ASSISTANT GENERAL MANAGER, STATE BANK OF INDIA & ORS. versus RADHEY SHYAM PANDEY on 2 March 2020

SUPREME COURT REPORTS

[2020] 4 S.C.R.

AASSISTANT GENERAL MANAGER,STATE BANK OF INDIA & ORS.

v.

RADHEY SHYAM PANDEY

B(Civil Appeal No. 2463 of 2015)

MARCH 02, 2020

[ARUN MISHRA, M. R. SHAH AND B. R. GAVAI, JJ.]

Service Law – Voluntary Retirement Scheme – Whether therespondent employees are entitled to pension on completion of 15Cyears of service as per the State Bank of India Voluntary RetirementScheme (VRS framed in 2000) – Held: The Central Board ofDirectors of the SBI accepted the memorandum for making paymentof pension, in case it was not accepting the proposal, in thememorandum it ought to have said clearly that it was not ready toDaccept the proposals of the Government and the Indian BankAssociation (IBA) and rejects the same – However, once it approvedthe proposals referred to in the memorandum which were on thebasis of IBA’s letter and Government of India’s decision it was boundto implement it in true letter and spirit – By accepting the same,binding obligation was created upon the SBI to make payment ofEpension on completion of 15 years of service – It cannot invalidateits own decision by relying on fact it failed to amend the rule, whereasother Banks did it later on with the retrospective effect – They cannotinvalidate otherwise valid decision by virtue of exclusive superiorpower to amend or not to amend the rule and act unfairly and makeFthe entire contract unreasonable based on misrepresentation – Thescheme of contractual nature has to be read in the context and inthe backdrop of facts and what has been resolved by the Board ofDirectors – There is no ambiguity with respect to the admissibility ofpension when the memorandum and the scheme are read together –In case of ambiguity and even if two interpretations are possible inGthe backdrop of facts of the case, one in favour of the employeehas to be adopted and any clarification, if it denies the benefit ofpension, has to be held to be unenforceable, illegal and contrary tolaw – In the instant case, the eligibility clause, when read with clausesproviding the benefit, i.e., clauses 5 and 6 of the scheme, leaves noH

ASSISTANT GENERAL MANAGER, STATE BANK OF INDIA &ORS. v. RADHEY SHYAM PANDEY

room for any doubt and makes it clear the employee with 15 yearsof service were treated as eligible to claim the benefit of the schemefloated by SBI – Therefore, the employees who completed 15 yearsof service or more as on cut-off date were entitled to proportionatepension under SBI-VRS to be computed as per SBI Pension FundRules.

Disposing of the appeals, the Court

Conclusion

HELD: 1. It is apparent that once the Central Board ofDirectors accepted the memorandum for making payment ofpension, in case it was not accepting the proposal in thememorandum, it ought to have said clearly that it was not readyto accept the proposals of the Government and the IBA and rejectsthe same. Once it approved the proposals referred to in thememorandum, which were on the basis of IBA’s letter andGovernment of India’s decision it was bound to implement it intrue letter and spirit. By accepting the same, binding obligationwas created upon the SBI to make payment of pension oncompletion of 15 years of service. It cannot invalidate its owndecision by relying on fact it failed to amend the rule, whereasother Banks did it later on with retrospective effect. They cannotinvalidate otherwise valid decision by virtue of exclusive superiorpower to amend or not to amend the rule and act unfairly andmake the entire contract unreasonable based onmisrepresentation. It was open to the Board of Directors to rejectthe proposal. Once it accepted the proposal to make payment ofpension on completion of 15 years of service as proposed in thememorandum, though the scheme is tried to be interpreted bythe SBI that pension was to be admissible as provided in the rulethat refers to proportionate pension as noted by this Court inO.P. Swarnakar & Ors., and what was decided by Government ofIndia/IBA, was not taken away rather adopted by the CentralBoard of Directors. The scheme of contractual nature has to beread in the context and in the backdrop of facts and what hasbeen resolved by the Board of Directors. There is no ambiguitywith respect to the admissibility of pension when the memorandumand the scheme are read together. In case of ambiguity and evenif two interpretations are possible in the backdrop of facts of thecase, one in favour of the employees has to be adopted and so- ABC

DE

F

G

H

Acalled clarification dated 11.1.2000 even if considered in themanner so as to deny the benefit of pension, has to be held to beunenforceable, illegal and contrary to law. [Para 53][877-G-H;878-A-E]

2. It is apparent from the eligibility clause of the VRSBscheme that eligibility is provided for the employees having 15years of pensionable service and they will be entitled for benefitsas provided in the scheme. The eligibility clause, when read withclauses providing the benefit, i.e., clauses 5 and 6 of the scheme,leaves no room for any doubt and makes it clear that employeeswith 15 years of service were treated as eligible to claim theCbenefit of the scheme floated by SBI. It was not the provision inthe VRS scheme that incumbents having completed 20 years ofservice would be entitled for pensionary benefits. The schemewas carved out specially for attracting the employees by providingpension and other benefits to eligible persons like ex gratia, Dgratuity, pension and leave encashment. Deprivation of pensionwould make them ineligible for the benefits and would runrepugnant to the eligibility clause. [Para 54][878-E-H]

3. The submission raised on behalf of the SBI that the draftscheme nowhere stipulated that 15 years’ service would be theEeligibility or that on completion of 15 years’ service, the incumbentwould be eligible for pension, is factually incorrect. It is apparentfrom the material circumstances, documents, and correspondencethat the decision was taken at all levels including the one by theCentral Board of Directors of SBI, that the benefit of pensionwas to be given to the employees on completion of 15 years ofFservice. In that perspective, vagueness of scheme of SBI, if any,can be of no advantage as it is clear beyond the pale of doubt thatpension was heart and soul of the scheme with ex gratia oncompletion of 15 years of service. It is due to the reason that thebenefit was to be accorded to the incumbents having completedG15 years of service, Regulation 28 as applicable to othernationalised banks was proposed to be modified as reflected inthe letter of IBA dated 11.12.2000 and Government of India letterdated 5.9.2000. Later on, the regulation was amended in 2002after the scheme had already been implemented in right earnest.

H

ASSISTANT GENERAL MANAGER, STATE BANK OF INDIA &ORS. v. RADHEY SHYAM PANDEY

There was not even an iota of doubt that VRS was to give benefitsto all eligible employees having completed 15 years of service.It was apparent from the letter dated 29.12.2000 of SBI that theguidelines of IBA were approved by the Central Board ofDirectors in its meeting dated 27.12.2000. [Para 55][879-A-E]

4. This Court observed that the principal aim of the socialistState as envisaged in the Preamble is to eliminate inequality. Thebasic framework of socialism is to provide security in the fall oflife to the working people and especially provides security fromthe cradle to the grave when employees have rendered servicein heydays of life, they cannot be destituted in old age, by takingaction in an arbitrary manner and for omission to completeobligation assured one. Though there cannot be estoppel againstthe law but when a bank had the power to amend it, it cannot takeshelter of its own inaction and SBI ought to have followed thepursuit of other banks and was required to act in a similar fairmanner having accepted the scheme. [Para 63][885-F-H]

Bank of India & Ors. v. O.P. Swarnakar & Ors. (2003)2 SCC 721 : [2002] 5 Suppl. SCR 438 ; Delhi TransportCorporation v. D.T.C. Mazdoor Congress & Ors. (1991)Supp 1 SCC 600 : [1990] 1 Suppl. SCR 142 ; CentralInland Water Transport Corporation Ltd. & Anr. v. BrojoNath Ganguly & Anr. (1983) 3 SCC 156 : [1986] 2SCR 278 ; Bank of India & Anr. v. K. Mohandas &Ors. (2009) 5 SCC 313 : [2009] 5 SCR 118 ; D.S.Nakara & Ors v. Union of India (1983) 1 SCC 305 :[1983] 2 SCR 165 – relied on.

HEC Voluntary Retd. Employees Welfare Society v. HeavyEngineering Corporation Ltd. (2006) 3 SCC 708 :[2006] 2 SCR 678 ; Jan Mohd. Noor Mohd. Bagban v.State of Gujarat, AIR 1966 SC 385 : [1966] 1 SCR505 ; Atlas Cycle Industries Ltd. v. State of Haryana(1979) 2 SCC 196 : [1979] 1 SCR 1070; S.G.Jaisinghani v. Union of India, AIR 1967 SC 1427 :[1967] 2 SCR 703 – referred to.

A

B

D

E

F

G

H

AA. Schoroeder Music Publishing Co. Ltd. v. Macaulay(formerly Instone) (1974) 1 WLR 1308 ; Levison v.Patent Steam Carpet Co. Ltd; (1949) 2 All ER 584 –referred to.

Case Law Reference

From the Judgment and Order dated 23.11.2006 of the High CourtEof Judicature at Allahabad in Special Appeal No. 904 of 2006.

With

Civil Appeal Nos. 2287-2288 of 2010, 5035-5037 of 2012, 10813of 2013.

FVikas Singh, N.K. Kaul, Pradeep Kant, Sr. Advs., Sanjay Kapur,V.M. Kannan, Harshal Narayan, Kauser Husain, Bharath Gangadharan,Sanjay Kapur, Ms. Hansa Kaul, Divyanshu Sahay, Ms. Shradha Narayan,Vishnu Shankar Jain, Sanjaye Goel, Jagjit Singh Chhabra, SakshamMaheshwari, Ms. Kamini Jaiswal, Ms. Rani Mishra, Jatinderpal Singh,Hari Shankar Jain, Pankaj Kr. Verma, Ms.Vaishnavi Ranjana, VinayGRajput, Ankur S. Kulkarni, Mrs. K. Sarada Devi, M/s. Mitter & Mitter,Advs. for the appearing parties.

The Judgment of the Court was delivered by ARUN MISHRA, J.

1. The question involved is whether the respondent-employeesare entitled to pension on completion of 15 years of service as per theState Bank of India Voluntary Retirement Scheme (for short, “the VRSframed in 2000”).

2. The matter has been referred to larger Bench due to conflict ofopinion between the Judges as to the admissibility of pension under theVRS.

3. After obtaining approval of the Government of India, the IndianBank Association (IBA) evolved a Voluntary Retirement Scheme. TheCentral Board of Directors of the State Bank of India (in short ‘theSBI’) adopted and approved the scheme in its meeting held on 27.12.2000for implementing the VRS for the employees of the bank by retiringthem on completion of 15 years of service with the benefit provided inthe scheme. The scheme had been drawn up, keeping in view theguidelines issued by the IBA. “Memorandum” dated 26.12.2000 wassubmitted by the Deputy Managing Director and the CorporateDevelopment Officer for according approval to the proposals containedin the Memorandum as also for adopting the scheme as Annexure ‘B’ tothe Memorandum.

4. The basis of Memorandum dated 26.12.2000, was the adviceby IBA vide letter dated 31.8.2000 in which it was pointed out that theydeliberated with the Government of India, Ministry of Finance (BankingDivision), at its meeting with the Finance Minister, with Chief Executivesof public sector banks on 13.6.2000. The human resource and manpowerplanning in public sector banks were reviewed, and a Committee wasconstituted to examine the issues concerned to public sector banks andto suggest suitable remedial measures. The Committee considered theeconomic reforms set in motion in the year 1990, the high establishmentcost and low productivity in public sector banks. It was felt that thebanks convert their human resource into assets compatible with thebusiness strategies through a variety of measures. The data availableindicated that 43% of the employees in public sector banks were in the46 + age group, and only 12% were in the 25-35 age group. It was feltthat this pattern has severe implications for the banks regarding mobility,training, development of skills, and succession plans for higher-level A

B

CD

E

F

G

H

A

B

CD

E

F

G

H

Apositions. 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 videletter dated 13.7.2000 sought no objection from the Government forcirculating the schemes to the banks for consideration and adoption bytheir Boards. The Government conveyed on 29.8.2000 that it did notBhave any objection for adopting and implementing the scheme by therespective Board of Directors. It advised that the banks may adopt theseschemes for sabbatical leave and voluntary retirement based on theessential features of the schemes given in the annexure to the letter.The scheme provided eligibility for all permanent employees with 15Cyears of service. It provided for amount of ex gratia and other benefitsaccepted by the Government of India which were to be provided (i)gratuity as per the Gratuity Act/service gratuity, as the case may be; (ii)pension (including commuted value of pension)/bank’s contributiontowards provident fund; and (iii) leave encashment as per rules.

D5. After the Central Board of SBI approved the proposalscontained in the memorandum on 27.12.2000, a circular was issued on29.12.2000 in which it was mentioned that the IBA advised that as theCommittee constituted by the Finance Ministry recommended introductionof a VRS in order to rationalise the manpower, the Government of Indiahas no objection for adopting and implementing the VRS. It was clearlyEstated in the Circular dated 29.12.2000 that the Central Board of Directorsaccorded approval for adopting and implementing the SBI voluntaryRetirement Scheme drawn up, “keeping in view the guidelines issued bythe IBA.” Copy of the scheme was placed as Annexure B. The schemewas open from 15.1.2001 till 31.1.2001. Specimen applications and otherFrelated forms inter alia for pension were also circulated, which formedpart of the circular. The circular also made it clear that gratuity, providentfund contribution as per the Provident Fund Rules, pension in terms ofthe SBI Employees’ Pension Fund Rules, leave encashment to be providedbeside the amount of ex gratia.

G6. The heart and soul of the scheme were that benefits to begiven on completion of 15 years of service. The eligibility for benefitswas provided to those who had completed 15 years of service as on31.12.2000.

7. The SBI submitted that it reserved a right under the scheme toHmodify, amend or cancel it or any of the clauses and to give effect to it from any date deemed fit. The Deputy Managing Director-cum-CDOwas the competent authority for the purpose. As specific queries wereraised, a clarification was issued by the Deputy Managing Director on15.1.2001, in which about a query whether an employee on completing15 years of pensionable service as on the relevant date of retirement,would be entitled to pensionary benefits, in response, para 6(c) of thescheme was reiterated, and it was also mentioned that as per the existingrules, employees who had not completed 20 years of pensionable service,were not eligible for pension.

8. The clarification issued by the Deputy General Manager wasnot in the form of modification or amendment of the scheme. The DeputyGeneral Manager in clarification quoted the provisions and simply statedthe position of a rule that the pensionable service was 20 years. Thecommunication was clarificatory and did not have the effect of modifyingthe SBI VRS scheme as approved and adopted.

9. (a) Radhey Shyam Pandey questioned the refusal of the bankto pay pension, vide communication dated 26.9.2006 in the writ applicationfiled in the High Court at Allahabad. He retired on 31.3.2001 under theSBI VRS. On 18.3.2001, the bank accepted the offer of the employeeto retire him voluntarily. He was aged 59 years three months and hadnine 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 oncompletion of 60 years, and would have put in a little more than 20 yearsof pensionable service.

(b) The High Court held that the case of the employee fell underthe Second Part of Rule 22(i)(a). He was in service of the bank on andafter 11.11.1993 and completed ten years of pensionable service, andfurther, he attained the age of 58 years before the date he retired. TheHigh Court opined that the clarification was not part of the VRS scheme.The employee retired outside rule as per the contractual retirementscheme. The contract had to prevail. In Pension Fund Rules, Clause (a)in Rule 22(i) was inserted to give the employees the benefit of pensionafter ten years of pensionable service even if they had joined late. TheHigh Court found that the matter was covered by Rule 22(i)(a). Theadmissible benefit cannot be denied. If a contracting party is entitled totake benefit of a permissible clause, then it cannot be denied to him.

AB

C

DE

F

G

H

A(c) In the Chairman, State Bank of India & Ors. v. Mihir KumarNandi & Anr. (C.A. Nos. 5035-5037/2012), a Division Bench of theHigh Court of Calcutta dismissing the intra-court appeal, affirmed theorder of the learned Single Judge and directed to make the payment ofpension. The employee was appointed on 21.5.1988. He opted for VRSon 15.1.2001. The acceptance was conveyed on 17.3.2001 by which heBwas informed that he would be relieved of his duties on 31.3.2001. Videletter dated 2.8.2001, the employee was granted a pension at the rate ofRs.1024 per month. However, vide communication dated 30.8.2001, thepension payment order, together with payment of commuted value, wasstopped in view of the amendment of Rule 22 of the Pension Fund Rules.CThough the amendments in Pension Fund Rules were made effectivewith effect from 31.3.2001, and the age of retirement had been raisedfrom 58 years to 60 years, w.e.f. 22.5.1998, this had necessitated increasein 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 pensionableDservice on or after 22.5.1998 are eligible for pension.

