1983 (5) TMI 218 - SC - Companies Law

Whether the sanctioning of the loan by the Corporation in favour of the respondent was conditional upon IDBI agreeing to and undertaking to re-finance the loan and as IDBI has declined, for the time being, to re-finance the loan, the Corporation cannot be compelled to undertake the onerous liability of financing a huge loan to one undertaking and therefore the appellant was discharged from performing its part of the contract? Whether there was a concluded contract between the parties about grant and acceptance of loan, the failure of the Corporation to carry out its part of the obligation may amount to breach of contract for which a remedy lies elsewhere but a writ of mandamus cannot be issued compelling the Corporation to specifically perform the contract? Held that - The parties had envisaged a situation where the re-finance of the loan may not be available from IDBI. The obligation undertaken by the appellant to sanction the loan was independent of a re-financing of loan available from IDBI. In such situation, the first contention of Mr. Bhatt cannot be accepted. The true principle of promissory estoppel, therefore seems to be that where one party has by his words of conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective whether there is any preexisting relationship between the parties or not. The High Court accordingly was fully justified in issuing a writ of mandamus to disburse the loan and therefore the appeal fails.

Issues Involved:
1. Conditionality of the loan sanction upon IDBI refinancing.
2. Issuance of a writ of mandamus for specific performance of a contract.
3. Application of the principle of promissory estoppel.
4. Arbitrary action by a statutory corporation.

Detailed Analysis:

1. Conditionality of the Loan Sanction upon IDBI Refinancing:
The appellant argued that the loan sanction to the respondent was conditional upon the Industrial Development Bank of India (IDBI) agreeing to refinance the loan. The refusal of IDBI to refinance, according to the appellant, discharged it from performing its part of the contract. However, the court found no merit in this contention. The terms of the loan agreement, specifically Clauses 2 and 5, indicated that the sanction of the loan was independent of IDBI's refinancing. The clauses affected only the rate of interest and commitment charges, not the obligation to disburse the loan. Therefore, the court concluded that the appellant's obligation to advance the loan remained unaltered and binding despite IDBI's refusal to refinance.

2. Issuance of a Writ of Mandamus for Specific Performance of a Contract:
The appellant contended that the dispute was purely contractual, and the appropriate remedy for breach of contract was damages, not a writ of mandamus compelling specific performance. The court rejected this argument, emphasizing that the appellant, as an instrumentality of the state under Article 12 of the Constitution, could not breach a solemn undertaking and then argue that the aggrieved party could only seek damages. The court held that the appellant's agreement to advance the loan was in performance of its statutory duty, and the respondent had acted upon this promise, incurring significant expenses and liabilities. Therefore, the principle of promissory estoppel applied, and a writ of mandamus was appropriate to compel the appellant to fulfill its obligation.

3. Application of the Principle of Promissory Estoppel:
The court invoked the principle of promissory estoppel, which prevents a party from going back on a promise that the other party has relied upon to its detriment. The court cited the precedent set in *Motilal Padampat Sugar Mills Co. (P) Ltd. v. State of U.P.*, which established that a clear and unequivocal promise intended to create legal relations and acted upon by the promisee binds the promisor. The court found that the appellant's promise to advance the loan had led the respondent to undertake the hotel project, incurring substantial expenses. Therefore, it would be inequitable to allow the appellant to renege on its promise.

4. Arbitrary Action by a Statutory Corporation:
The court noted that as an instrumentality of the state, the appellant was subject to the constitutional prohibition against arbitrary action. The appellant's refusal to disburse the loan, despite a binding agreement and the respondent's reliance on the promise, was deemed unreasonable and arbitrary. The court emphasized that statutory corporations must act in conformity with principles of reason and relevance, and their actions must not cause harm or injury through unreasonable conduct. Consequently, the court held that the appellant's arbitrary refusal to disburse the loan warranted judicial intervention through a writ of mandamus.

Conclusion:
The court dismissed the appeal, upholding the High Court's issuance of a writ of mandamus directing the appellant to disburse the loan. The judgment reaffirmed the principles of promissory estoppel and the prohibition against arbitrary action by state instrumentalities, ensuring that statutory corporations honor their binding commitments.

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