Arbitrariness Can Never Masquerade As Discretion: Karnataka High Court Orders Against Ethanol Procurement By Oil Marketing Companies

The Karnataka High Court ruled against the Oil Marketing Companies (OMCs) for abruptly curtailing the procurement allocation of a Dedicated Ethanol Plant to less than half of its bid quantity.

The Court observed that when an instrumentality of the State enjoys monopoly power, fairness and reasonableness are constitutional obligations rather than matters of grace.

The Court emphasized that the petitioner had altered its position and invested several hundred crores of rupees based on the solemn assurances embedded within a Long-Term Offtake Agreement (LTOA), which contractually prohibited it from selling its manufacturing output to any third party.

Consequently, the Court allowed the writ petition and issued a writ of mandamus directing the respondent OMCs to consider the petitioner’s representation for enhanced procurement within four weeks, mandating that this consideration must precede any final decision on the newly issued tender.

The Bench of Justice M Nagaprasanna observed, "In the case at hand, the petitioner had a legitimate expectation of continuance of the prevailing policy, such expectation having arisen directly from the agreement itself and the consistent past conduct of the respondents. The impugned tender condition could not have travelled beyond, or contrary to, the terms of the agreement entered into between the parties. It cannot be gainsaid that the State may alter or deviate from an earlier policy or agreement; yet, such deviation must withstand the scrutiny of law and comport with the mandate of Article 14 of the Constitution. Arbitrariness can never masquerade as discretion."

Senior Advocate Prabhuling K. Navadgi appeared for the Petitioner, while Attorney General for India R. Venkataramani, Senior Central Government Counsel M.B. Kanavi, Senior Advocate Sajan Poovayya, Senior Advocate Dhyan Chinnappa, and Senior Advocate Udaya Holla appeared for the Respondents.

Brief Facts

The petitioner was a dedicated ethanol plant engaged in the manufacturing and supply of Denatured Anhydrous Ethanol, established exclusively to supply ethanol to the respondent-Oil Marketing Companies (OMCs). Pursuant to an Expression of Interest (EOI) floated by the respondent-OMCs for entering into Long-Term Offtake Agreements (LTOAs) in ethanol-deficit States, the petitioner emerged as the successful bidder, leading to the issuance of a Letter of Intent and the subsequent execution of an LTOA between the parties.

A fresh tender was later floated by the respondent-OMCs inviting bids for the supply of a massive quantity of ethanol for the upcoming Ethanol Supply Year. The petitioner participated in the pre-bid process, seeking clarity on preferential allocation. However, the respondent-OMCs communicated a severely curtailed allocation to the petitioner, granting less than half of the quantity bid for, resulting in a substantial deficit.

Aggrieved by this short allotment, the petitioner submitted a detailed representation to the respondents, seeking a complete allocation in alignment with the contractual clauses. Upon the failure of the respondents to consider the said representation, the petitioner approached the High Court by way of the subject Writ Petition, seeking a writ in the nature of mandamus.

An interim order passed by the Single Bench was affirmed by the Division Bench in appeal, but both orders were subsequently set aside by the Hon’ble Supreme Court with a direction to decide the matter afresh on its own merits.

Contentions of the Petitioner

It was contended on behalf of the petitioner that the respondents had departed from their long-standing practice. In all previous agreements since the inception of their contractual relationship, the petitioner’s full production capacity was allocated, and the sudden curtailment was entirely arbitrary.

The petitioner argued that it had invested hundreds of crores of rupees exclusively to operate as a dedicated ethanol plant. Since the respondent-OMCs exercised an absolute monopoly over procurement and the petitioner could not sell its product to private entities, the short allotment would force the unit into severe losses and ultimate closure.

The petitioner heavily relied upon the "preferential allocation" and "best endeavour" clauses of the agreement, asserting that the respondents, being "State" under Article 14 of the Constitution of India, could not act arbitrarily even within a contractual matrix, especially when the national demand for ethanol blending had exponentially increased.