(d) The Central Board of the SBI in its meeting held on 30.1.2001accorded approval to the amendment in Rules 8 and 22(i)(a) of the Rulesas set out in Annexure 1. The Trustees of the SBI Employees’ PensionFund in their meeting on 30.10.2001 adopted the amended rules.EConsequently, a Circular was issued on 8.11.2001. The amendment wasgiven effect from 31.3.2001, the date on which it was notified, though itwas adopted by the Trustees of the SBI Trust Pension Fund in October2001.

(e) A Division Bench of the High Court held respondent-employee,Fas 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 werepublished, which took away the existing right to get the pension. In VRSScheme, it was mentioned that the pension would be payable inaccordance with the rules as on 31.3.2001. The employee had no meansGof knowing about the future amendment of the Pension Rules, whichwould be detrimental to his interest. If he had known the fact, then hewould not have opted for the scheme. The silence maintained by theemployer in such a situation amounted to a fraud on its part. The HighCourt relied upon section 17 of the Contract Act and Illustration (d) tosection 19 of the Contract Act. The High Court further held that it wasH

the duty of the employer to disclose that there would be a futureamendment on the last date of their service by which their right to pensionwould be taken away. The same cannot but be said to be unfair andarbitrary. Thus, the High Court held that action is violative of Article 14of the Constitution of India. The employee is entitled to the relief ofpension along with interest.

10. Ramesh Prasad Nigam (supra) had joined the services in1984 in the clerical cadre and was confirmed on 2.3.1985. He had appliedfor VRS, having completed 15 years of service and 57 years of age.The clarification was internal circulation. It was not within the knowledgeof employees; as such, he was entitled to the pension.

11. (a) In C.A. Nos.2287-88/2010, M.P. Hallan joined the servicesof the bank on 18.5.1981 as a clerk. The acceptance under VRS wascommunicated on 17.3.2001. On 27.3.2001, he applied to withdraw hisrequest made under VRS as retirement was w.e.f. 31.3.2001. The Bankdeclined application on 18.4.2001 on the ground that the last date ofwithdrawal of the application was 15.2.2001. The employee claimedpension under Pension Fund Rules in terms of SBI Employees’ PensionFund Rules (hereinafter referred to as ‘Pension Rules’). By writing aletter on 12.4.2001, the claim of the employee for withdrawal ofapplication for voluntary retirement, pension, and leave encashment wasagain declined on 4.7.2001. Thereafter, he filed a writ petition in theHigh Court of Punjab & Haryana.

(b) The High Court rejected the claim concerning the withdrawalfrom VRS. As the last date for withdrawal was over, and acceptancehad been communicated, however, considering Rule 22 of the PensionRules, the High Court opined that as the employee completed more than19 years and ten months of service on 31.3.2001, therefore, the first partof clause one of Rule 22 is not applicable. Further, the third part ofclause (a) is not applicable as he has completed ten years of service butnot attained the age of 60 years. The case of the employee was coveredunder the second part of clause (a) of Rule 22, which enabled the memberto get a pension if an employee in the service of the bank on or after1.11.1993, and completed ten years pensionable service and attained 58years age. The employee applied in terms of the Pension Rules prevailingin January 2001. Alternatively, if an employee was in service of the bankon or after 1.11.1993, having completed ten years of pensionable serviceand on attaining the age of 58 years, shall be entitled to a pension. Thus, A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Ahe fulfilled the requirement of second part of clause (a) of Rule 22 as hewas in service of the bank on 1.11.1993 and completed ten years ofpensionable service, and the age of 58 years, therefore, in terms of Rule22, he was entitled to pension as well as leave encashment dues alongwith interest at the rate of 9 percent per annum.

B12. On behalf of the bank, it was submitted that VRS 2000stipulated that the pension in terms of SBI Pension Fund Rules on therelevant date, i.e., 31.3.2001, was to be provided. In other words, incase the employee was entitled to a pension in terms of Pension Rulesand not otherwise. A provision was added in Rule 22(1) of the PensionRules in the year 1986, accordingly, the pension was to be granted in allCcases relating to voluntary retirement on completion of 20 years ofservice. The employees opting for the SBI-VRS would be governedonly 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 underclause 22(i)(c) shall be entitled to a proportionate pension, which is onDcompletion of 20 years of pensionable service. Eligibility clause 3 hasnothing to do with the admissibility of the pension. It was further submittedthat the employees who completed ten years of pensionable service andwere 60 years of age were entitled to pension; while employees underthe VRS on completion of 15 years would not get pension and for that20 years’ service was necessary, the submission of employees that itEwould be discriminatory is based on incorrect premise. There is nochallenge to the SBI Pension Rules or SBI-VRS. The bank provided thepensionable service period of 10 years on attaining the age of 60 yearsin terms of reservation policy. The bank appoints late entrants like ex-servicemen who, after serving in Armed Forces, join the bank and are Fleft only with about ten years of service before they attain the age ofsuperannuation. It is to grant benefit to such a particular category ofemployees that a period of 10 years on attaining the age of superannuationof 60 years was provided in Rule 22(i)(a).

13. The appellants further submitted that 20 years’ period isGprovided in case of voluntary retirement to ensure that an employee onwhom the bank has spent a considerable amount during training, worksfor a substantial period before he seeks retirement. It is a uniform policyfollowed by the bank. Regulation 28 was amended in 2002 providing for15 years of service. It applies to the employees who are governed bythe Bank Employees’ Pension Regulations, 1995. These regulations doH

not apply to SBI employees as the SBI Pension Rules govern them. SBIemployees are entitled to Provident Fund, gratuity and pension in termsof the Rules on completion of 20 years of service. Thus, there cannot beany comparison of SBI employees with the employees of othernationalised banks. The clarification dated 11.01.2000 has also been reliedon by the bank. Now more than 19 years have passed and to grant apension to all those who have retired, w.e.f. 1.4.2001 would cast a hugefinancial liability on the bank.

14. It was submitted on behalf of the employees that the decisionrendered by the High Court is appropriate. No case for interference ismade out in appeals. The very essence of the VRS was the admissibilityof pension on completion of 15 years of service and other benefits. Oncethe scheme was adopted and approved by the Central Board of SBI, theclarification could not have been made to the detriment of employees.The clarification did not have effect of the amendment, modification, orcancellation of the VRS scheme as approved and adopted by Board.The amendment in the Pension Regulations of 1995 was carried out byother public sector banks with retrospective effect in 2002, though thescheme was floated and implemented in the year 2000-2001. However,the benefits were extended on the strength of the VRS scheme evenbefore amending the Regulations of 1995. The SBI adopted the Schemein toto and Pension Rule 22 providing eligibility of 20 years applies onlyto those cases where employees seek retirement in the ordinary courseof completion of 10 years or 20 years, as the case may be. The VRSwas taken in the specific scheme providing eligibility and benefits oncompletion of 15 years of service, and that constituted a concludedcontract. It was not open to the bank to alter the terms. In case thebank’s submission is accepted, it would lead to a situation that employeeswho have already reached the age of superannuation, would have beenentitled to take VRS. The bank has misled the employees, and the actioncould not be said to be fair. Once an offer was accepted and after thatto amend the rules or not to amend the rules till 31.3.2000 depended onexercise of power by SBI which may have the effect to deprive thepension when the option was not available even to withdraw the offer asit was the last day of the employment. Rule 22 was amended, that toowith retrospective effect. Thus, the employees who joined service afterretirement from other services, have completed the age of 58 years andwere in employment as on 1.11.1993 were entitled to a pension. Theyhave also been deprived of the benefit of pension, which would have A

B

C

D

E

F

G

H

Abeen otherwise available to them. In case pension was not to be paid, itwas not a profitable bargain for them to forego pension only for exgratia benefit. It was incumbent upon the SBI to amend the Rule, incase it was necessary to do so. Otherwise, also, the meaning of theexpression “pension” to be paid as per rules was that proportionate pensionto be awarded to the employees with 15 years’ service who were eligibleBfor benefits granted as specified in the circular and the VRS scheme.The clarification issued on 11.1.2000 only pointed out the provisions ofthe VRS scheme as well as the existing position of the rule. It could nothave effect to take away the benefit in any manner which becameavailable to the employees of obtaining the pension on completion of 15Cyears of permanent pensionable service. On the one hand, employeeswho served for ten years and attained the age of superannuation wereentitled to pension and to deprive the same to a permanent employeewho rendered the service for 15 years, would be per se discriminatory,unfair and arbitrary. Once the scheme was floated and approved, thebank being State within the purview of Article 12 of the Constitution ofDIndia, it would not be permissible for it to discriminate and act unfairly.The VRS constituted an independent contract and was binding upon thebank. The benefits could not have been taken away from eligibleemployees who accepted VRS, which was implemented by the bank forits benefit to induct new skills as well as to rationalise the workforce.EThus, appeals being bereft of merit, deserve dismissal.

15. The main question is whether, under the scheme as approvedand adopted by the Central Board of SBI, the pension is admissible tothe employees on completion of 15 years of permanent service.Connected question is whether employees have been denied benefit ofFpension unfairly and arbitrarily contrary to the essential terms of thescheme.

16. Firstly, it is necessary to consider the nature of the package,which was accepted in the resolution by the Central Board of Directorsof SBI in its meeting dated 27.12.2000. As already mentioned, exerciseGwas done in order to rationalise the workforce as it was felt that bankswere overstaffed. The IBA advised the SBI regarding the issuesconfronting the public sector banks. In the memorandum submitted tothe Central Board of Directors of SBI, the following facts were mentionedas to the adoption of Scheme in right earnest and requirement ofmanpower planning:H

“The data available with IBA indicates that 43% of employees inPublic Sector Banks are in the 46+ age group, and only 12% arein the 25-35 age group. This pattern has serious implications forthe Banks with reference to mobility, training, development ofskills, and succession plans for higher-level positions. This, coupledwith excess manpower wherever it exists, would come in theway of induction of new skills and proper career progression.

The Committee has recommended the introduction of a VoluntaryRetirement Scheme that would assist the Banks in their effort tooptimise their human resources and achieve a balanced age andskills profile in keeping with their business strategies. IBA hasadvised that the Government of India has conveyed that they haveno objection to the banks’ placing before their respective Boardsof Director’s proposals for adopting and implementing theVoluntary Retirement Scheme. It has been advised that Banksmay adopt the scheme after obtaining their Boards’ approval andimplement it in right earnest.” (emphasis supplied)

“a) The high establishment costs of the Bank vis-à-vis the foreignbanks and new private sector banks have been a matter of concern.The percentage of staff expenses to total expenses in the Bank is21.85 against the percentage of 7.66 and 3.04 for foreign banksand new private sector banks, respectively. Even if we compareit with other Public Sector Banks, our ratio is adverse.

d) With the computerisation of accounting and other work at alarge number of branches, manpower, which was needed forbalancing of books, is now rendered surplus. This indicates animperative need to rationalize the manpower at these branches.While we have already initiated steps for the productiveredeployment of staff at these branches through shift bankingand seven-day banking, there still exists scope for improvementin this area. Most of these branches are situated in metropolitanand urban centers. Incidentally, the experience of other banks inrespect of voluntary retirement schemes shows that a maximumnumber of applications have been received from these centers.

f) As against the average of 43% of employees in Public SectorBanks in the 46+ age group, we have 47% of the employees inthis age group. Of this, 1/5[th] are in the age group of 56 and above.

AB

C

D

EF

G

H

ATo put it simply, 21,824 employees will reach the age ofsuperannuation and retire by March 2005.

In the light of the above-mentioned factors, it will be seen that themanpower of the Bank will undergo major changes in the ensuingyears in number and deployment. Further, considering the varietyBof business the Bank undertakes, and its special role in the bankingsector, over-emphasis on quantitative parameters would beinappropriate. An approach paper on Manpower Planning is placedat Annexure-‘A’.

Considering the various aspects of Manpower Planning, we areCof the view that the Voluntary Retirement Scheme should beemployed as a moderate tool to right-size the manpower in StateBank of India.”

In the light of aforesaid, it is clear that the VRS scheme wasdevised as a tool to reduce overstaffing. The memorandum submitted toDthe Central Board contained the following significant aspects:

“Keeping in view the above, the IBA guidelinesand the feedbackreceived from other Banks, the draft ‘SBI Voluntary RetirementScheme (SBIVRS)’ is prepared and placed for approval atAnnexure-‘B.’

E

It is proposed to introduce SBIVRS for employees who have ason 31-12-2000, 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 anyother category as ineligible. We propose to exclude the Watchand Ward staff as these positions cannot be reduced. We alsoFpropose to exclude highly skilled and qualified staff from theScheme.

SBIVRS will be voluntary in nature. The decision to seekretirement under the Scheme rests with the employee only. Themanagement will retain the discretion as to whether to accept orGnot the request for voluntary retirement under the Scheme. Wehave to ensure that while, on the one hand, our Bank benefits bythe rightsizing of the staff strength, on the other, any sudden exodusof a very large number of staff does not destabilise the normaloperations of the Bank. Considering the attractive features of the H

Scheme, in terms of ex-gratia payment, etc., a large number ofapplications are expected. However, the Bank will have to controlthe outflow according to its requirements. Towards this end, itwill be necessary to retain the discretion with the management ofthe Bank to limit the number of employees allowed to retire ineach category of staff to be covered under SBIVRS, and wepropose to retain such discretion.”

A

B

It was proposed to introduce a VRS for employees who on31.12.2000, completed 15 years of service as approved by the Governmentof India and conveyed by IBA. So, it assumes significance that whatwas approved and conveyed, in terms of the IBA scheme, the Banks’Boards were permitted to specify any other category as ineligible. TheSBI considering its requirement proposed to exclude the Watch and Wardstaff as these positions could not be reduced. It was also proposed toexclude the highly skilled and qualified staff from the scheme.

C

D

Funds outlay was also proposed in the memorandum submitted tothe Central Board as under:

“FUNDS OUTLAY

As per the estimate received from Bank’s actuary, an outlay ofapproximately Rs. 2100 crores would be required for theimplementation of SBIVRS if 10% of the employees opt forretirement. The break-up being as under:

E

(These estimates may undergo a change on receipt of clarificationfrom Government of India as to the components of ‘Pay’ for thepurpose of Ex-gratia)”

G

A provision was made for the pension. The bank reserved theright to modify, amend or cancel any or all the clauses. The DeputyManaging Director and CDO would be the competent authority. Followingis the relevant clause regarding modification of the scheme:

H

A“MODIFICATION OF THE SCHEME

Bank reserves the right to modify, amend or cancel any or all theclauses of the Scheme and to give effect thereto from any date itmay deem fit. The Dy. Managing Director and CDO would bethe Competent Authority for the purpose.”

B

The effective date of retirement was 31.3.2001. The relevantclause is extracted hereunder:

“EFFECTIVE DATE OF RETIREMENT

CWhile the SBIVRS will be open to employees from 15[th] January2001 to 31[st] January 2001 (both days included), the retirementunder SBIVRS is proposed to be given effect from 31[st] March2001.”

17. The letter dated 31.8.2000 annexed to memorandum submittedDto the Central Board of the SBI is also of utmost significance in order tounderstand what was accepted by the Central Board. The relevant portionof the letter dated 31.8.2000 of IBA is extracted hereunder:

“Attention is invited to letter DO No. 11/1/99-IR dated 22.05.2000,addressed to the Chief Executive of public sector banks by theEGovernment of India, Ministry of Finance (Banking Division),wherein banks have been advised to carry out detailed manpowerplanning in order to adopt measures to have optimum humanresource at various levels in keeping with the business strategiesand requirements of each bank.

At the meeting the Finance Minister had with Chief Executivesof public sector banks on 13[th] June 2000, the human resource andman-power planning in public sector banks were reviewed, and aCommittee was constituted to examine the issues confronting publicsector banks in that regard and suggest suitable remedialmeasures.”

