Dealership Agreements Terminable On Notice Cannot Be Restored Through Arbitration: Allahabad High Court

The Lucknow Bench of the Allahabad High Court on 15 May held that an arbitral tribunal cannot restore a dealership agreement that either party can terminate by notice. Such a contract is determinable in nature and Section 14 of the Specific Relief Act bars its specific enforcement.

A Division Bench of Chief Justice Arun Bhansali and Justice Jaspreet Singh allowed Indian Oil Corporation Limited's (IOCL) appeal, set aside the arbitral award directing restoration of the dealership, and quashed the Commercial Court's order that had upheld the award. The judges held:

“In view of the above fact situation, the award passed by the Arbitral Tribunal as upheld by the Commercial Court is ex-facie and patently illegal being against the provisions of the Specific Relief Act as well as the law laid down by the Hon'ble Supreme Court.”

IOCL appointed Kumar Filing Station as a petrol pump dealer at Gehra Street, Unnao, under a dealership agreement dated 27 July 2008. The agreement was valid for five years, renewable annually, and allowed either party to terminate it by giving three months' written notice.

On 9 May 2017, a joint inspection team allegedly found a tampered pulsar card in a dispensing unit. IOCL issued a show-cause notice and terminated the dealership on 9 April 2019.

The dispute went to arbitration. The Arbitrator held that IOCL had terminated the dealership arbitrarily and without application of mind. He set aside the termination order, directed immediate restoration of petrol and diesel supplies, awarded costs of Rs.50,000, and rejected the dealer's compensation claim for lack of evidence.

IOCL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Commercial Court dismissed the challenge on 23 February 2023. IOCL then filed the present appeal under Section 37 of the Act.

It argued that the dealership agreement was determinable in nature and that Section 14(1)(c) of the Specific Relief Act barred specific performance or restoration of such a contract. It also relied on the Supreme Court's decisions in Indian Oil Corporation Ltd. v. Amritsar Gas Service and E. Venkatakrishna v. Indian Oil Corporation Ltd. Kumar Filing Station argued that once the Arbitrator found the termination illegal, restoration necessarily followed.

The High Court noted that the Arbitrator had framed a specific issue on whether he could order restoration and had referred to Amritsar Gas Service. However, he did not analyse that issue and simply concluded that the dealer was entitled to restoration because he had found the termination invalid. It held that the Arbitrator failed to consider the law governing restoration of a determinable contract.

The judges also noted that the Commercial Court dealt with the issue only briefly and distinguished Amritsar Gas Service on the ground that it was decided under the Arbitration Act, 1940.

Examining Clause 3 of the agreement, the Bench observed that either party could terminate the dealership by giving three months' written notice. Relying on Amritsar Gas Service, they reiterated that courts and tribunals cannot specifically enforce contracts that are determinable in nature.

Further, the Bench held that the Arbitrator could not have ordered restoration of the dealership even after finding the termination illegal. Since the award granted a relief barred by Section 14 of the Specific Relief Act, it was patently illegal and unsustainable in law.

Accordingly, the High Court allowed the appeal and set aside the arbitral award and the Commercial Court's order.