Contentions of the Respondents

It was argued that the dispute fell purely within the realm of private contract law and did not warrant public law remedies. It was submitted that a writ petition involving complex, disputed questions of fact regarding national allocation methodologies was not maintainable.

The respondents contended that the allocation framework was designed to prioritize ethanol-deficit States. Since the petitioner’s manufacturing unit was situated in a surplus State, the short allotment was a rational and necessary measure to balance national blending targets and optimize distribution.

It was urged that the terms "preferential allocation" and "best endeavour" did not confer an absolute, legally enforceable right upon the petitioner. These clauses were directory and subject to prevailing government guidelines, market dynamics, and commercial feasibility.

The respondents concluded that the allocation methodology was an outcome of expert economic and administrative policy, which was ordinarily immune to judicial review unless demonstrably malicious or patently perverse.

The impleaded intervenors adopted the submissions of the respondent-OMCs, maintaining that the petitioner could not seek a mandamus to alter a structured national policy to suit its individual commercial interests.

Observations of the Court

The Court observed that the genesis of the present controversy traced back to the ‘Ethanol Blended Petrol Programme’ launched by the Government of India, a policy initiative aimed at achieving energy security, environmental sustainability, and reducing dependency on conventional hydrocarbon energy sources. This clean-energy transition was further strengthened through successive policy documents, including the "Roadmap for Ethanol Blending in India," which set ambitious national targets for blending ethanol with petrol and recommended massive capacity augmentation. To achieve pan-India implementation, the national strategy explicitly contemplated the movement of ethanol from surplus States to deficit States.

It was noted by the Court that the Central Government had actively incentivised private participation by introducing interest subvention schemes, which induced private entrepreneurs, including the petitioner, to establish Dedicated Ethanol Plants by investing colossal sums running into hundreds of crores of rupees.

Under the regulatory architecture of the Expression of Interest (EOI) and the subsequent Long-Term Offtake Agreements (LTOAs), successful bidders were bound by strict exclusivity clauses.

The Court emphasized that these contractual terms created a monopolistic procurement framework under the absolute control of the respondent-Oil Marketing Companies (OMCs), strictly interdicting the petitioner from selling its manufactured ethanol to any third party or private entity.

The Court scrutinized the relevant terms of the LTOA, particularly focusing on the clauses governing the "Annual Offtake Quantity" and "preferential allocation."

It was observed that while a minimum quantity was secured on a "best endeavour" basis to meet location-specific blending requirements, the agreement explicitly permitted dedicated plants to expand to their full design capacity. 

The Court further observed that for over three years, the commercial arrangement between the parties operated smoothly and without disruption. However, a palpable departure from the established contractual framework was introduced through a fresh tender floated by the respondent-OMCs. 

The Court took serious note of the fact that despite the petitioner participating in pre-bid meetings, raising formal objections, and submitting a detailed representation against the drastic curtailment of its allocated supply—which granted less than half of its bid quantity—the respondent-OMCs failed to heed the request and left the representation completely unheeded.

The Court observed that the sudden departure from this settled course of conduct by the respondents through the modified tender conditions—which sought to treat dedicated plants on par with non-dedicated plants for additional quantities—palpably diluted the contractual assurances and violated the principles of fairness.

"When an instrumentality of the State enjoys monopoly power, fairness and reasonableness are not matters of grace but constitutional obligation. The State cannot, by a sudden volte-face, dismantle a long-standing course of conduct or defeat the solemn assurances upon which parties altered their positions and invested colossal sums", the Court said. 

The Court then turned its focus to the pivotal question of whether the twin doctrines of promissory estoppel and legitimate expectation stood attracted to the facts of the present case.

It observed that while it was trite law that neither legitimate expectation nor promissory estoppel could operate against a statutory command, the case at hand did not involve any statutory interdiction. Instead, it concerned the interpretation of obligations flowing from a contract entered into by the State with a contracting party.

The Court noted that it was undisputed that the petitioner had invested several hundred crores of rupees based upon the solemn assurances embedded within the Long-Term Offtake Agreement, rather than on a fanciful illusion. It was observed that after years of adherence to a settled course of conduct, the respondents' sudden attempt to alter the regime through the impugned Expression of Interest constituted a deviation that could not evade constitutional scrutiny.