F

G

“In order to remedy this situation with the urgency thatcircumstances demand, the Committee has placed before theGovernment two schemes, viz., Sabbatical Leave and a VoluntaryRetirement Scheme that would assist the banks in their effort tooptimise their human resource and achieve a balanced age and H

skills’ profile in keeping with their business strategies. Salientfeatures of the two schemes are given in the Annexure.

IBA, vide its letter dated 13[th] July 2000, has sought no objectionfrom the Government for circulating the schemes to the Banksfor consideration and adoption by their Boards. The Governmenthave conveyed to us that they have no objection to the banks’placing the two schemes before their respective Board of Directorsfor adopting and implementing the above schemes. It has beenadvised that the Banks may adopt these schemes for sabbaticaland voluntary retirement based on the essential features of theschemes given in the Annexure, after obtaining their Board’sapproval 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 underSection 10(10C), prior approval from the Chief Commissioneror Director General of Income-tax, as the case may be, is notrequired for VRS.

3. Income-tax shall be deducted at source in respect of ex-gratiaexceeding Rs.5.00 lakhs or such other ceiling as may beprescribed under the Income-tax Act.

4. Only completed years of service will be reckoned for arrivingat the minimum eligible service. Subject to this, fraction ofservice of six months and above will be reckoned as one yearfor the purpose of calculating the ex-gratia.

5. While exercising discretion to decline applications for VRS orto make exceptions in the case of employees categorised asineligible for VRS, the decision should not be discriminatoryamong employees who are similarly placed and the reasonstherefor should be recorded.

6. The competent authority for accepting VRS for the variouscategories/class of employee should be clearly laid down bythe Board of Directors.

7. Banks should ensure compliance with requirements underlabour legislations before giving effect to the Scheme.”

A

B

C

D

E

F

G

H

A18. IBA’s letter dated 31.8.2000 makes clear the salient featuresof the VRS scheme that all permanent employees with 15 years of servicewere eligible to retire. Ineligible persons have also been specified. Inunqualified terms, it was mentioned in the annexures that such employeeswould be entitled to the amount of ex gratia of 60 days’ salary for eachcompleted year of service or salary for the number of months service isBleft, whichever is less. Other benefits admissible were gratuity, pensionincluding the commuted value of pension, bank’s contribution towardsprovident fund, and leave encashment as per rules. Thus, scheme wasto grant pension to all such employees who opted for VRS on completionof 15 years of service and other benefits as specified in the scheme.CThe Government of India, Ministry of Finance, Department of EconomicAffairs, (Banking Division), that it communicated approval vide letterdated 29.8.2000 to IBA, it was sent to the SBI also, the same is extractedhereunder:

“F. No. 11/1/99-IR (Vol.II)

DGovernment of India

Ministry of Finance

Department of Economic Affairs

(Banking Division)

E

New Delhi, dated the 29th August 2000

To

The Chairman

Indian Banks‘ AssociationFMUMBAI

Sub:- Human Resource Management and Manpower Planning inPublic Sector Banks-Introduction of a Voluntary RetirementScheme/Scheme for Sabbatical Leave.

GSir,

I am directed to refer to IBA’s letter No. PD/ACAP/GOVT/521dated 13th July 2000 sending therewith a copy of the interim reportof the Committee on Human Resource Management in PublicSector Banks and requesting for no objection from the GovernmentHfor circulating to banks Voluntary Retirement Scheme and Scheme

for granting Sabbatical Leave for consideration and adoption bytheir Boards, and to say that Government has no objection to theproposals 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 banksmay please be sent to Banking Division for record.

A

B

Yours faithfully

Sd/- (U.P. SINGH)

DIRECTOR (IR)”

19. The agenda submitted on 27.12.2000 for consideration of theCentral Board of SBI along with resolution are extracted as under:

“AGENDA NO.3

Man- Power Planning and SBI Voluntary Retirement Scheme (SBIVRS)

C

D

E

Submitted Memorandum dated the 26th December 2000 by theDeputy Managing Director & Corporate Development Officer,recommending that for the reasons stated therein, approval beaccorded for the proposals contained in the Memorandum as alsofor adopting the stated approach tomanpower planning andintroduction SBIVRS in terms of the provisions contained in theScheme at Annexure ‘B‘ of the Memorandum.

F

Copies of the Memorandum were placed before the Directorspresent at the Meeting.

‘‘APPROVED”G

(SEAL)

20. Annexure ‘B’ to the memorandum contained the VRS. TheVRS was prepared in view of the guidelines of the IBA. The amount ofex gratia and other benefits specified in the scheme under clauses 5/ 6of the scheme are extracted hereunder:

H

SUPREME COURT REPORTS

A“5. Amount of Ex-gratia:

The staff members whose request for retirement under SBIVRShas been accepted by Competent Authority will be paid an amountof ex-gratia of 60 days‘ salary (pay plus stagnation incrementsplus dearness allowance) for each completed year of service (forBthis purpose fraction of service of six months and above will betaken as one year and accordingly service of less than six monthswill not be counted) or salary for the number of months service isleft, whichever is less. Fraction of a month, if any, will be ignored.

‘Relevant Date‘ means the date on which the employee ceasesCto be in service of the Bank as a consequence of the acceptanceof the Bank as a consequence of the acceptance of the requestfor voluntary retirement under the Scheme. For the purpose ofcalculation of ex-gratia, 60 days‘ salary mentioned in the Schemeis to be taken as equivalent to 2 months‘ salary (with reference tosalary for the month in which employee is relieved from serviceDon Voluntary Retirement.

Income Tax shall be deducted at source in respect of ex-gratiaexceeding Rs. 5.00 lakhs or such other ceiling as may be prescribedunder the Income Tax Act on the relevant date.”

The benefits were as under:E

“6. Other benefits(a) Gratuity as payable under the extant instructions on the relevantdate.

(b) Provident Fund contribution as per State Bank of IndiaFEmployees‘ Provident Fund Rules as on relevant date.

(c) Pension in terms of State Bank of India Employees‘ PensionFund Rules on the relevant date (including commuted value ofpension).

G(d) Encashment of balance of Privilege Leave, as applicable, onthe relevant date.

(e) Respective facilities extended to officers/others such asretention of accommodation, telephone, car, continuation of housingloan, etc. will be extended to officers. Others retiring underHSBIVRS as per present dispensations, at the discretion of

Competent Authority. However, in such cases of retention ofphysical facilities, 50% of the amount of ex-gratia payable will bereleased only after the employee surrenders the facility. No interest,however, will be paid for the amount so withheld. All otheroutstanding loans/advances will have to be repaid before date ofretirement under SBIVRS, failing which the amount of ex-gratiaand other terminal benefits payable to the employee will beappropriated towards the outstanding loans/advances; and thebalance only will be payable to the employee.”

21. Most significantly, the scheme of the IBA, accepted by theBoard on 27.12.2000, was for providing pension on completion of 15years of service. The pension specified in clause 6 of scheme was to beworked out in terms of the Pension Fund Rules including the commutedvalue of the pension. It was not mentioned in the VRS adopted by theSBI that the person on completion of 15 years would not be entitled tothe benefit of pension. On the other hand, proposal of IBA, as approvedby the Government of India, was accepted in toto by SBI. When gaugedin terms of the proposals of the IBA, the essential feature was that anemployee was entitled to get pension on completion of 15 years of service.The meaning of the expression “pension” in terms of the rules would beproportionate pension on completion of 15 years of service as per theterms of calculation provided in Rule 23 of the Pension Rules. VRS is anindependent contract and the background in which it was floated, pensionon completion of 15 years of service was an essential part of the schemeof VRS 2000, as approved by the Government and floated by the IBAand adopted by all the Banks, and Pension Rules were to be amendedaccordingly.

22. The Government of India suggested to the IBA to amendRegulation 29 of the Regulations of 1995 so that the employees do notlose the benefit of pension, the IBA may work out modalities and suggestamendments, if any, required to be made in the Pension Regulations toensure that the employees get the benefit of pension. The letter dated5.9.2000 of Government of India is extracted hereunder:

“F. No. 4/8/4/2000-IRGovernment of India,Ministry of Finance,Department of Economic Affairs

A

B

C

D

E

F

G

H

SUPREME COURT REPORTS

A

(Banking Division)

New Delhi, 5-9-2000

To

The Personnel Advisor,Indian Banks’ Association, B

Mumbai

Sub.: Amendment to Regulation 29 of the Pension Regulations.

Sir,

C

I am directed to refer to this Division’s Letter No. 11/1/99 IRdated 29-8-2000, conveying the Government’s no objection forcirculation of Voluntary Retirement Scheme in public sector banks.The Scheme, inter alia, provides that employees with 15 years ofservice or 40 years of age shall be eligible to take voluntaryDretirement under the Scheme. As per the provisions contained inRegulation 29 of the Pension Regulations, an employee can takevoluntary retirement after 20 years of qualifying service andthereafter becomes eligible for pension. Thus, employees havingrendered 15 years of service or completing 40 years of age butnot having completed 20 years of service shall not be eligible forEpensionary benefits on taking voluntary retirement under theScheme.

D

In order to ensure that such employees do not lose the benefit ofpension, IBA may work out modalities and suggest amendments,if any, required to be made in the Pension Regulations to ensureFthat these employees also get the benefit of pension.

Yours faithfully,sd/-(U.P. Singh)

G

Director (IR)”

23. SBI issued a circular on 10.1.2001 with respect to thewithdrawal of the application submitted under the scheme. It was decidedthat the employee could withdraw the application on or before 15.2.2001by making a written request.H

24. Clarification was issued on 15.1.2001 to a query raised, whetheror not the employees on completing 15 years of pensionable servicewould be entitled to pensionary benefits. Following is a relevant portion:

“3. Whether or not the employees, completing 15 years ofpensionable service as on relevant date (date of retirement underSBIVRS), will be entitled for pension benefits?

In this connection, we invite a reference to para 6(c) of theScheme forwarded under the cover of Staff Circular letter No.CDO/81 dated 30/12/2000. The payment of pension to theemployee retiring under SBIVRS would be governed by StateBank of India Employees Pension Fund Rules on the relevantdate (including commuted value of pension). However, as perexisting rules, employees who have not completed 20 years ofPensionable Service are not eligible for pension.”

It is clear from answer that the staff circular dated 30.12.2000was reiterated. Payment of pension to an employee retiring under VRSwould be governed by rules on the relevant date, i.e., 31.3.2001. At thesame time, the position of the existing rule was indicated that thoseemployees who had not completed 20 years of pensionable service werenot eligible for a pension. It was not clarified what was the meaning andpurport of para 6(c) of the scheme. It was not mentioned that an employeewould not be entitled to pension on 15 years of service as per the schemeapproved by the Government of India and floated by the IBA and adoptedby the Central Board of SBI. The above clarification being in form ofopinion, could not be said to have caused a modification, amendment, orcancellation of any of the clauses of VRS or resolution passed by theBoard, nor it was so stated. It was necessary to state that on completionof 15 years of service, employees would not be paid pension. The existingrule position was known to everybody, whereas the scheme was framedfor providing pension on completion of 15 years of service.

25. Rule 22 of the Pension Rules of SBI as it existed up to 9.3.2001and amended are extracted hereunder:

Existing Rule

“22(i) A member shall be entitled to a pension under these ruleson retiring from the Bank’s service-

A

B

C

DE

F

G

H

838SUPREME COURT REPORTS

A(a) After having completed 20 years’ pensionable service providedthat he has attained the age of 50 years or if he is in theservice of the Bank on or after 01.11.93, after havingcompleted ten years pensionable service provided that he hasattained the age of 58 years.

B(b) After having completed twenty years’ irrespective of the agehe shall have attained if he shall satisfy the authority competentto sanction his retirement by approved medical certificate orotherwise that he is incapacitated for further active service;

(c) After having completed twenty years pensionable service,Cirrespective of the age he shall have attained at his request inwriting; (d) After twenty-five years’ pensionable service.”

Amended Rule

D“22(i) A member shall be entitled to a pension under these ruleson retiring from the Bank’s service- (a) After having completed twenty years’ pensionable serviceprovided that he has attained the age of fifty years or if he isin the service of the Bank on or after 01.11.93, after havingcompleted 10 years, pensionable service provided that he hasEattained the age of fifty-eight years or if he is in the service ofthe bank on or after 22.05.1998. After having completed tenyears, pensionable service provided that he has attained theage of sixty years.

(b) After having completed twenty years’ pensionable service,Firrespective of the age he shall have attained if he shall satisfythe authority competent to sanction his retirement by approvedmedical certificate or otherwise that he is incapacitated forfurther active service;

(c) After having completed twenty years pensionable service,Girrespective of the age he shall have attained at his request inwriting;

(d) After twenty-five years’ pensionable service.”

H

26. It is clear from Rule 22 that pension is admissible to anemployee thus:

A

1) After having completed 20 years’ pensionable service providedthat 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, afterBhaving completed 10 years pensionable service provided thathe has attained the age of 50 years; or

3) If he is in the service of the Bank on or after 22.05.1998, afterhaving completed 10 years pensionable service provided thathe has attained the age of 60 years.

C

27. Rule 22(1)(c) was incorporated in the Pension Fund Rulesw.e.f. 20.9.1986 when the bank decided inter alia to introduce VRS oncompletion of 20 years of service. The unamended rule 22(i)(a) providedthe normal age of retirement to be 58 years. Thereafter, as per theguidelines issued by the Government on 22.5.1998, the age of retirementwas increased from 58 to 60 years. Accordingly, Rule 22(i)(a) wasproposed to be amended on 30.1.2001, and instead of 58 years, the ageof retirement of 60 years was to be incorporated. On 28.5.1998, theExecutive Committee of the Central Board of SBI pending amendmentto the related service rules adopted the age of retirement as 60 years.The amendment was notified on 31.3.2001 and approved by the Trusteesof the SBI Employees’ Pension Fund on 30.10.2001.

DE

28. Similar scheme of VRS concerning nationalised banks wasimplemented according to the decision of the Government of India. InPunjab & 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: 15.11.2000to 14.12.2000; Union Bank of India: 1.12.2000 to 31.12.2000; UnitedBank of India: 1.1.2001 to 31.1.2001. In SBI, the said scheme wasadopted by the Central Board on 27.12.2000.

F

29. The State Bank of India was constituted under the SBI Act,1955. The nationalised banks were taken over in terms of the BankingCompanies (Acquisition and Transfer of Undertakings) Act, 1970. Underthe Act of 1970, the Punjab National Bank (Employees) PensionRegulations, 1995, were framed. Regulation 28, provided pension onattaining the age of superannuation, and Regulation 29 provided pensionon voluntary retirement on completion of 20 years of qualifying service.

G

H

ARegulation 29(5), applicable to the banks mentioned above, providedthat the qualifying service of an employee retiring voluntarily under theRegulation shall be increased by a period not exceeding five years, subjectto the condition that the total qualifying service rendered by suchemployee shall not exceed 33 years.

B30. The VRS 2000 came up for consideration before this Court inBank of India & Ors. v. O.P. Swarnakar & Ors., (2003) 2 SCC 721 inthe context of Regulation 29(5) of Regulations, 1995. The Court heldthat the scheme is contractual and provided for pensionary benefits oncompletion of 15 years of service. The decision was followed in HECVoluntary Retd. Employees Welfare Society v. Heavy EngineeringCCorporation Ltd., (2006) 3 SCC 708.

31. Due to introduction of Scheme, Regulation 28 of Regulationsof 1995 was proposed to be amended. It was amended in the year 2002with a retrospective effect from 1.9.2000. By way of amendment, aproviso has been inserted in Regulation 28 thus:D

“28. Superannuation pension.—Superannuation pension shallbe granted to an employee who has retired on his attaining theage of superannuation specified in the Service Regulations orSettlements.”

E“Provided that pension shall also be grantedto an employee whoopts to retire before attaining the age of superannuation, but afterhaving served for a minimum period of 15 years in terms of anyscheme that may be framed for the purpose by the Bank’s Board”with the concurrence of the Government.

