Scope of Promissory Estoppel against the Government

INTRODUCTION

“Men must turn square corners when they deal with the government” [1]

The sanctity of promises in our society lies in the societal and moral conventions that allow a promisor to be treated as bound to his promise. This moral convention is usually reflected in law by the enforcement of promises that are given in return of other promises or consideration, compelling the promisor to perform his end of the promise or pay expectation damages. In order to maintain this, there are yet more moral rules which govern promises, statements and agreements. These are embodied in the concept of estoppel which may be invoked in case of a breach in contract or against the government.

The doctrine of promissory estoppel is a doctrine of equity. It makes a promise irrevocable when the acceptor acts on the promise and irreversibly changes his position. The rationale behind this doctrine is that it is unfair if one party, acting on the promise of the other, does something to his detriment and receives no consideration because the promise is revoked. [2]

The government can enter into a contract just like any other individual or entity. Today, state officials make promises to individual parties who enter into commitments on the basis of these promises, only to find that the government’s discretion cannot be relied upon. The defence of statutory provisions provide sufficient umbrage for the government to go back on promises. Therefore, in this time of escalating administrative and executive facets of the State, the doctrine of promissory estoppel has gained considerable importance in the field of administrative law.

ROLE OF COURTS

While it can be said that it is essential in a constitutional democracy that no one howsoever high or low is above the law and that everyone is subject to the law as fully as another, the government being no exception [3] , it is also true that this in itself is not sufficient. There remain factors such as rule of law, sovereign immunity, public interest and appropriate regard for administrative veracity of public programs that must be taken into consideration when establishing a case against the government.

Indian Courts have, even whilst taking these considerations into mind, estopped the government every so often and held it to its representations. However, there is no single interpretation that can explain all the cases and the judges take on it. The various requirements of promissory estoppel are hard to state and harder still to apply. [4] The doctrine of estoppel is one that is based on equity and accordingly applied with respect to the circumstances of the case. Such application cannot follow a set of predictive rules. [5]

In essence, the courts are required to examine whether the injustice done to an individual outweighs the disadvantages to public interest. Lord Denning explained the balancing approach in a succinct manner as follows:

“ The underlying principle is that the Crown cannot be estopped from exercising its powers, whether given in a statute or by common law, when it is doing so in the proper exercise of its duty to act for the public good, even though this may work some injustice or unfairness to the private individual…it can, however, be estopped, when it is not properly exercising its powers but is misusing them; and it does misuse them if it exercises them in circumstances which work injustice or unfairness to the individual without any countervailing benefit to the public.” [6]

EVOLUTION OF THE DOCTRINE OF PROMISSORY ESTOPPEL

The foundation of the doctrine of promissory estoppel in India, as such, was laid down in the ratio of Collector of Bombay v. Municipal Corporation of the City of Bombay. [7] Chandrashekar Aiyer J. , in this case, expressed the following view :

“But even otherwise, that is if there was merely the holding out of a promise that no rent will be charged in the future, the Government must be deemed in the circumstances of this case to have bound themselves to fulfil it. Courts must do justice by the promotion of honesty and good faith, as far as it lies in their power”.

Nevertheless, it was in the case of Union of India vs. Anglo Afghan Agencies [8] that there was a manifest depiction of the newfound stress on the principles of equity under the doctrine. The Government of India announced certain concessions with regard to the import of certain raw materials in order to en-courage export of woollen garments to Afghanistan. Subsequently, only partial concessions and not full concessions were extended as announced. The Supreme Court applied the rule of estoppel based on equity and maintained that such promises may bind the Government even in the absence of constitutional formalities prescribed for government contracts. [9]

The Anglo Afghan case depicted a judicial trend. The key to this trend was to be found in the following statement of the Supreme Court [10] :

“If our nascent democracy is to thrive different standards of conduct for the people and public bodies cannot ordinarily be permitted”

However, the judicial attitude in the matter of applying promissory estoppel in the post Anglo Afghan period with respect to applying promissory estoppel against administrative remained ambivalent. The doctrine was applied in some cases, and not in others.