The Court emphasized that the promise made to the petitioner was not merely an abstract assurance but had been acted upon and operationalized, and the impugned tender condition now sought to dilute the execution of that very promise.

The Court further elucidated that legitimate expectation had, through judicial evolution, attained the status of a facet of Article 14 of the Constitution of India.

It held that whenever a departure from a settled policy resulted in arbitrariness, constitutional courts would not hesitate to interdict such action. Relying upon the established precedents of the Apex Court, the Court held that the actions of a contracting party answering the description of "State" under Article 12 could undoubtedly be subjected to judicial review and struck down if they fell foul of the doctrine of legitimate expectation. 

"If the facts obtaining in the present case are tested upon the anvil of the law declared by the Apex Court in the aforesaid judgments, what unmistakably emerges is that notwithstanding the contractual complexion of the dispute, a writ petition under Article 226 would indeed be maintainable. It is not in dispute that respondents 2 to 4 are “other authorities” within the meaning of Article 12 of the Constitution of India and therefore answer the description of “State”. Once the State enters into a contractual relationship and disputes arise therefrom, judicial review does not stand eclipsed merely because the controversy has its genesis in contract. The writ petition is therefore maintainable as well as entertainable", it observed. 

In the present case, the petitioner possessed a legitimate expectation of the continuance of the prevailing policy, which arose directly from the agreement and the consistent past conduct of the respondents. The Court observed that while the State could alter or deviate from an earlier policy, such deviation must withstand the scrutiny of law and comport with the mandate of Article 14, as arbitrariness could never masquerade as discretion.

It was noted that ethanol was admittedly required, with the impugned notification seeking the procurement of 1,500 crore litres. The Court observed that Dedicated Ethanol Plants, which had hitherto supplied ethanol exclusively to the OMCs and were contractually prohibited from manufacturing anything else or supplying to third parties, could not be relegated to the short end of the stick, as doing so would visit them with grave and manifest prejudice.

Consequently, the Court held that the petitioner was entitled to the issuance of a writ of mandamus directing the respondent OMCs to act in consonance with Clause 6.8 of the agreement, especially since the respondents themselves had previously invoked the said clause to enhance procurement from 1.44 crore litres to 3.92 crore litres.

The Court remarked that there could not be a selective or partial invocation of Clause 6.8 to deny the 9.90 crore litres sought by the petitioner, as countenancing such conduct would reduce the operation of the clause to the whims and fancies of the respondents—an eventuality wholly antithetical to law.

In view of the matter, the Court allowed the writ petition and issued a writ of mandamus directing respondents 2 to 5 to consider the petitioner’s representation for the enhancement of procurement.

The Court ordered that this consideration must bear in mind the observations made in the judgment and must precede the decision on the newly issued tender.

The respondents were directed to pass an appropriate order on the representation within four weeks from the date of receipt of a copy of the order.

Cause Title: M/s VINP Distilleries and Sugars Ovt. Ltd. v. Union of India and Ors. [Neutral Citation: Writ Petition No.109133 of 2025]

Appearances:

Petitioner: Senior Advocate Prabhuling K. Navadgi, Advocate Ajay Kadkol, Advocate Shashank Padiyar, Advocate Sharan K., Advocate Priyanka J. Sreedhara.

Respondents: Attorney General for India R. Venkataramani, Senior Central Government Counsel M.B. Kanavi, Senior Advocate Sajan Poovayya, Senior Advocate Dhyan Chinnappa, Senior Advocate Udaya Holla, Advocate C.V. Angadi, Advocate Amit Dhingra, Advocate Kartikay Aggarwal, Advocate Rohit Mahajan, Advocate Siddharth Agarwal, Advocate Kesang Doma, Advocate Manu S. Kulkarni, Advocate Aakash Sherwal, Advocate Nikita Ganesh, Advocate Naman Jhabakh.

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