F

32. The employees who opted for VRS on completion of 15 yearsof service within the specified period in 2000/2001, were given the benefitof pension. The Regulations came to be amended in 2002 with theretrospective effect. However, the benefit under Regulation 29(5) wasnot extended to the optees/employees who completed 20 years of serviceGby 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 1stday of November 1993 at any time, after an employee hascompleted twenty years of qualifying service he may, by givingH

notice of not less than three months in writing to the appointingauthority retire from service:

Provided that this sub-regulation shall not apply to an employeewho is on deputation or on study leave abroad unless after havingbeen transferred or having returned to India he has resumed chargeof the post in India and has served for a period of not less thanone year:

Provided further that this sub-regulation shall not apply to anemployee who seeks retirement from service for being absorbedpermanently in an autonomous body or a public sector undertakingor company or institution or body, whether incorporated or not towhich he is on deputation at the time of seeking voluntaryretirement:

Provided that this sub-regulation shall not apply to an employeewho is deemed to have retired in accordance with clause (1) ofRegulation 2.

x x x

(5) The qualifying service of an employee retiring voluntarily underthis Regulation shall be increased by a period not exceeding fiveyears, subject to the condition that the total qualifying servicerendered by such employee shall not in any case exceed thirty-three years and it does not take him beyond the date ofsuperannuation.”

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.3561-65/2002, the appeals were decided by this Court by a commonjudgment. It noted that reference to pension as per rules was made forcomputation of pension, and the employees who had completed 15 yearsof service were to be extended the benefit of VRS 2000 along withpension and other benefits. IBA wrote a letter dated 11.12.2000 to allpublic sector banks for amending Pension Regulations, 1995. The IBAmentioned that pension was to be paid to the employees as per VRS2000. They would be eligible for pro-rata pension; as such, Regulation28 be amended. The employees who applied for voluntary retirementafter having rendered 15 years’ service, under a special/ad hoc schemeformulated with the specific approval of the Government and the Boardof Directors would be eligible for pro-rata pension for the period of AB

C

D

E

F

G

H

AB

C

D

E

F

G

H

Aservice rendered as if they were to retire on attaining the age ofsuperannuation on that date. The letter made it clear that the Governmentof India approved the pension to be given on completion of 15 years ofservice. The scheme was for extending the benefit of pension to theemployees retiring on completion of 15 years of permanent service, andthe Government of India also desired that the IBA advised banks toBmake necessary amendments to their pension regulations, as mentionedin the Annexure. Thus, the essence of the VRS scheme was the benefitof pro-rata pension as per the rules on completion of 15 years ofpensionable service.

34. It is apparent that the very fulcrum of the scheme was a feltCneed for inducting new workforce, with adequate knowledge of newskills such as modern technology, foreign exchange, venture capital, e-commerce, money management, etc. as pointed out by the Ministry ofFinance in its letter dated 22.5.2000. The banks were overstaffed andfor effective management and manpower planning, the desirability of Dintroducing VRS was felt in order to rationalise the workforce and skill.Hence a Committee was constituted by the Central Government. Inpursuance of report of the Committee, a policy decision was taken toframe the VRS. The scheme applied to employees who, on the date ofthe application, completed 15 years of service. The employees specifiedtherein were otherwise not eligible to seek voluntary retirement onEcompletion of 15 years under the rules/regulations. Under the schemefloated by the other banks, identical reliefs were admissible, as in SBIVRS. The Scheme of Punjab National Bank is extracted hereunder:

“7. x x x “Amount of ex gratia

FAn employee seeking voluntary retirement under theScheme will be entitled to the ex gratia amount mentioned belowin para (a) or (b), whichever is less:

(a) 60 days’ salary (pay plus stagnation increments plusspecial pay plus dearness relief) for each completed year ofGservice; OR

(b) salary for the number of months of service left; Other benefits H

An employee seeking voluntary retirement under theScheme will be eligible for the following benefits in addition to theex gratia amount mentioned in para 6 above of this Scheme:

(i) Gratuity as per the Payment of Gratuity Act, 1972 orgratuity payable under the Service Rules, as the case may be, asper existing rules.

(ii) (a) Pension (including commuted value of pension) asper PNB (Employees) Pension Regulations, 1995.

OR

(b) Bank’s contribution towards PF as per existing rules.

(iii) Leave encashment as per existing rules.”

35. The eligibility criteria in all the schemes, including SBI VRS,clearly provided that employees who completed 15 years of service andparticular age shall be eligible to apply. The benefits to which they wereentitled, were culled out. In other banks, the pension was as per PensionRegulation, 1995. Thus, on eligibility of an employee, admissibility of theavailable reliefs in Scheme followed i.e., the amount of ex gratia andother benefits, including pension, were to be paid as provided in thescheme. Otherwise, there was no purpose of retiring an employee with15 years of service as they were not eligible for retirement as per therules before completion of 20 years of service in all nationalised banksas well as SBI. A reference to the admissibility of the pension as perrules/ regulations was made in all the VRS to mean that proportionatepension shall be admissible as provided in rules, this Court has noted it inO.P. Swarnakar (supra), thus:

“49. An offer indisputably can be made to a group of personscollectively which is capable of being accepted individually, butthe question which has to be posed and answered is as to whetherhaving regard to the service jurisprudence; the principles of theIndian Contract Act would be applicable in the instant case. It isthe specific case of the “banks” that the Schemes had been floatedby 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.

A

B

C

DE

F

G

H

A36. Significantly in O.P. Swarnakar (supra), this Court observedthat employees must have proceeded to apply for VRS on the basiseven though they have merely completed 15 years of service, whichwas not a qualifying service, under the Pension Regulations of Bank,they would be entitled to benefits in terms of the VRS scheme. TheCourt observed thus:B

“89. Furthermore, a large number of employees have withdrawntheir offer only when a proviso was sought to be added toRegulation 28 aforementioned. In terms of the Scheme theemployees, who expected to get benefits of sub-regulation (4) ofRegulation 29 would be deprived therefrom. It is not in this disputeCthat the qualifying period for receiving pension was 20 years. Onlyupon completion of 20 years, in terms of the statutory regulationcontained in Regulation 29, an employee could opt for voluntaryretirement, and in terms thereof, he would be entitled to the benefitsspecified therein. The said Regulations had specifically beenDmentioned for the purpose of computation, which would includeinvocation of sub-regulation (4) of Regulation 29, providing forrelaxation of 5 years towards the qualifying period. The employeesmust have proceeded on the basis that despite the fact that theyhave merely rendered 15 years of service, which was not aqualifying service under the Regulations, they would be entitled toEthe pensionary benefits in terms of the Scheme.By introducingthe proviso to Regulation 28 pension was sought to be made prorata in place of full pension.”

F37. In O.P. Swarnakar & Ors. (supra), it was held that the schemewas 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 samebefore Parliament; and secondly, if the same was a regulation, the laying-down rule is merely directory and not mandatory. This Court relied uponthe decisions in Jan Mohd. Noor Mohd. Bagban v. State of Gujarat,GAIR 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 badin 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 necessaryHfor the Central Government to place the same before Parliament.

125. Secondly, even if the same was a regulation, the laying-down rule is merely a directory one and not mandatory.

126. In Jan Mohd. case, AIR 1966 SC 385, the law is stated inthe following terms: (AIR pp. 394-95, para 18)

“18. Finally, the validity of the rules framed under BombayAct 22 of 1939 was canvassed. By Section 26(1) of the BombayAct, the State Government was authorised to make rules for thepurpose of carrying out the provisions of the Act. It was providedby sub-section (5) that the rules made under Section 26 shall belaid before each of the Houses of the Provincial Legislature atthe session thereof next following and shall be liable to be modifiedor rescinded by a resolution in which both Houses concur, andsuch rules shall, after notification in the Official Gazette, be deemedto have been modified or rescinded accordingly. It was urged bythe petitioner that the rules framed under Bombay Act 22 of 1939were not placed before the Legislative Assembly or the LegislativeCouncil at the first session, and therefore they had no legal validity.The rules under Act 22 of 1939 were framed by the ProvincialGovernment of Bombay in 1941. At that time, there was noLegislature in session, the Legislature having been suspendedduring the emergency arising out of World War II. The session ofthe Bombay Legislative Assembly was convened for the first timeafter 1941 on 20-5-1946, and that session was prorogued on24-5-1946. The second session of the Bombay LegislativeAssembly was convened on 15-7-1946, and that of the BombayLegislative Council on 3-9-1946 and the rules were placed on theAssembly Table in the second session before the LegislativeAssembly on 2-9-1946 and before the Legislative Council on 13-9-1946. Section 26(5) of Bombay Act 22 of 1939 does not prescribethat the rules acquired validity only from the date on which theywere placed before the Houses of Legislature. The rules are validfrom the date on which they are made under Section 26(1). It istrue that the Legislature has prescribed that the rules shall beplaced before the Houses of Legislature, but failure to place therules before the Houses of Legislature does not affect the validityof the rules, merely because they have not been placed beforethe Houses of the Legislature. Granting that the provisions ofsub-section (5) of Section 26 by reason of the failure to place the A

BC

D

E

F

G

H

A

rules before the Houses of Legislature were violated, we are ofthe view that sub-section (5) of Section 26 having regard to thepurposes for which it is made, and in the context in which it occurs,cannot be regarded as mandatory. The rules have been in operationsince the year 1941, and by virtue of Section 64 of Gujarat Act 20of 1964, they continue to remain in operation.”

B

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 inquestion cannot be said to be bad in law.”

C

38. The Court concerning the provision of withdrawal held thatthe relevant clause of the scheme created an enforceable right in casethe State Bank failed to adhere to its preferred policy.

39. In our opinion, the reference in the SBI VRS to the admissiblebenefits, like pension shall be as per the pension rules, was for the purposeDof computation of pension. It is apparent from a reading of the schemethat proportionate pension was admissible to employees as noted in para49 of O.P. Swarnakar & Ors. (supra). A similar expression was usedin the schemes of nationalised banks also. This Court has notedexpression in the scheme that pension as per rules to mean forEcomputation of pension. The formula for computation for a pension isprovided in Rule 23 of the SBI Pension Rules.

40. It is of utmost significance that the Central Board in its meetingdated 27.12.2000 accorded approval “for the proposals contained in theMemorandum.” A bare perusal of the memorandum makes it clear thatFthe letter of IBA dated 31.8.2000 was enclosed as part of thememorandum submitted to the Central Board. In the memorandum, it was mentioned “that the Government of India conveyed that they hadno objection to the banks’ placing before their respective Boards ofDirector’s proposals for adopting and implementing the VoluntaryRetirement Scheme. It advised that Banks may ‘adopt’ the scheme afterGobtaining their Boards’ approval and implement it in ‘right earnest’.”The memorandum also contained that the employees who completed 15years of service were to be the beneficiaries of VRS as approved by theGovernment of India and conveyed by the IBA. The approval byGovernment of India and scheme, conveyed by IBA, was to provide forthe benefit of pension on completion of 15 years of service. The sameH

was an essential condition of the scheme. The Annexure, which waspart of the memorandum, provided inter alia the benefit of pension,including the commuted value of pension without any rider of completionof 20 years period of service. Once SBI accepted the proposals containedin the memorandum, when we gauge the scheme in the light of thesubject 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 ruleswas only for providing the proportionate pensionary benefit of thequalifying service on and above 15 years, rendered by an employee.

41. The IBA advised the banks for amending the rules. TheGovernment of India, Ministry of Finance, also issued a letter dated5.9.2001 to the Bank to amend the rules. There was a proposal to amendthe rules. After the scheme was implemented in 2000, the nationalisedbanks, including the Punjab National Bank, amended their rules in 2002with retrospective effect. However, the fact remains the VRS schemeswere implemented by banks governed by the Banking Companies Act,1970, by making payment of pension though Regulation 28 of Regulationof 1995 provided for 20 years of qualifying service at the relevant time.Once a particular scheme of VRS, based on the recommendations ofCommittee formed by Government of India, was formulated and floatedby IBA. In all fairness, it was required to be implemented in right earnestin that form in which it was approved and adopted by the Board ofDirectors of SBI on 27.12.2000. In case the Board of Directors were ofthe opinion that the scheme was not acceptable to them, they could haverejected it or could have stated they reject the proposal for paying pensionon completion of 15 years of service which was the essence of a schemeformed to reduce workforce of Bank and for achieving other objectives.Nonetheless, on the contrary, resolution dated 27.12.2000 indicates thatthe proposals of IBA/Government was approved unconditionally. Thus,in case it was so necessary to amend the pension rules as done by otherbanks, it was incumbent upon the State Bank of India to amend its ruleseither after implementation of the scheme as was done by other banksor before giving effect to VRS.

42. It is also significant to mention that SBI accepted the schemeas approved by the Government and floated by IBA. In case SBI haddeclined to accept or wanted to modify, it was necessary for it to takeapproval of Government of India as to its scheme. As per section 49, the AB

C

D

E

F

G

H

ACentral Government has the power to make rules. Section 50 deals withthe power of Central Government to make regulations. Section 50(1)provides that the Central Board, after consultation with the ReserveBank of India and with the previous sanction of the Central Government,can make Regulations. Under Section 50(2)(o), the Regulations can bemade by the Central Board with the previous sanction of the CentralBGovernment with respect to superannuation pension and other funds forthe benefit of the employees of the State Bank. Section 50(2)(o) reads:

“50. Power of Central Board to make regulations.—(1) TheCentral Board may, after consultation with the Reserve Bank andwith the previous sanction of the Central Government [byCnotification in the Official Gazette,] make regulations, notinconsistent with this Act and the rules made thereunder, to providefor all matters for which provision is expedient for the purpose ofgiving effect to the provisions of this Act.

(2) In particular, and without prejudice to the generality ofDthe foregoing power, such regulations may provide for—

x x x

(o) the establishment and maintenance of superannuationpension, provident or other funds for the benefit of the employeesEof the State Bank or of the State Bank or of the dependents ofsuch employees or for the purposes of the State Bank, and thegranting of superannuation allowances, annuities and pensionspayable out of any such fund;]”

43. Thus, it is apparent that the Central Board of SBI could nothave framed a scheme different than the one approved by the CentralFGovernment on its own, nor could have implemented it without approvalof the Central Government. In case it wanted to modify or amend thescheme, as approved by the Government of India, it was incumbentupon it to send its modified scheme to the Central Government forapproval. No scheme for VRS could have been framed without approvalGof the Government of India. In fact, the Central Board accepted theproposal of IBA, as approved by the Government of India. In case SBI’sstand is accepted, its scheme would have been valid as no modificationcould have been made without approval of the Government of India. Infact, no such modification was made, as held above.

H

44. Once it approved the Scheme SBI being an instrumentality ofState under Article 12, is bound by the principle of fairness andrepresentation made that it accepted the contents of memorandum andthe scheme floated by IBA and invited the applications based on approvingthe memorandum which contained proposal of pension on rendering 15years of permanent pensionable service, it could not later on wriggle outof its obligation taking a rigmarole by claiming shelter of the Rules or bynot amending the Rules or by issuing a clarification which was fanciful,irrational and contrary to the spirit of the resolution of the Board. Itwould amount to an unfair and unreasonable action to deprive theemployees of the benefit of pension because of the decision taken bythe 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 andaccepted, implemented by all the banks in true spirit except by SBI. Itcannot be permitted to act unfairly by virtue of having superior bargainingpower by issuing vague clarification to the detriment of the economicinterest of the employees. Clarification did not have the effect of re-writing or superseding the resolution of the Central Board nor effect ofmaking modifications in the resolution passed by the Central Board ofthe SBI.

46. The VRS scheme was not floated by the SBI on its ownvolition. It was pursuant to an exercise that was undertaken by the IBAin view of the recent developments of modern technology consideringthe 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 decidedat the Government level to provide pension after completion of 15 yearsof service as a special measure, the banks were bound to implement it inthat manner or not at all. The Central Board of Directors of the SBIaccepted the VRS proposal of Government and IBA without anyreservation of not providing pension along with other benefits, as mandatedin the VRS scheme. The action of the instrumentality of the State cannotbe violative of Article 14. It cannot be permitted to act arbitrarily. Articles15 and 16 provide for equality and provide for an umbrella againstdiscrimination.