It was in Motilal Padampat Sugar Mills v Uttar Pradesh [11] that the doctrine of promissory estoppel was expounded afresh and given its most liberal interpretation by the Supreme Court. [12] In this case, the Government of U. P. notified a sales tax exemption for three years to all new industrial units with a view to increase industrial progress. The appellant company wanted to avail of the exemption by setting up a hydrogen plant for Vanaspati manufacturing. In answer to the appellant company’s enquiry, the Director of Industries confirmed the tax concession as announced by the government. The appellant company thereupon took steps towards getting finances for the project and the necessary machinery. The Chief Secretary and advisor to the government made a further oral assurance about the exemption from sales tax as well as gave a written confirmation. Later, the government announced only partial sales tax concessions. The appellant agreed to these concessions. At an even later date, however, the government rescinded the concessional rates and the appellant company challenged it. The facts necessary for invoking the doctrine of promissory estoppel were, therefore, clearly present and the Government was bound to carry out the representation and exempt the appellant from sales tax in respect of sales of Vanaspati effected by it in Uttar Pradesh for a period of three years from the date of commencement of the production. The Government was held bound to the principle of promissory estoppel to make good the prosecution made by it. [13]

The importance of equity was emphasised as it was held that the doctrine of promissory estoppel was not really based on the principle of estoppel and instead was evolved by equity in order to prevent injustice. It was pronounced that there was no reason why the doctrine should be given only a limited application by way of defence and that it could be the basis of cause of action. [14] In addition, Justice Bhagwati stated :

”  The law may, therefore, now be taken to be settled as a result of this decision, that where the Government makes a promise knowing or intending that it would be acted on by the promise and, in fact, the promise, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promise, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Article 299 of the Constitution.”

Another important aspect of the doctrine of promissory estoppel that was argued in this case was the complexity that arose with the conflicting doctrine of executive necessity. The doctrine of executive necessity prevents the government from contracting with another party to refrain from exercising its statutory functions. Since the term ‘statutory functions’ is a very broad one, this is a major constraint to the application of the doctrine of promissory estoppel to government contracts. [15]

It was held that the doctrine could not be defeated on the plea of executive necessity or freedom of future executive action. There is, however, much controversy regarding this particular decision as there is a conflicting decision in the case of Shri Bakul Oil Industries v State of Gujarat [16] . In that case, the Government of Gujarat issued a notification under Section 49 (2) of the Gujarat Sales Tax Act, 1969 exempting wholly or partly from payment of sales tax or purchase tax, as the case may be, certain specified classes of sales and purchases in order to stimulate wider distribution of industrial units in rural areas. The appellant company set up a plant for decorticating and crushing cotton and groundnut seeds for manufacture of oil. The plant and the appellant company satisfied all the requirements laid out in the notification. When the appellant company applied for the exemption, the government rejected the offer and amended the notification saying that this particular category of plants is sufficiently well distributed in rural areas. The appellant company challenged the rejection in Court. The doctrine of promissory estoppel was not applied and it was held that the government was not estopped from amending the notification. [17]

Though the facts are almost similar, the decisions in these two cases are in conflict with each other. This presents a divergence of opinion. In recent times, there has been a leaning towards the decision in Shri Bakul Oil Industries v State of Gujarat [18] because there has been an increasing tendency of the Courts to apply the doctrine of executive necessity in cases involving changes in public policy. [19] This virtually makes the doctrine of executive necessity an effective defence against the doctrine of promissory estoppel.

In the author’s opinion, the decision in the case of M. P. Sugar Mills v State of U. P. [20] is one that is more in consonance with the principles of equity. The rationale behind this opinion is that though the government may be justified in making a change in public policy in exercise of its statutory powers, it is necessary to put in safeguards against the retrospective effects of such a policy change. For example, the government may be justified in saying that all industrial units that are established from this date onwards will not be entitled to the benefits but it is not justified in saying that from this date onwards all industrial units, even those that have been established earlier, will no longer be entitled to the benefits that had provided them the incentive to be established in the first place. Therefore, in the author’s opinion, the doctrine of executive necessity should not be treated as an effective defence against the doctrine of promissory estoppel.

Another contention that arose was in the case of Jit Ram Shiv Kumar v State of Haryana [21] which diluted the impact of the decision made in Motilal. It was held in this case that the doctrine of estoppel is not available against the exercise of executive functions of the state.

