it came to be framed after great deliberations. The only
provision that could have been in mind while providing for
pension as per the Pension Regulations was Regulation 29.
Obviously, the employees, too, had the benefit of Regulation
29(5) in mind when they offered for voluntary retirement as
admittedly Regulation 28, as was existing at that time, was not
applicable at all. None of Regulations 30 to 34 was attracted."
(emphasis supplied)
61. In K. Mohandas (supra) the Court considered the argument that
Regulation 28 would be applicable only for providing 15 years of
eligibility as provided by way of amendment of Regulation of 1995, and
held that as the banks are “State” within the meaning of Article 12, it
would be an arbitrary action on their part to deny the benefit of
section 29(5), and there has to be harmonious construction to the
scheme and Pension Regulations, thus:
“35. We are afraid; it would be unreasonable if amended
Regulation 28 is made applicable, which had not seen the light
of the day and which was not the intention of the banks when
the Scheme was framed. The banks in the present batch of
appeals are public sector banks and are "State" within the
meaning of Article 12 of the Constitution and their action even
in contractual matters has to be reasonable, lest, as observed
in O.P. Swarnakar (2003) 2 SCC 721, it must attract the wrath
of Article 14 of the Constitution.
36. Any interpretation of the terms of VRS 2000, although
contractual in nature, must meet the test of fairness. It has to
be construed in a manner that avoids arbitrariness and
unreasonableness on the part of the public sector banks who
brought out VRS 2000 with an objective of rightsizing their
manpower. The banks decided to shed surplus manpower. By
formulation of the special scheme (VRS 2000), the banks
intended to achieve their objective of rationalising their force
as they were overstaffed. The special Scheme was, thus,
oriented to lure the employees to go in for voluntary
retirement. In this background, the consideration that was to
pass between the parties assumes significance and a
harmonious construction to the Scheme, and the Pension
Regulations, therefore, has to be given.
79
37. The amendment to Regulation 28 can, at best, be said to
have been intended to cover the employees with 15 years of
service or more but less than 20 years of service. This
intention is reflected from the communication dated 592000
sent by the Government of India, Ministry of Finance,
Department of Economic Affairs (Banking Division) to the
Personnel Advisor, Indian Banks’ Association.”
(emphasis supplied)
It opined that the amendment to Regulation 28 of 1995
Regulation intended to cover 15 years of service, i.e., employees with
15 years of service who have not completed 20 years of service. A
similar action to amend the Rule was required to be taken by the SBI,
but it failed to take it after having floated a similar scheme. It kept it
uncertain what would be the position of the rule as on the appointed
date, i.e., 31.3.2001. Be that as it may. But it was crystal clear that
the incumbent with 15 years of service was eligible for the benefit as
provided in the scheme itself. The benefit clause has to be read with
the eligibility criteria. Once VRS was formulated and adopted by the
SBI in toto, it constituted a complete contractual package in itself.
62. As urged on behalf of SBI if section 23 of the Contract Act is
applied, then how it is helpful to the bank, is not understandable. In
case it is held that the very scheme was opposed to the law/rules, the
entire scheme would fall down. Once it adopted the scheme, invited
applications and the employees acted upon it and retired on the basis
of the scheme, they cannot be left in lurch. In case its submission is
accepted, the Scheme becomes violative of Section 23 of Contact Act,
80
the bank would have to suffer the consequences of striking down of
the very scheme and would be required to reinstate the employees and
to pay them the salary and other benefits. However, SBI accepted the
scheme, it was incumbent upon it to bring the rules in consonance
with the similar VRS scheme as was done by other banks. The SBI
accepted the scheme on 27.12.2000 without any ifs and buts. Thus,
the anomaly was the outcome of the bank's inaction to propose and
make amendment of rules. In such a scenario, the action of SBI is
violative of Articles 14, 16 and 21 of the Constitution. The situation
created by itself is not going to benefit the bank to lend support to
arbitrary action. The bank was bound to extend the benefits by
amending the rules, if necessary, to salvage the situation for itself.
Breach of law has been committed by the SBI itself, its action is
arbitrary and it cannot be permitted to take advantage of its own
wrong.
63. The pension cannot be dealt with arbitrarily and cannot be
denied in an unfair manner. The concept of pension was considered
in D.S. Nakara & Ors. v. Union of India, (1983) 1 SCC 305. The right to
a pension can be enforced through the court, it observed :
“20. The antequated notion of pension being a bounty, a
gratuitous payment depending upon the sweet will or grace of
the employer not claimable as a right and, therefore, no right
to pension can be enforced through Court has been swept
under the carpet by the decision of the Constitution Bench in
81
Deokinandan Prasad v. State of Bihar (1971) 2 SCC 330
wherein this Court authoritatively ruled that pension is a right
and the payment of it does not depend upon the discretion of
the Government but is governed by the rules and a
government servant coming within those rules is entitled to
claim pension. It was further held that the grant of pension
does not depend upon anyone’s discretion. It is only for the
purpose of quantifying the amount having regard to service
and other allied matters that it may be necessary for the
authority to pass an order to that effect but the right to receive
pension flows to the officer not because of any such order but
by virtue of the rules. This view was reaffirmed in State of
Punjab v. Iqbal Singh, (1976) 2 SCC 1.
22. In the course of transformation of society from feudal to
welfare and as socialistic thinking acquired respectability.
State obligation to provide security in old age, an escape from
undeserved want was recognised and as a first step pension
was treated not only as a reward for past service but with a
view to helping the employee to avoid destitution in old age.
The quid pro quo was that when the employee was physically
and mentally alert, he rendered unto master the best,
expecting him to look after him in the fall of life. A retirement
system, therefore, exists solely for the purpose of providing
benefits. In most of the plans of retirement benefits, everyone
who qualifies for normal retirement receives the same amount
(see Retirement Systems for Public Employees by Bleakney, p.
33).”
This Court observed that the principal aim of the socialist State
as envisaged in the Preamble is to eliminate inequality. The basic
framework of socialism is to provide security in the fall of life to the
working people and especially provides security from the cradle to the
grave when employees have rendered service in heydays of life, they
cannot be destituted in old age, by taking action in an arbitrary
manner and for omission to complete obligation assured one. Though
there cannot be estoppel against the law but when a bank had the
power to amend it, it cannot take shelter of its own inaction and SBI
82
ought to have followed the pursuit of other banks and was required to
act in a similar fair manner having accepted the scheme.
64. Resultantly, we are of the opinion that the employees who
completed 15 years of service or more as on cutoff date were entitled
to proportionate pension under SBI VRS to be computed as per SBI
Pension Fund Rules. Let the benefits be extended to all such similar
employees retired under VRS on completion of 15 years of service
without requiring them to rush to the court. However, considering the
facts and circumstances, it would not be appropriate to burden the
bank with interest. Let order be complied with and arrears be paid
within three months, failing which amount to carry interest at the rate
of 6 per cent per annum from the date of this order. The appeals are
accordingly disposed of. No costs.
…………………………J.
(Arun Mishra)
………………….……..J.
(M.R. Shah)
New Delhi; …….…………………..J.
March 2, 2020. (B.R. Gavai)