47. Though the Deputy General Manager was authorised by theCentral Board of Directors to amend, modify or cancel the VRS. TheRules were amended by other banks later in 2002. It was not stated in AB

C

D

E

F

G

H

Aanswer to the query that under the VRS scheme, a person who hasrendered 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 Boardof SBI. That apart, Deputy General Manager tried to interpret VRSscheme in isolation without considering what was approved by the Board.Not only the scheme but also the memorandum have to be read togetherBto understand resolution of Board. Once the memorandum containingthe IBAs proposal of providing pension was approved in absolute terms,the clarification could not be of any value to dilute the otherwise clearand unambiguous resolution of the Board of Directors. The DeputyGeneral Manager did not have any such wide and arbitrary power toCdefeat the claim of the employees for pension on completion of 15 yearsof permanent service, which was their right. The action of D.G.M. couldnot be said to be in accordance with the resolution. The pension was theessence of the scheme, depriving it could not be said to be authorised,such action can only be termed as unfair and unreasonable and patentlyviolative of Articles 14, 16, and 21 of the Constitution of India.D

48. Yet another aspect which cannot be lost sight is that the bankmentioned in the scheme that the benefit would be admissible as per therule which prevails on the appointed day, i.e., 31.3.2001. Thus, it isapparent that when VRS scheme was floated, it was in contemplationof amendment of rules which was suggested by the IBA and theEGovernment of India in its communication dated 5.9.2001 so thatemployees were not deprived of the benefit of pension.

49. The question arises in case the bank accepts the proposal ofVRS, and does not alter its rules, can employees be deprived of thebenefit of pension in such an unconscionable manner over an event onFwhich they had no control. It would be nothing, but an outcome of unfairand arbitrary act in case the SBI never intended to act upon the schemeit ought not to have accepted it, and once it approved VRS, it wasincumbent upon it to amend its rule, if necessary, as was done by otherbanks in 2002 after scheme worked out in the year 2000. Even otherwiseGonce it accepted the proposal of the Government of India, it would beviolative of provisions of Articles 14 and 16 to permit it to wriggle out ofits obligation under the guise that the bank did not amend its rules orpension was not admissible as per existing rules, mainly when the schemeprovided for eligibility for pension on completion of 15 years, that formedindependent contract. If the bank is permitted to get rid of the schemeH

due to Rule position, then the scheme itself would become void andunenforceable. Bank cannot act in a fanciful manner, particularly withrespect to retirement under VRS which was contractual and deny benefitof pension, a right accrued to the employees for receiving the pension inview of the memorandum and the resolution passed by the Central Boardof Directors adopting memorandum and the SBI-VRS.

50. (a). The rights under contract cannot be taken away, and theybecome enforceable by a court of law. Bank cannot be permitted tomake a representation and later on wriggle out of its obligation. It is notpermissible to make a “misrepresentation”. Under section 19 of theContract Act, when consent is obtained by coercion, fraud, or‘misrepresentation,’ the agreement is voidable at the option of theaggrieved party. In Central Inland Water Transport Corporation Ltd.& Anr. v. Brojo Nath Ganguly & Anr., (1986) 3 SCC 156, this Courtconsidered the contract of employment between the Central Inland WaterTransport Corporation and its employees and also the rules. In thatcontext, observed thus:

“75.Under Section 19 of the Indian Contract Act, when consentto an agreement is caused by coercion, fraud or misrepresentation,the agreement is a contract voidable at the option of the partywhose consent was so caused. It is not the case of either of thecontesting respondents that there was any coercion brought tobear upon him or that any fraud or misrepresentation had beenpracticed upon him. Under Section 19-A, when consent to anagreement is caused by undue influence, the agreement is acontract voidable at the option of the party whose consent was socaused and the court may set aside any such contract eitherabsolutely or if the party who was entitled to avoid it has receivedany benefit thereunder, upon such terms and conditions as to thecourt may seem just. Sub-section (1) of Section 16 defines “Undueinfluence” as follows:

“16. ‘Undue influence’ defined.—(1) A contract is said tobe induced by ‘undue influence’ where the relations subsistingbetween the parties are such that one of the parties is in a positionto dominate the will of the other and uses that position to obtain anunfair advantage over the other.”

A

B

D

E

F

G

H

A

B

C

D

E

F

G

H

The material provisions of sub-section (2) of Section 16are as follows:

“(2) In particular and without prejudice to the generality ofthe foregoing principle, a person is deemed to be in a position todominate the will of another—

(a) where he holds a real or apparent authority over theother ....”

We need not trouble ourselves with the other sections ofthe Indian Contract Act except Sections 23 and 24. Section 23states that the consideration or object of an agreement is lawfulunless inter alia the court regards it as opposed to public policy.This section further provides that every agreement of which theobject or consideration is unlawful is void. Under Section 24, ifany part of a single consideration for one or more objects, oranyone or any part of any one of several considerations for asingle object is unlawful, the agreement is void. The agreement is,however, not always void in its entirety for it is well settled that ifseveral distinct promises are made for one and the same lawfulconsideration, and one or more of them be such as the law willnot enforce, that will not of itself prevent the rest from beingenforceable. The general rule was stated by Willes, J., in Pickeringv. Ilfracombe Ry. Co. (1868) LR 3 CP 235 (at p. 250) as follows:

“The general rule is that, where you cannot sever the illegalfrom the legal part of a covenant, the contract is altogether void;but where you can sever them, whether the illegality be createdby statute or by the common law, you may reject the bad part andretain the good.”

(b) . In Brojo Nath Ganguly (supra), this Court considered theconcept of unconscionable bargain and as to actions showing no regardfor conscience; irreconcilable with what is right or reasonable, observedthus:

“76. Under which head would an unconscionable bargain fall? Ifit falls under the head of undue influence, it would be voidable butif it falls under the head of being opposed to public policy, it wouldbe void. No case of the type before us appears to have fallen for

decision under the law of contracts before any court in India norhas any case on all fours of a court in any other country beenpointed out to us. The word “unconscionable” is defined in theShorter Oxford English Dictionary, Third Edition, Volume II,page 2288, when used with reference to actions, etc. as “showingno regard for conscience; irreconcilable with what is right orreasonable.” An unconscionable bargain would, therefore, be one”which is irreconcilable with what is right or reasonable.

(c) . Chitty on Contracts was referred in Brojo Nath Ganguly(supra) about the old ideas of freedom of contract in modern times, 25[th]Edn., Vol. 1, para 4, Chitty observed:

“79. In this connection, it is useful to note what Chitty has to sayabout the old ideas of freedom of contract in modern times. Therelevant passages are to be found in Chitty on Contracts, 25thEdn., 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 socialideal only to the extent that equality of bargaining power betweencontracting parties can be assumed, and no injury is done to theeconomic interests of the community at large.’ Freedom of contractis of little value when one party has no alternative betweenaccepting a set of terms proposed by the other or doing withoutthe goods or services offered. Many contracts entered into bypublic utility undertakings and others take the form of a set ofterms fixed in advance by one party and not open to discussion bythe other. These are called ‘contracts d’adhesion’ by Frenchlawyers. Traders frequently contract, not on individually negotiatedterms, but on those contained in a standard form of contract settledby a trade association. And the terms of an employee’s contractof employment may be determined by agreement between histrade union and his employer, or by a statutory scheme ofemployment. Such transactions are nevertheless contractsnotwithstanding that freedom of contract is to a great extent lacking.

Where freedom of contract is absent, the disadvantages toconsumers or members of the public have, to some extent, beenoffset by administrative procedures for consultation, and by A

B

C

D

E

F

G

H

A

legislation. Many statutes introduce terms into contracts whichthe parties are forbidden to exclude, or declare that certainprovisions in a contract shall be void. And the courts have developeda number of devices for refusing to implement exemption clausesimposed 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 clausewill not be enforced unless it is reasonable. Again, more recently,certain of the judges appear to have recognized the possibility ofrelief from contractual obligations on the ground of ‘inequality ofbargaining power.’”

B

C

What the French call “contracts d’adhesion,” theAmerican 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 offeredto consumers of goods and services on essentially ‘take it or leaveit’ basis without affording consumer realistic opportunity to bargainand under such conditions that consumer cannot obtain desiredproduct or services except by acquiescing in form contract.Distinctive feature of adhesion contract is that weaker party hasno realistic choice as to its terms. Not every such contract isunconscionable.”

D

E

80. The position under the American law is stated in Reinstatementof the Law — Second as adopted and promulgated by theAmerican Law Institute, Volume II which deals with the law ofcontracts, in Section 208 at page 107, as follows:

F

Ҥ 208. Unconscionable Contract or Term

If a contract or term thereof is unconscionable at the time thecontract is made a court may refuse to enforce the contract, ormay enforce the remainder of the contract without theGunconscionable 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 H

to a wide variety of types of conduct. The determination that acontract or term is or is not unconscionable is made in the light ofits setting, purpose and effect. Relevant factors includeweaknesses in the contracting process like those involved in morespecific rules as to contractual capacity, fraud and other invalidatingcauses; the policy also overlaps with rules which render particularbargains or terms unenforceable on grounds of public policy.Policing against unconscionable contracts or terms hassometimes been accomplished by adverse construction oflanguage, by manipulation of the rules of offer and acceptance orby determinations that the clause is contrary to public policyor to the dominant purpose of the contract. Uniform CommercialCode § 2-302 Comment 1 .... A bargain is not unconscionablemerely because the parties to it are unequal in bargaining position,nor even because the inequality results in an allocation of risks tothe weaker party. But gross inequality of bargaining power,together with terms unreasonably favourable to the strongerparty, may confirm indications that the transaction involvedelements of deception or compulsion, or may show that the weakerparty had no meaningful choice, no real alternative, or did not in”fact assent or appear to assent to the unfair terms.

There is a statute in the United States called the UniversalCommercial Code, which applies to contracts relating to sales ofgoods. Though this statute is inapplicable to contracts not involvingsales of goods, it has proved very influential in what is called inthe United States, “non-sales” cases. It has many times beenused either by analogy or because it was felt to embody a generallyaccepted social attitude of fairness going beyond its statutoryapplication to sales of goods. In the Reporter’s Note to said Section208, it is stated at p. 112:

“It is to be emphasized that a contract of adhesion is notunconscionable per se, and that all unconscionable contracts arenot contracts of adhesion. Nonetheless, the more standardisedthe agreement and the less a party may bargain meaningfully,the more susceptible the contract or a term will be to a claimof unconscionability.”

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

The position has been thus summed up by John R. Peden in ‘TheLaw of Unjust Contracts’ published by Butterworths in 1982, atpages 28-29:

“... Unconscionability represents the end of a cyclecommencing with the Aristotelian concept of justice and the Romanlaw laesio enormis, which in turn formed the basis for themedieval church’s concept of a just price and condemnation ofusury. These philosophies permeated the exercise, during theseventeenth and eighteenth centuries, of the Chancery court’sdiscretionary powers under which it upset all kinds of unfairtransactions. Subsequently the movement towards economicindividualism in the nineteenth century hardened the exercise ofthese powers by emphasising the freedom of the parties to maketheir own contract. While the principle of pacta sunt servandaheld dominance, the consensual theory still recognized exceptionswhere one party was overborne by a fiduciary, or entered acontract under duress or as the result of fraud. However, theseexceptions were limited and had to be strictly proved.

It is suggested that the judicial and legislative trend duringthe last 30 years in both civil and common law jurisdictions hasalmost brought the wheel full circle. Both courts and parliamentshave provided greater protection for weaker parties from harshcontracts. In several jurisdictions this included a general power togrant relief from unconscionable contracts, thereby providing alaunching point from which the courts have the opportunity todevelop a modern doctrine of unconscionability. Americandecisions on Article 2.302 of the UCC have already gone somedistance into this new arena....”

The expression “laesio enormis” used in the above passagerefers to “laesio ultra dimidium vel enormis” which in Romanlaw meant the injury sustained by one of the parties to an onerouscontract when he had been overreached by the other to the extentof more than one-half of the value of the subject-matter, as forexample, when a vendor had not received half the value of propertysold, 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.”

This Court held that due to inequality of bargaining power,unreasonable terms, unreasonable favour to the stronger party mayinvolve an element of deception or compulsion, or may show that theweaker party had no meaningful choice. The Court in Brojo NathGanguly (supra) also observed that in the sphere of the law of contract,the test of reasonableness or fairness has emerged. Even an unreasonableclause cannot be enforced as that would be unconscionable.

Here the reasonable construction in the matter is that the pensionis clearly admissible as per the resolution passed by the Central Boardof Directors of SBI, which is sought to be denied, it was for SBI toamend Rules. Such an action would be unconscionable, and courts cannotbe said to be powerless in such a situation to enforce the SBI VRS withan obligation to make payment of pension.

(d) . This Court considered the enforcement of unreasonablecontracts and enforceability thereof in Brojo Nath Ganguly (supra)thus:

“83. Yet another theory which has made its emergence in recentyears in the sphere of the law of contracts is the test ofreasonableness or fairness of a clause in a contract where thereis inequality of bargaining power. Lord Denning, MR, appears tohave been the propounder, and perhaps the originator —at leastin England, of this theory. In Gillespie Brothers & Co. Ltd. v.Roy Bowles Transport Ltd., (1973) QB 400, where the questionwas whether an indemnity clause in a contract, on its trueconstruction, relieved the indemnifier from liability arising to theindemnified from his own negligence, Lord Denning said (at pages415-416):

“The time may come when this process of ‘construing’ thecontract can be pursued no further. The words are too clear topermit of it. Are the courts then powerless? Are they to permitthe party to enforce his unreasonable clause, even when it isso unreasonable, or applied so unreasonably, as to beunconscionable? When it gets to this point, I would say, as I saidmany years ago:

‘there is the vigilance of the common law which, whileallowing freedom of contract, watches to see that it is not abused’:John Lee & Son (Grantham) Ltd. v. Railway Executive, (1949)2 All ER 581.

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

It will not allow a party to exempt himself from his liabilityat common law when it would be quite unconscionable for him todo so.”

In the above case, the Court of Appeal negatived the defenseof the indemnifier that the indemnity clause did not cover thenegligence of the indemnified. It was in Lloyds Bank Ltd. v. Bundy(1974) 3 All ER 757 that Lord Denning first clearly enunciated histheory of “inequality of bargaining power.” He began his discussionon this part of the case by stating (at page 763) :

“There are cases in our books in which the courts will setaside a contract, or a transfer of property, when the partieshave not met on equal terms, when the one is so strong inbargaining power and the other so weak that, as a matter ofcommon fairness, it is not right that the strong should beallowed to push the weak to the wall. Hitherto those exceptionalcases have been treated each as a separate category in itself.But I think the time has come when we should seek to find aprinciple to unite them. I put on one side contracts or transactionswhich are voidable for fraud or misrepresentation or mistake. Allthose are governed by settled principles. I go only to those wherethere has been inequality of bargaining power, such as to meritthe intervention of the court.”

He then referred to various categories of cases andultimately deduced therefrom a general principle in these words(at page 765):

“Gathering all together, I would suggest that through allthese instances there runs a single thread. They rest on‘inequality of bargaining power.’ By virtue of it, the English lawgives relief to one who, without independent advice, enters into acontract on terms which are very unfair or transfers property fora consideration which is grossly inadequate, when his bargainingpower is grievously impaired by reason of his own needs or desires,or by his own ignorance or infirmity, coupled with undue influencesor 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 thatthe principle depends on proof of any wrongdoing. The one whostipulates for an unfair advantage may be moved solely by hisown self-interest, unconscious of the distress he is bringing to theother. I have also avoided any reference to the will of the onebeing ‘dominated’ or ‘overcome’ by the other. One who is inextreme need may knowingly consent to a most improvidentbargain, solely to relieve the straits in which he finds himself.Again, I do not mean to suggest that every transaction is saved byindependent advice. But the absence of it may be fatal. With theseexplanations, I hope this principle will be found to reconcile thecases.”