However, the Apex Court in Union of India vs. Godfrey Phillips India Limited [22] removed this doubt. The Court held that the law laid down in Motilal’s case represents the correct law on promissory estoppel.

IMMUNITY FROM ESTOPPEL

It is important to note that the doctrine of promissory estoppel cannot be invoked unreservedly keeping in mind factors such as rule of law and public interest. A wanton use of this doctrine would amount to rendering the government and its agencies ineffective, presenting a difficulty. Therefore, courts have laid down certain immunities to prevent the same.

The essence of the doctrine of estoppel lies in the notion of equity. Therefore it is only expected that the doctrine must yield to equity when so requisite. A promise cannot be enforced against the government if it is inequitable to do so. It was contended in Motilal Padampat Sugar Mills v Uttar Pradesh that where the government claims that public interest would be at stake by enforcement of a promise, the onus would be upon the government to prove the facts and circumstances confirming the same. It is on this basis that the court would decide whether it is inequitable to enforce liability against the government. However, a plea of change of policy is not deemed sufficient. It must be shown that overriding and overwhelming public interest required that the government be absolved of its past promise. [23]

The doctrine of promissory estoppel cannot be applied against the government if it endangers the constitutional powers of the government. Similarly, the plea of estoppel also may not be enforced against the government if it has the effect of repealing any constitutional provision intended for the protection of the general public. [24] In C. Sankaranarayan v State of Kerala [25] , a notification was issued under Article 309 of the Constitution, raising the age for retirement while a later notification brought it down again. The Supreme Court, in this case, rejected the contention of estoppel and held that the powers conferred by Article 309 could not be curtailed by any agreement.

Furthermore, the principle of estoppel cannot be invoked to defeat the plain provisions of a statute as there can be no estoppel against the law. The doctrine of estoppel cannot be called upon to render valid a transaction which the legislature has said to be invalid on the basis of general public policy. Neither can it be used to give the court jurisdiction which is denied to it by statute or to oust the court’s statutory jurisdiction under an enactment which precludes the parties contracting out of its provisions. [26] The government cannot be compelled to carry out a representation if it is in contradiction with the law or beyond its authority. It cannot be applied in the exercise of legislative power. The legislature cannot be precluded from exercising its function by this doctrine. [27]

CONCLUSION

The doctrine of promissory estoppel is a doctrine of equitable adjustment. It is in place to ensure that no party to an agreement suffers any detriment while attempting to perform the act that would serve as consideration for a unilateral promise by another party. However, this doctrine can only be applied when certain conditions are fulfilled. Firstly, the party seeking to impose the estoppel must have altered his position. Secondly, the other party must not have given reasonable notice or reasonable opportunity to the party to resume his position. Finally, the party must be unable to resume his original position. If the above three conditions are fulfilled, then the doctrine of promissory estoppel is applicable.

The doctrine of promissory estoppel is necessary to place checks on the arbitrary powers of the State and this doctrine is one that would certainly serve that purpose by protecting the freedom to contract of citizens. In recent times, there is emphasis on government promises, especially in the realm of contract law and business transactions. It follows that an ordinary citizen who invests his assets based on the government’s promise only to find that the government does not abide by its promise must be afforded protection.

It is thus unfortunate to note that the judicial pronouncements in India, post Motilal Padampat Sugar Mills v Uttar Pradesh have neither been uniform nor consistent. Where there have been certain instances when the doctrine of promissory estoppel has been used to bind the government to its representation, there have also been certain similar instances when it has not. In recent times, the trend has been not to apply the doctrine and allow the use of the doctrine of executive necessity as an effective defence. However, the author is of the opinion that it is not equitable to do so as it has a retrospective effect even if it is in the exercise of the government’s statutory powers.

While the contribution and role of the Supreme Court in the development of the doctrine of promissory estoppel has been significant, the author is discontent with the restrictive view and limited application of the doctrine. The powers and limitations given to the government have a social function to perform, namely for the benefit of its people. The transformation in the attitude of the Apex Court is not an agreeable one as it tilts the balance in favour of one against the other, with the government emerging victorious against the ordinary citizen.