(e) . The Court clearly held that the contracts, which are theoutcome of misrepresentation, cannot be enforced, and inequality ofbargaining power merit the intervention of the court. In A. SchroederMusic Publishing Co. Ltd. v. Macaulay (formerly Instone) (1974) 1WLR 1308, Lord Diplock made the following observations at pp. 1315-16 thus:

“84. …. “My Lords, the contract under consideration in this appealis one whereby the respondent accepted restrictions upon the wayin which he would exploit his earning power as a songwriter forthe next ten years. Because this can be classified as a contract inrestraint of trade the restrictions that the respondent accepted fellwithin one of those limited categories of contractual promises inrespect of which the courts still retain the power to relieve thepromisor of his legal duty to fulfill them. In order to determinewhether this case is one in which that power ought to be exercised,what your Lordships have in fact been doing has been to assessthe relative bargaining power of the publisher and the songwriterat the time the contract was made and to decide whether thepublisher had used his superior bargaining power to exact fromthe songwriter promises that were unfairly onerous to him. YourLordships have not been concerned to inquire whether the publichave in fact been deprived of the fruit of the song writer’s talentsby reason of the restrictions, nor to assess the likelihood that theywould be so deprived in the future if the contract were permittedto run its full course.

A

BC

D

E

F

G

H

A

B

C

D

E

F

G

H

It is, in my view, salutary to acknowledge that in refusing toenforce provisions of a contract whereby one party agrees forthe benefit of the other party to exploit or to refrain from exploitinghis own earning power, the public policy which the court isimplementing is not some 19th century economic theory about thebenefit to the general public of freedom of trade, but the protectionof those whose bargaining power is weak against being forced bythose whose bargaining power is stronger to enter into bargainsthat are unconscionable. Under the influence of Bentham and oflaissez faire the courts in the 19th century abandoned the practiceof applying the public policy against unconscionable bargains tocontracts generally, as they had formerly done to any contractconsidered to be usurious; but the policy survived in its applicationto penalty clauses and to relief against forfeiture and also to thespecial category of contracts in restraint of trade. If one looks atthe reasoning of 19th-century judges in cases about contracts inrestraint of trade one finds lip service paid to current economictheories, but if one looks at what they said in the light of what theydid, one finds that they struck down a bargain if they thought itwas unconscionable as between the parties to it and upheld it ifthey thought that it was not.

So I would hold that the question to be answered as respectsa contract in restraint of trade of the kind with which this appealis concerned is: ‘Was the bargain fair?’ The test of fairness is,no doubt, whether the restrictions are both reasonablynecessary for the protection of the legitimate interests of thepromisee and commensurate with the benefits secured to thepromisor under the contract. For the purpose of this test, allthe provisions of the contract must be taken intoconsideration.”

(f) . A term which exempts the stronger party from his ordinarycommon law liability should not be given effect except when it isreasonable, 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 Levisonv. Patent Steam Carpet Co. Ltd. are also useful and require to bequoted. These observations are as follows (at page 79) :

“In such circumstances as here the Law Commission in1975 recommended that a term which exempts the stronger partyfrom his ordinary common law liability should not be given effectexcept when it is reasonable: see The Law Commission and theScottish Law Commission Report, Exemption Clauses, SecondReport (1975) (August 5, 1975), Law Com. No. 69 (H.C. 605),pp. 62, 174; and there is a Bill now before Parliament, whichgives effect to the test of reasonableness. This is a gratifyingpiece of law reform: but I do not think we need wait for that Billto 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 clauseshould not be given effect if it was unreasonable, or if it would beunreasonable to apply it in the circumstances of the case. I see noreason why this should not be applied today, at any rate in contractsin 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 consideredthe question thus:

“87. In Photo Production Ltd. v. Securicor TransportLtd. (1980) AC 827, a case before the Unfair Contract TermsAct, 1977, was enacted, the House of Lords upheld an exemptionclause in a contract on the defendants’ printed form containingstandard conditions. The decision appears to proceed on the groundthat the parties were businessmen and did not possess unequalbargaining power. The House of Lords did not, in that case, rejectthe test of reasonableness or fairness of a clause in a contractwhere the parties are not equal in bargaining position. On thecontrary, the speeches of Lord Wilberforce, Lord Diplock, andLord Scarman would seem to show that the House of Lords in afit case would accept that test. Lord Wilberforce, in his speech,after referring to the Unfair Contract Terms Act, 1977, said (atpage 843) :

“This Act applies to consumer contracts and those basedon standard terms and enables exception clauses to be appliedwith regard to what is just and reasonable. It is significant thatParliament refrained from legislating over the whole field of AB

C

D

E

F

G

H

A

B

C

D

E

F

G

H

contract. After this Act, in commercial matters generally, whenthe parties are not of unequal bargaining power, and whenrisks are normally borne by insurance, not only is the case forjudicial intervention undemonstrated, but there is everything to besaid, and this seems to have been Parliament’s intention, for leavingthe parties free to apportion the risks as they think fit and forrespecting their decisions.”

Lord Diplock said (at page 850-51):

“Since the obligations implied by law in a commercialcontract are those which, by judicial consensus over the years orby Parliament in passing a statute, have been regarded asobligations which a reasonable businessman would realisethat he was accepting when he entered into a contract of aparticular kind, the court’s view of the reasonableness of anydeparture from the implied obligations which would be involved inconstruing the express words of an exclusion clause in one sensethat they are capable of bearing rather than another, is a relevantconsideration in deciding what meaning the words were intendedby the parties to bear.”

Lord Scarman, while agreeing with Lord Wilberforce,described (at page 853) the action out of which the appeal beforethe House had arisen as “a commercial dispute between partieswell able to look after themselves” and then added: “In such asituation what the parties agreed (expressly or impliedly) is whatmatters, and the duty of the courts is to construe their contractaccording to its tenor.”

88. As seen above, apart from judicial decisions, the UnitedStates and the United Kingdom have statutorily recognised, atleast in certain areas of the law of contracts, that there can beunreasonableness (or lack of fairness, if one prefers that phrase)in a contract or a clause in a contract where there is inequality ofbargaining power between the parties although arising out ofcircumstances not within their control or as a result of situationsnot of their creation. Other legal systems also permit judicial reviewof a contractual transaction entered into in similar circumstances.

For example, Section 138(2) of the German Civil Code providesthat a transaction is void “when a person” exploits “the distressedsituation, inexperience, lack of judgmental ability, or graveweakness of will of another to obtain the grant or promise ofpecuniary advantages ... which are obviously disproportionate tothe performance given in return”. The position, according to theFrench law, is very much the same.”

(h) . In Brojo Nath Ganguly (supra), it was pointed out whatcourt 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 andoutworn ideologies? Should we not adjust our thinking caps tomatch the fashion of the day? Should all jurisprudentialdevelopment pass us by, leaving us floundering in the sloughs of19th-century theories? Should the strong be permitted to push theweak to the wall? Should they be allowed to ride roughshod overthe weak? Should the courts sit back and watch supinely whilethe strong trample underfoot the rights of the weak? We have aConstitution for our country. Our judges are bound by their oathto “uphold the Constitution and the laws.” The Constitution wasenacted to secure to all the citizens of this country social andeconomic justice. Article 14 of the Constitution guarantees to allpersons equality before the law and the equal protection of thelaws. The principle deducible from the above discussions on thispart of the case is in consonance with right and reason, intendedto secure social and economic justice and conforms to the mandateof the great equality clause in Article 14. This principle is that thecourts will not enforce and will, when called upon to do so, strikedown an unfair and unreasonable contract, or an unfair andunreasonable clause in a contract, entered into between partieswho are not equal in bargaining power. It is difficult to give anexhaustive list of all bargains of this type. No court can visualizethe different situations which can arise in the affairs of men. Onecan only attempt to give some illustrations. For instance, the aboveprinciple will apply where the inequality of bargaining power isthe result of the great disparity in the economic strength of thecontracting parties. It will apply where the inequality is the resultof circumstances, whether of the creation of the parties or not. It AB

C

D

E

F

G

H

A

AB

C

D

E

F

G

H

A

Awill apply to situations in which the weaker party is in a position inwhich he can obtain goods or services or means of livelihood onlyupon the terms imposed by the stronger party or go without them.It will also apply where a man has no choice, or rather nomeaningful choice, but to give his assent to a contract or to signon the dotted line in a prescribed or standard form or to accept aBset of rules as part of the contract, however unfair, unreasonableand unconscionable a clause in that contract or form or rules maybe. This principle, however, will not apply where the bargainingpower of the contracting parties is equal or almost equal. Thisprinciple may not apply where both parties are businessmen, andCthe contract is a commercial transaction. In today’s complex worldof giant corporations with their vast infrastructural organizationsand with the State through its instrumentalities and agenciesentering into almost every branch of industry and commerce, therecan be myriad situations which result in unfair and unreasonablebargains between parties possessing wholly disproportionate andDunequal bargaining power. These cases can neither be enumeratednor fully illustrated. The court must judge each case on its ownfacts and circumstances.”

(i) . The Court in Brojo Nath Ganguly (supra) held that thecontract, which affected a large number of persons if they areEunconscionable, unfair, and unreasonable, the contract is voidable. Thecourt would not compel each person with whom the party with superiorbargaining power had contracted to go to court to adjudge the contractvoidable and would result in a multiplicity of litigation. It observed:

“91. Is a contract of the type mentioned above to be adjudgedFvoidable or void? If it was induced by undue influence, then underSection 19-A of the Indian Contract Act, it would be voidable. Itis, however, rarely that contracts of the types to which the principleformulated by us above applies are induced by undue influence asdefined by Section 16(1) of the Indian Contract Act, even thoughGat times they are between parties one of whom holds a real orapparent authority over the other. In the vast majority of cases,however, such contracts are entered into by the weaker partyunder pressure of circumstances, generally economic, whichresults in inequality of bargaining power. Such contracts will notfall within the four corners of the definition of “undue influence”H

given in Section 16(1). Further, the majority of such contracts arein a standard or prescribed form or consist of a set of rules. Theyare not contracts between individuals containing terms meant forthose individuals alone. Contracts in prescribed or standard formsor which embody a set of rules as part of the contract are enteredinto by the party with superior bargaining power with a largenumber of persons who have far less bargaining power or nobargaining power at all. Such contracts which affect a largenumber of persons or a group or groups of persons, if they areunconscionable, unfair, and unreasonable, are injurious to the publicinterest. To say that such a contract is only voidable would be tocompel each person with whom the party with superior bargainingpower had contracted to go to court to have the contract adjudgedvoidable. This would only result in multiplicity of litigation, whichno court should encourage and would also not be in the publicinterest. Such a contract or such a clause in a contract ought,therefore, to be adjudged void. While the law of contracts inEngland is mostly judge-made, the law of contracts in India isenacted in a statute, namely, the Indian Contract Act, 1872. Inorder that such a contract should be void, it must fall under one ofthe relevant sections of the Indian Contract Act. The only relevantprovision in the Indian Contract Act, which can apply is Section23, when it states that “The consideration or object of an agreementis lawful, unless ... the court regards it as ... opposed to publicpolicy.”

(j) . The Court also considered the “public policy”. The same isnot the policy of a particular Government. It connotes some matter whichconcerns the public good and the public interest. Action has to besubservient to public policy. This Court in the context of Contract Actand 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 natureof 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 thepublic interest. The concept of what is for the public good or inthe public interest or what would be injurious or harmful to thepublic good or the public interest has varied from time to time. As

ABC

DE

F

G

H

A

ABC

DE

F

G

H

A

Anew concepts take the place of old, transactions which were onceconsidered against public policy are now being upheld by the courts,and similarly, where there has been a well-recognized head ofpublic policy, the courts have not shirked from extending it to newtransactions and changed circumstances and have at times noteven flinched from inventing a new head of public policy. ThereBare two schools of thought— “the narrow view” school and “thebroad view” school. According to the former, courts cannot createnew heads of public policy, whereas the latter countenances judiciallaw-making in this area. The adherents of “the narrow view”school would not invalidate a contract on the ground of publicCpolicy unless that particular ground had been well-established byauthorities. Hardly ever has the voice of the timorous spoken moreclearly and loudly than in these words of Lord Davey in Jansonv. Driefontein Consolidated Gold Mines Ltd.: “Public policy isalways an unsafe and treacherous ground for legal decision.” Thatwas in the year 1902. Seventy-eight years earlier, Burrough, J., inDRichardson v. Mellish, (1824-34) All ER 258, described publicpolicy as “a very unruly horse, and when once you get astride ityou never know where it will carry you.” The Master of the Rolls,Lord Denning, however, was not a man to shy away fromunmanageable horses and in words which conjure up before ourEeyes the picture of the young Alexander the Great tamingBucephalus, he said in Enderby Town Football Club Ltd. v.Football Assn. Ltd. (1971) Ch 591: “With a good man in thesaddle, the unruly horse can be kept in control. It can jump overobstacles.” Had the timorous always held the field, not only thedoctrine of public policy but even the Common Law or the principlesFof Equity would never have evolved. Sir William Holdsworth inhis “History of English Law,” Volume III, page 55, has said:

B

C

D

E

“In fact, a body of law like the common law, which hasgrown up gradually with the growth of the nation, necessarilyacquires some fixed principles, and if it is to maintain theseprinciples, it must be able, on the ground of public policy or someother like ground, to suppress practices which, under ever newdisguises, seek to weaken or negative them.”

G

It is thus clear that the principles governing public policymust be and are capable, on proper occasion, of expansion or H

modification. Practices which were considered perfectly normalat one time have today become obnoxious and oppressive to publicconscience. If there is no head of public policy which covers acase, then the court must in consonance with public conscienceand in keeping with public good and public interest declare suchpractice to be opposed to public policy. Above all, in deciding anycase which may not be covered by authority, our courts havebefore them the beacon light of the Preamble to the Constitution.Lacking precedent, the court can always be guided by that lightand the principles underlying the Fundamental Rights and theDirective Principles enshrined in our Constitution.

93. The normal rule of Common Law has been that a party whoseeks to enforce an agreement which is opposed to public policywill be non-suited. The case of A. Schroeder Music PublishingCo. Ltd. v. Macaulay (1974) 1 WLR 1308, however, establishesthat where a contract is vitiated as being contrary to public policy,the party adversely affected by it can sue to have it declaredvoid. The case may be different, where the purpose of the contractis illegal or immoral. In Kedar Nath Motani v. Prahlad Rai, AIR1960 SC 213, reversing the High Court and restoring the decreepassed by the trial court declaring the appellants’ title to the landsin suit and directing the respondents who were the appellants’benamidars to restore possession, this Court, after discussing theEnglish and Indian law on the subject, said: (at page 873) :

“The correct position in law, in our opinion, is that what onehas to see is whether the illegality goes so much to the root of thematter that the plaintiff cannot bring his action without relyingupon the illegal transaction into which he had entered. If the illegalitybe trivial or venial, as stated by Williston and the plaintiff is notrequired to rest his case upon that illegality, then public policydemands that the defendant should not be allowed to takeadvantage of the position. A strict view, of course, must be takenof the plaintiff’s conduct, and he should not be allowed tocircumvent the illegality by resorting to some subterfuge or bymisstating the facts. If, however, the matter is clear and the illegalityis not required to be pleaded or proved as part of the cause ofaction, and the plaintiff recanted before the illegal purpose wasachieved, then, unless it be of such a gross nature as to outrage AB

C

D

E

F

G

H

Athe conscience of the court, the plea of the defendant should notprevail.”

The types of contracts to which the principle formulated by usabove applies are not contracts which are tainted with illegality but arecontracts which contain terms which are so unfair and unreasonableBthat they shock the conscience of the court. They are opposed to publicpolicy and require to be adjudged void.”

51. This Court also considered the law of contract and itsinterpretation in changing times in Delhi Transport Corporation v.D.T.C. Mazdoor Congress & Ors., (1991) Supp 1 SCC 600 thus:

C

“279. In paragraph 4 of Chitty on Contracts (25th edn.,vol. 1) it is stated that “freedom of contract is a reasonable socialideal only to the extent that equality of bargaining power betweencontracting parties can be assumed and no injury is done to theeconomic interest of the community at large.”

D

280. In Anson’s Law of Contract at pages 6 and 7 statedthe scope of freedom of contract in the changing circumstancesthus:

“Today the position is seen in a very different light. Freedomof contract is a reasonable social ideal only to the extent thatEequality of bargaining power between contracting parties can beassumed, and no injury is done to the economic interests of thecommunity at large. In the more complicated social and industrialconditions of a collectivist society, it has ceased to have muchidealistic attraction. It is now realised that economic equality oftendoes not exist in any real sense and that individual interests haveFto be made to subserve those of the community hence there hasbeen a fundamental change both in our social outlook and in thepolicy of the legislature towards contract and the law todayinterferes at numerous points with the freedom of the parties tomake what contract they like. The relation between employersGand employed, for example, have been regulated by statutesdesigned to ensure that the employee’s condition of work are safe,that he is properly protected against redundancy, and that he knowshis terms of service. The public has been protected againsteconomic pressure by such measures as the Rent Acts, the Supplyof Goods (Implied Terms) Act, the Consumer Credit Act, and E

G

H

other similar enactments. These legislative provisions will overrideany contrary terms which the parties may make for themselves.Further, the legislature has intervened in the Restrictive TradePractices Act, 1956, and the Fair Trading Act, 1973 to promotecompetition in industry and to safeguard the interests of consumers.This intervention is specially necessary today when most contractsentered by ordinary people are not the result of individualnegotiation. It is not possible for a private person to settle theterms of his agreement with a British Railways Board or with alocal electricity authority.”

The ‘standard form’ contract is the rule. He must eitheraccept the terms of this contract in toto or go without. Since,however, it is not feasible to deprive oneself of such necessaryservices, the individual is compelled to accept on those terms. Inview of this fact, it is quite clear that freedom of contract is nowlargely an illusion.”

52. (a). It has been emphasised in D.T.C. (supra) that the periodof contract is to be reasonable and the employee has a right to know theconditions of work and he is properly protected against redundancy.Approving decision in Central Inland Water Transport CorporationLtd. & Anr. v. Brojo Nath Ganguly & Anr. (1983) 3 SCC 156 Courtheld thus:

“282. In Brojo Nath case (1986) 3 SCC 156, Madon, J. elaboratelyconsidered the development of law relating to unfair orunreasonable terms of the contract or clauses thereof in extenso,and it is unnecessary for me to traverse the same grounds onceover. The learned Judge also considered the arbitrary, unfair, andunbridled power on the anvil of distributive justice or justness orfairness of the procedure envisaged therein. The relevant caselaw in that regard was dealt with in extenso in the light of thedevelopment of law in the Supreme Court of United States ofAmerica and the House of Lords in England and in the continentalcountries. To avoid needless burden on the judgment, I do notrepeat 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 ofGovernment contracts and the right of the State to impose unconstitutionalconditions, observed:

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

“283. The problem also could be broached from the anglewhether the State can impose unconstitutional conditions as partof the contract or statute or rule etc. In (1959-60) 73 HarvardLaw Review, in the Note under the caption ‘UnconstitutionalCondition’ at pages 1595-96 it is postulated that the State is devoidof power to impose unconstitutional conditions in the contract thatthe power to withhold largesse has been asserted by the State infour 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. Itwas further adumbrated at pages 1602-03 thus:

“The sovereign’s constitutional authority to choose those withwhom it will contract for goods and services is, in effect, a powerto withhold the benefits to be derived from economic dealingswith the government. As government activity in the economicsphere increases, the contracting power enables the governmentto control many hitherto unregulated activities of contractingparties through the imposition of conditions. Thus, regarding thegovernment, as a private entrepreneur, threatens to impairconstitutional rights. The government, unlike a private individual,is limited in its ability to contract by the Constitution. The federalcontracting power is based upon the Constitution’s authorisation of these acts ‘necessary and proper’ to the carrying out of thefunctions which it allocates to the national government. Unlessthe objectives sought by terms and conditions in governmentcontracts requiring the surrender of rights are constitutionallyauthorised, the conditions must fall as ultra vires exercise ofpower.”

Again at page 1603, it is further emphasised thus:

“When conditions limit the economic benefits to be derivedfrom dealings with the government to those who forego theexercise of constitutional rights, the exclusion of those retainingtheir rights from participation in the enjoyment of these benefitsmay be violative of the prohibition, implicit in the due processclause of Fifth Amendment and explicit in the equal protectionclause of the Fourteenth Amendment against unreasonablediscrimination in the governmental bestow of advantages. Finally,disabling those exercising certain rights from participating in the

advantages to be derived from contractual relations with thegovernment may be a form of penalty lacking in due process. Toavoid invalidation for any of the above reasons, it must be shownthat the conditions imposed are necessary to secure the legitimateobjectives of the contract, ensure its effective use, or protect societyfrom 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 inhis “Retroactivity, Paramount Power and ContractualChanges” (1961-62) 71 Yale Law Journal 1191, stated that thegovernment can make contracts that are necessary and properfor carrying out any of the specific clauses of the Constitution orpower to spend for general welfare. The Federal Governmenthas no power, inherent or sovereign, other than those specificallyor explicitly granted to it by the Constitution. At page 1197, it isfurther stated thus:

“The government acts according to due process standards for thedue process clause is quite up to that task without the rule.Alterations of government contracts are not desirable in a freecountry even when they do not constitute a ‘taking’ of property orimpinge on questions of fundamental fairness of the typecomprehended in due process. The government may makechanges, but only if war or commerce require them and not onthe broader and more ephemeral grounds that the general welfarewould be served by the change. Any other rule would allow thegovernment to welch almost at will.”

x x x

286. In Brojo Nath case (supra, after elaborate consideration ofthe doctrine of “reasonableness or fairness” of the terms andconditions of the contract vis-a-vis the relative bargaining powerof the contracting parties this Courtlaid down that the principlesdeducible from the discussion made therein is in consonance with-right or reason intended to secure socioeconomic justice andconform to mandate of the equality clause in Article 14. Theprinciple laid was that courts will not enforce and will, when calledupon to do so, strike down an unfair and unreasonable contract oran unfair and unreasonable clause in a contract, entered intobetween parties who are not equal in bargaining power …. It will AB

C

DE

F

G

H

A

Aapply to situations in which the weaker party is in a position inwhich he can obtain goods or services or means of livelihood onlyupon the terms imposed by the stronger party or go without them.It will also apply where a man has no choice, or rather nomeaningful choice, but to give his assent to a contract or to signon the dotted line in a prescribed or standard form or to accept aBset of rules as part of the contract, however unfair, unreasonableand unconscionable a clause in that contract or form or rules maybe. This principle, however, will not apply where the bargainingpower of the contracting parties is equal or almost equal or whereboth parties are businessmen, and the contract is a commercialCtransaction.

287. In today’s complex world of giant corporations with theirvast infrastructural organisations the State through itsinstrumentalities and agencies has been entering into almost everybranch of industry and commerce and field of service, there canbe myriad situations which result in unfair and unreasonablebargains between parties possessing wholly disproportionate andunequal bargaining power. These cases can neither be enumeratednor fully illustrated. The court must judge each case on its ownfacts and circumstances.”

D

E

The Court held that there can be myriad situations which result inunfair and unreasonable bargains, which are the outcome of an unequalbargaining power. Each case has to be seen on its own facts andcircumstances.

F

(c) . In D.T.C. (supra), the Court also held that Article 14 shedslight on public policy to curb arbitrariness thus:

“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 policyrecognised and valued in all States, and it admonishes the StateGwhen 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 genuswhile Article 16 is a specie. Article 16 gives effect to the doctrineof equality in all matters relating to public employment. The basicHprinciple which, therefore, informs both Articles 14 and 16 is

equality and inhibition against discrimination. “Equality is a dynamicconcept with many aspects and dimensions, and it cannot be“cribbed, cabined and confined” within traditional and doctrinairelimits. From a positivistic point of view, equality is antithetical toarbitrariness. In fact, equality and arbitrariness are sworn enemies;one belongs to the rule of law in a republic while the other, to thewhim and caprice of an absolute monarch. Where an act isarbitrary, it is implicit in it that it is unequal both according to politicallogic and constitutional law and is therefore violative of Article14, and if it affects any matter relating to public employment, it isalso violative of Article 16. Articles 14 and 16 strike at arbitrarinessin State action and ensure fairness and equality of treatment. InManeka Gandhi case (1978) 1 SCC 248, it was further held thatthe principle of reasonableness, which legally as well asphilosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence.In Ramana case (1979) 3 SCC 489, it was held that it is merely ajudicial formula for determining whether the legislative or executiveaction in question is arbitrary and therefore constituting denial ofequality. If the classification is not reasonable and does not satisfythe two conditions, namely, rational relation and nexus, theimpugned 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, whetherit be of legislature or of the executive or of an “authority” underArticle 12, Article 14, “immediately springs into action and strikesdown such State action.”In fact, the concept of reasonablenessand non-arbitrariness pervades the entire constitutional schemeand is a golden thread which runs through the whole of the fabricof the constitution.

302. Article 14 is the general principle, while Article 311(2) is aspecial provision applicable to all civil services under the State.Article 311(2) embodies the principles of natural justice, but provisoto clause (2) of Article 311 excludes the operation of principles ofnatural justice engrafted in Article 311(2) as an exception in thegiven circumstances enumerated in three clauses of the provisoto Article 311(2) of the Constitution. Article 14 read with Articles16(1), and 311 are to be harmoniously interpreted that the provisoto Article 311(2) excludes the application of the principles of natural

ABC

DEF

GH

A

ABC

DEF

GH

A

Ajustice as an exception; and the applicability of Article 311(2) must,therefore, be circumscribed to the civil services and be construedaccordingly. In respect of all other employees covered by Article12 of the Constitution, the dynamic role of Article 14 and otherrelevant articles like Article 21 must be allowed to have full playwithout any inhibition, unless the statutory rules themselves,Bconsistent with the mandate of Articles 14, 16, 19 and 21 provide,”expressly such an exception.

(d) . Arbitrariness in State action whether of the legislature or theCexecutive or of an authority under Articles 12, 14 and 21 comes into playto strike down such an action. The Court in D.T.C. (supra) held thus:

“303. Article 19(1)(g) empowers every citizen the right toavocation or profession etc. which includes right to be continuedin employment under the State unless the tenure is validlyterminated consistent with the scheme enshrined in theDfundamental rights of the Constitution. Therefore, if any procedureis provided for deprivation of the right to employment or right tothe continued employment till the age of superannuation as is asource to right to livelihood, such a procedure must be just, fairand reasonable. This Court in Fertilizer Corporation KamgarEUnion (Regd.), Sindri v. Union of India (1981) 1 SCC 568,held that Article 19(1)(g) confers a broad and general right whichis available to all persons to do works of any particular kind and oftheir choice. Therefore, whenever there is arbitrariness in Stateaction — whether it be of the legislature or of the executive or ofFan authority under Article 12, Articles 14 and 21 spring into actionand strikes down such an action. The concept of reasonablenessand non-arbitrariness pervades the entire constitutional spectrumand is a golden thread which runs through the whole fabric of theConstitution. Therefore, the provision of the statute, the regulationor the rule which empowers an employer to terminate the servicesGof an employee whose service is of an indefinite period till heattains the age of superannuation, by serving a notice or pay inlieu thereof must be conformable to the mandates of Articles 14,19(1)(g) and 21 of the Constitution. Otherwise, per se, it would bevoid. In Moti Ram Deka case, AIR 1964 SC 600, Gajendragadkar,J. (as he then was) after invalidating the Rules 149(3) and 148(3)

H

under Article 311(2) which are in pari materia with Regulation9(b) of the Regulations also considered their validity in the light ofArticle 14 and held thus: (SCR p. 731)

“Therefore, we are satisfied that the challenge to the validityof the impugned Rules on the ground that they contravene Article14 must also succeed.”

This was on the test of reasonable classification as theprinciple then was applied. Subba Rao, J. (as he then was) in aseparate but concurring judgment, apart from invalidating the ruleunder Article 311(2) also held that the rule infringed Article 14 aswell, though there is no elaborate discussion in that regard. But,Das Gupta, J. considered elaborately on this aspect and held: (SCRp. 770)

“Applying the principle laid down in the above case to thepresent Rule, I find on the scrutiny of the Rule that it does not laydown any principle or policy for guiding the exercise of discretionby the authority who will terminate the service in the matter ofselection or classification. Arbitrary and uncontrolled power isleft in the authority to select at its will any person against whomaction will be taken. The rule thus enables the authority concernedto discriminate between two railway servants to both of whomRule 148(3) equally applied by taking action in one case and nottaking it in the other. In the absence of any guiding principle in theexercise of the discretion by the authority, the Rule has, therefore,to be struck down as contravening the requirements of Article 14of the Constitution.”

308. In Ramana case (1979) 3 SCC 489, it has been heldthat: (SCC p. 504, para 10)

“It is indeed unthinkable that in a democracy governed bythe rule of law, the executive government or any of its officersshould possess arbitrary power over the interests of the individual.”

The procedure adopted should match with what justicedemands. History shows that it is always subtle and insidiousencroachments made ostensibly for a good cause that imperceptibly”but surely erode the foundations of liberty.

AB

C

DE

F

G

H

A(e). An employer cannot act in a manner that is in the negation ofjust, 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 butdo have power to mend it so as to be in conformity with theBintendment of the legislature. Doctrine of reading down is one ofthe principles of interpretation of statute in that process. But whenthe offending language used by the legislature is clear, precise,and unambiguous, violating the relevant provisions in theConstitution, resort cannot be had to the doctrine of reading downto blow life into the void law to save it from unconstitutionality orCto confer jurisdiction on the legislature. Similarly, it cannot be takenaid of to emasculate the precise, explicit, clear and unambiguouslanguage to confer arbitrary, unbridled and uncanalised power onan employer which is a negation to just, fair and reasonableprocedure envisaged under Articles 14 and 21 of the ConstitutionDand to direct the authorities to record reasons, (sic) unknown orunintended procedure, in the manner argued by the learned counsel”for the appellants.

(f) . In D.T.C. (supra) this Court also relied upon S.G. JaisinghaniEv. Union of India, AIR 1967 SC 1427 :

“331. x x x “In this context it is important to emphasise thatthe absence of arbitrary power is the first essential of the rule oflaw upon which our whole constitutional system is based. In asystem governed by rule of law, discretion, when conferredFupon executive authorities, must be confined within definedlimits.The rule of law from this point of view means that decisionsshould be made by the application of known principles and rulesand, in general, such decisions should be predictable, and the citizenshould know where he is.If a decision is taken without any principleGor without any rule, it is unpredictable, and such a decision is theantithesis 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. inUnited States v. Wunderlich 342 US 98, ‘when it has freed manfrom the unlimited discretion of some ruler …. Where discretion H

is absolute, man has always suffered.’ It is in this sense that therule of law may be said to be the sworn enemy of caprice.Discretion, as Lord Mansfield stated it in classic terms in the caseof John Wilkes (1770) 4 Burr 2528, ‘means sound discretionguided by law. It must be governed by rule, not by humour: it mustnot be arbitrary, vague and fanciful’”.

(emphasis supplied)

(g) . The Court emphasised that the decision has to be predictableand it cannot be uncertain. The decision has to be taken by applicationof known principles and rules. The exercise of power cannot be whimsicalor capricious. This Court in D.T.C. (supra) held:

“332. In an appropriate case where there is no sufficient evidenceavailable to inflict by way of disciplinary measure, penalty ofdismissal or removal from service and to meet such a situation, itis not as if that the authority is lacking any power to make rules orregulations to give a notice of opportunity with the grounds or thematerial on records on which it proposed to take action, considerthe objections and record reasons on the basis of which it hadtaken action and communicate the same. However, scanty thematerial may be, it must form foundation. This minimal procedureshould be made part of the procedure lest the exercise of thepower is capable of abuse for good as well as for whimsical orcapricious purposes for reasons best known to the authority andnot germane for the purpose for which the power was conferred.The action based on recording reasoning without communicationwould always be viewed with suspicion. Therefore, I hold thatconferment of power with wide discretion without any guidelines,without any just, fair or reasonable procedure is constitutionallyanathema 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 oncethe Central Board of Directors accepted the memorandum for makingpayment of pension, in case it was not accepting the proposal in thememorandum, it ought to have said clearly that it was not ready to acceptthe proposals of the Government and the IBA and rejects the same.Once it approved the proposals referred to in the memorandum, which A

B

F

G

H

Awere on the basis of IBA’s letter and Government of India’s decision itwas bound to implement it in true letter and spirit. By accepting thesame, binding obligation was created upon the SBI to make payment ofpension on completion of 15 years of service. It cannot invalidate itsown decision by relying on fact it failed to amend the rule, whereasother Banks did it later on with retrospective effect. They cannotBinvalidate otherwise valid decision by virtue of exclusive superior powerto amend or not to amend the rule and act unfairly and make the entirecontract unreasonable based on misrepresentation. It was open to theBoard of Directors to reject the proposal. Once it accepted the proposalto make payment of pension on completion of 15 years of service asCproposed in the memorandum, though the scheme is tried to be interpretedby the SBI that pension was to be admissible as provided in the rule thatrefers 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 inDthe backdrop of facts and what has been resolved by the Board ofDirectors. There is no ambiguity with respect to the admissibility ofpension when the memorandum and the scheme are read together. Incase of ambiguity and even if two interpretations are possible in thebackdrop of facts of the case, one in favour of the employees has to beEadopted and so-called clarification dated 11.1.2000 even if considered inthe manner so as to deny the benefit of pension, has to be held to beunenforceable, illegal and contrary to law.

54. It is apparent from the eligibility clause of the VRS schemethat eligibility is provided for the employees having 15 years of pensionableFservice 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 makesit clear that employees with 15 years of service were treated as eligibleto 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 serviceGwould be entitled for pensionary benefits. The scheme was carved outspecially for attracting the employees by providing pension and otherbenefits to eligible persons like ex gratia, gratuity, pension and leaveencashment. Deprivation of pension would make them ineligible for thebenefits and would run repugnant to the eligibility clause.H

55. The submission raised on behalf of the SBI that the draftscheme nowhere stipulated that 15 years’ service would be the eligibilityor that on completion of 15 years’ service, the incumbent would be eligiblefor pension, is factually incorrect. It is apparent from the materialcircumstances, documents, and correspondence that the decision wastaken at all levels including the one by the Central Board of Directors ofSBI, that the benefit of pension was to be given to the employees oncompletion of 15 years of service. In that perspective, vagueness ofscheme of SBI, if any, can be of no advantage as it is clear beyond thepale of doubt that pension was heart and soul of the scheme with exgratia on completion of 15 years of service. It is due to the reason thatthe benefit was to be accorded to the incumbents having completed 15years of service, Regulation 28 as applicable to other nationalised bankswas proposed to be modified as reflected in the letter of IBA dated11.12.2000 and Government of India letter dated 5.9.2000. Later on, theregulation was amended in 2002 after the scheme had already beenimplemented in right earnest. There was not even an iota of doubt thatVRS was to give benefits to all eligible employees having completed 15years of service. It was apparent from the letter dated 29.12.2000 ofSBI that the guidelines of IBA were approved by the Central Board ofDirectors in its meeting dated 27.12.2000. Para 2 of the letter dated29.12.2000 of SBI Deputy Managing Director-cum-SDO is extractedhereunder:

“2. Accordingly, the Central Board of Directors, in its meetingheld on 27.12.2000, has accorded approval for adopting andimplementing the Voluntary Retirement Scheme for the employeesof the Bank, namely “SBI Voluntary Retirement Scheme(SBIVRS).” The Scheme “SBIVRS” has been drawn up, keepingin view the guidelines issued by IBA. A copy of the Scheme isplaced at Annexure ‘B’.”

56. As noted in O.P. Swarnakar & Ors., (supra), the case ofbank itself was that it was a contractual scheme. The expression“pension” as per rules was only for the purpose of working out theproportionate pension. It was clearly decided to open the scheme toemployees who have put in 15 years of service. It was not provided inthe scheme that the incumbent was required to render a pensionableservice of 20 years as per the rules in order to acquire eligibility for the AB

C

DE

F

G

H

Apension. The submission made on behalf of SBI is too tenuous to beaccepted. It was observed in para 89 of O.P. Swarnakar & Ors., (supra)quoted above that the employee must have proceeded on the basis of 15years of service then they were entitled to pensionary benefits.

The Court further observed in O.P. Swarnakar & Ors., (supra)Bthat the scheme is enforceable thus:

“92. However, the case of the State Bank of India stands slightlyon a different footing. Firstly, the State Bank of India had notamended the Scheme. It, as noticed hereinbefore, even permittedwithdrawal of the applications after (sic by) 15th February. TheCScheme floated by the State Bank of India contained a clause(clause 7) laying down the mode and manner in which theapplication for voluntary retirement shall be considered. Therelevant clause, as referred to hereinbefore, creates an enforceableright. In the event the State Bank failed to adhere to its preferredpolicy, the same could have been specifically enforced by a courtDof law. The same would, therefore, amount to some consideration.”

57. While construing a contract, the language and surroundingcircumstances of the overall scheme, memorandum and letters are to beread conjointly to find out whether any departure made by the Board ofDirectors in its Resolution dated 27.12.2000 is of pivotal significance. InEthis case, the decision was taken by it of approval of the IBA scheme asproposed. Its binding effect cannot be changed on the basis what partieschoose to say afterward, nor they can be permitted to wriggle out. Thecontract is required to be read as a whole. It is apparent on a barereading that optees will be eligible for proportionate pension under theFPension Regulations of the bank and therefore, the bank bears the riskof lack of clarity, if any.

58. In Bank of India & Anr. v. K. Mohandas & Ors., (2009) 5SCC 313 wherein several other banks were also parties, the questionarose as to the nature of VRS, 2000. The Court noted the objectives, theGamendment made in Regulation 28 in 2002, providing for 15 years ofservice. The scheme was open in November-December, 2000 and inUnion Bank of India in January, 2001. The employees claimed that thosewho completed 20 years of service, were entitled to the benefit ofprovisions contained in Regulation 29(5) of Employees’ PensionRegulations, 1995 applicable to the said banks. They claimed havingHcompleted the qualifying service of 20 years under Regulation 29, were

entitled for 5 years’ increase in the service tenure subject to the maximumof 33 years which was not given to them on the ground that the benefitof VRS was available to incumbents having completed 15 years of serviceas provided in amended Regulation 28, and Regulation 29 was notapplicable. This Court held that the benefit of VRS was available to theemployees having completed 15 years of service, but the additional benefitwhich was available on completion of 20 years of service was alsoadmissible as provided in Regulation 29(5).

59. While considering the aforesaid similar scheme of VRS, thisCourt observed with respect to the construction of the contract on thebasis of the import of the words. The intention of the parties must beascertained from the language they have used and considered in thelight of surrounding circumstances, and the meaning cannot be changedby a course of conduct adopted by the parties in acting under it. ThisCourt in K. Mohandas (supra) held thus:

“28.The true construction of a contract must depend upon theimport of the words used and not upon what the parties choose tosay afterwards. Nor does subsequent conduct of the parties inthe performance of the contract affect the true effect of the clearand unambiguous words used in the contract. The intention of theparties must be ascertained from the language they have used,considered in the light of the surrounding circumstances and theobject of the contract. The nature and purpose of the contract isan important guide in ascertaining the intention of the parties.

29. In Ottoman Bank of Nicosia v. Ohanes Chakarian, LordWright made these weighty observations: (AIR p. 29)

“… that if the contract is clear and unambiguous, its true effectcannot be changed merely by the course of conduct adopted by”the parties in acting under it.

30. In Ganga Saran v. Firm Ram Charan Ram Gopal AIR1952 SC 9, a four-Judge Bench of this Court stated: (AIR p. 11,para 6)

“6. … Since the true construction of an agreement must dependupon the import of the words used and not upon what the partieschoose to say afterwards, it is unnecessary to refer to what theparties have said about it.”

A

B

C

DE

F

G

H

SUPREME COURT REPORTS

A

A31. It is also a well-recognised principle of construction of acontract that it must be read as a whole in order to ascertain thetrue meaning of its several clauses and the words of each clauseshould be interpreted so as to bring them into harmony with theother provisions if that interpretation does no violence to themeaning of which they are naturally susceptible. (North EasternBRailway Co. v. Lord Hastings, 1900 AC 260)”

60. With respect to lack of clarity in the scheme, this Court inK. Mohandas (supra) relied on maxim verba chartarum fortiusaccipiuntur contra proferentem to hold that banks who wereresponsible for formulation of the terms in the contractual Scheme, bearCthe risk of lack of clarity. Thus, the benefit has to be given to the employeesby making interpretation against the banks. The Court held :

“32. The fundamental position is that it is the banks who wereresponsible for formulation of the terms in the contractual Schemethat the optees of voluntary retirement under that Scheme will beDeligible 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 termsapplied by one party are unclear, an interpretation against thatparty is preferred (verba chartarum fortius accipiuntur contraEproferentem).

E

33. What was, in respect of pension, the intention of the banks atthe time of bringing out VRS 2000? Was it not made expresslyclear therein that the employees seeking voluntary retirement willbe eligible for pension as per the Pension Regulations? If theFintention was not to give pension as provided in Regulation 29 andparticularly sub-regulation (5) thereof, they could have said so inthe Scheme itself. After all, much thought had gone into theformulation of VRS 2000, and it came to be framed after greatdeliberations. The only provision that could have been in mindwhile providing for pension as per the Pension Regulations wasGRegulation 29. Obviously, the employees, too, had the benefit ofRegulation 29(5) in mind when they offered for voluntaryretirement as admittedly Regulation 28, as was existing at thattime, was not applicable at all. None of Regulations 30 to 34 wasattracted.”

H

61. In K. Mohandas (supra) the Court considered the argumentthat Regulation 28 would be applicable only for providing 15 years ofeligibility as provided by way of amendment of Regulation of 1995, andheld that as the banks are “State” within the meaning of Article 12, itwould be an arbitrary action on their part to deny the benefit of section29(5), and there has to be harmonious construction to the scheme andPension Regulations, thus:

“35. We are afraid; it would be unreasonable if amendedRegulation 28 is made applicable, which had not seen the light ofthe day and which was not the intention of the banks when theScheme was framed. The banks in the present batch of appealsare public sector banks and are “State” within the meaning ofArticle 12 of the Constitution and their action even in contractualmatters has to be reasonable, lest, as observed in O.P. Swarnakar(2003) 2 SCC 721, it must attract the wrath of Article 14 of theConstitution.

36. Any interpretation of the terms of VRS 2000, althoughcontractual in nature, must meet the test of fairness. It has to beconstrued in a manner that avoids arbitrariness andunreasonableness on the part of the public sector banks whobrought out VRS 2000 with an objective of rightsizing theirmanpower. The banks decided to shed surplus manpower. Byformulation of the special scheme (VRS 2000), the banks intendedto achieve their objective of rationalising their force as they wereoverstaffed. The special Scheme was, thus, oriented to lure theemployees to go in for voluntary retirement. In this background,the consideration that was to pass between the parties assumessignificance and a harmonious construction to the Scheme, andthe Pension Regulations, therefore, has to be given.

37. The amendment to Regulation 28 can, at best, be said to havebeen intended to cover the employees with 15 years of service ormore but less than 20 years of service. This intention is reflectedfrom the communication dated 5-9-2000 sent by the Governmentof India, Ministry of Finance, Department of Economic Affairs(Banking Division) to the Personnel Advisor, Indian Banks’Association.”

A

B

C

D

E

F

G

H

A

AIt opined that the amendment to Regulation 28 of 1995 Regulationintended to cover 15 years of service, i.e., employees with 15 years ofservice who have not completed 20 years of service. A similar action toamend the Rule was required to be taken by the SBI, but it failed to takeit after having floated a similar scheme. It kept it uncertain what wouldbe the position of the rule as on the appointed date, i.e., 31.3.2001. BeBthat as it may. But it was crystal clear that the incumbent with 15 yearsof service was eligible for the benefit as provided in the scheme itself.The benefit clause has to be read with the eligibility criteria. Once VRSwas formulated and adopted by the SBI in toto, it constituted a completecontractual package in itself.C

62. As urged on behalf of SBI if section 23 of the Contract Act isapplied, then how it is helpful to the bank, is not understandable. In caseit is held that the very scheme was opposed to the law/rules, the entirescheme would fall down. Once it adopted the scheme, invited applicationsand the employees acted upon it and retired on the basis of the scheme,

Dthey cannot be left in lurch. In case its submission is accepted, theScheme becomes violative of Section 23 of Contact Act, the bank wouldhave to suffer the consequences of striking down of the very schemeand would be required to reinstate the employees and to pay them thesalary and other benefits. However, SBI accepted the scheme, it wasincumbent upon it to bring the rules in consonance with the similar VRSEscheme as was done by other banks. The SBI accepted the scheme on27.12.2000 without any ifs and buts. Thus, the anomaly was the outcomeof the bank’s inaction to propose and make amendment of rules. In sucha 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 Fbank to lend support to arbitrary action. The bank was bound to extendthe benefits by amending the rules, if necessary, to salvage the situationfor itself. Breach of law has been committed by the SBI itself, its actionis arbitrary and it cannot be permitted to take advantage of its ownwrong.

G63. The pension cannot be dealt with arbitrarily and cannot bedenied in an unfair manner. The concept of pension was considered inD.S. Nakara & Ors. v. Union of India, (1983) 1 SCC 305. The right toa pension can be enforced through the court, it observed :

“20. The antequated notion of pension being a bounty, a gratuitousHpayment depending upon the sweet will or grace of the employer

not claimable as a right and, therefore, no right to pension can beenforced through Court has been swept under the carpet by thedecision of the Constitution Bench in Deokinandan Prasad v.State of Bihar (1971) 2 SCC 330 wherein this Court authoritativelyruled that pension is a right and the payment of it does not dependupon the discretion of the Government but is governed by therules and a government servant coming within those rules is entitledto claim pension. It was further held that the grant of pensiondoes not depend upon anyone’s discretion. It is only for the purposeof quantifying the amount having regard to service and other alliedmatters that it may be necessary for the authority to pass an orderto that effect but the right to receive pension flows to the officernot because of any such order but by virtue of the rules. Thisview was reaffirmed in State of Punjab v. Iqbal Singh, (1976) 2SCC 1.

22. In the course of transformation of society from feudal towelfare and as socialistic thinking acquired respectability. Stateobligation to provide security in old age, an escape from undeservedwant was recognised and as a first step pension was treated notonly as a reward for past service but with a view to helping theemployee to avoid destitution in old age. The quid pro quo wasthat when the employee was physically and mentally alert, herendered unto master the best, expecting him to look after him inthe fall of life. A retirement system, therefore, exists solely for thepurpose of providing benefits. In most of the plans of retirementbenefits, everyone who qualifies for normal retirement receivesthe same amount (see Retirement Systems for Public Employeesby Bleakney, p. 33).”

This Court observed that the principal aim of the socialist State asenvisaged in the Preamble is to eliminate inequality. The basic frameworkof socialism is to provide security in the fall of life to the working peopleand especially provides security from the cradle to the grave whenemployees have rendered service in heydays of life, they cannot bedestituted in old age, by taking action in an arbitrary manner and foromission to complete obligation assured one. Though there cannot beestoppel against the law but when a bank had the power to amend it, itcannot take shelter of its own inaction and SBI ought to have followedthe pursuit of other banks and was required to act in a similar fair mannerhaving accepted the scheme.

A

B

C

D

E

F

G

H

A64. Resultantly, we are of the opinion that the employees whocompleted 15 years of service or more as on cut-off date were entitledto proportionate pension under SBI VRS to be computed as per SBIPension Fund Rules. Let the benefits be extended to all such similaremployees retired under VRS on completion of 15 years of servicewithout requiring them to rush to the court. However, considering theBfacts and circumstances, it would not be appropriate to burden the bankwith interest. Let order be complied with and arrears be paid withinthree months, failing which amount to carry interest at the rate of 6 percent per annum from the date of this order. The appeals are accordinglydisposed of. No costs.

C

Ankit Gyan

Appeals disposed of.

D

E

F

G

H