Supreme Court Dismisses IOCL’s Plea in Kerosene Dealership Dispute, Upholds High Court’s Stand on Fair Business Practices

The matter stemmed from a longstanding commercial relationship between IOCL and M/s Shree Niwas Ramgopal, a partnership firm which had been dealing in kerosene distribution since 1990 under a dealership agreement. Initially a proprietorship, the firm was converted into a partnership on November 24, 1989, by its proprietor Kanhaiyalal Sonthalia, who inducted his sons Ramesh and Gobinda as partners. Their shares were 55%, 35%, and 10% respectively.

The agreement between IOCL and the firm allowed three courses of action in the event of a partner's death: continuation with the existing firm, reconstitution with legal heirs, or termination. This flexibility was central to the present litigation.

The controversy erupted following the death of Kanhaiyalal Sonthalia on November 29, 2009. As is often seen in joint family businesses, his demise triggered internal conflicts among the legal heirs over his 55% stake. While some heirs, like Rakesh Sonthalia, claimed exclusive rights based on a purported will, others sought clarity or inclusion as partners. Rakesh, in fact, moved for probate of the will in a civil court.

Meanwhile, the two surviving partners, Ramesh and Gobinda, along with another legal heir, Bijoy Sonthalia, proposed reconstitution of the firm and submitted the necessary documents and fees to IOCL. Despite this, IOCL, citing clause 1.5 of its revised 2008 guidelines, refused to extend the firm’s supply token for kerosene beyond June 14, 2010, asserting that not all legal heirs had consented to or joined the reconstitution.

Faced with impending disruption to their business, the firm and its partners approached the Calcutta High Court under Article 226 of the Constitution, challenging the IOCL’s interpretation of its guidelines and seeking a mandamus for continuity in supply and recognition of the reconstituted partnership.

On July 3, 2012, a Single Judge of the High Court allowed the writ petition, directing IOCL to maintain the supply of kerosene to the firm with the existing partners, subject to any decision in the probate proceedings or civil disputes among heirs. Crucially, the High Court recognized the validity of the partnership deed, which allowed business continuity despite the death of a partner.

This order was challenged by IOCL alone; none of the legal heirs questioned the directions, implying tacit acceptance. The Division Bench of the High Court, in a judgment dated July 4, 2018, reaffirmed the Single Judge’s directions, holding that IOCL, as a public sector entity, was expected to act in the public interest and not adopt a restrictive or rigid interpretation that could stifle long-standing businesses.

The Division Bench cited the earlier decision in Indian Oil Corporation vs. Roy and Company (2018), wherein similar principles of fair dealing and continuity were upheld in cases of dealer disputes.

Before the Supreme Court, IOCL, represented by senior advocate Madhavi Goradia Divan, relied heavily on Clause 1.5 of the 2008 guidelines. It argued that reconstitution required the participation or at least the no-objection of all legal heirs of the deceased partner.

The respondents, represented by senior advocate Yashraj Singh Deora and counsel Pallavi Pratap, countered that the partnership deed and the dealership agreement both permitted continuity. Clause 18 of the 1989 partnership deed explicitly allowed the surviving partners to continue the business and induct any competent heir on mutually agreed terms. There was no requirement for all heirs to join or approve. The dealership agreement, too, recognized IOCL's discretion to continue with the existing firm without requiring reconstitution with every legal heir.

The Supreme Court, speaking through Justice Pankaj Mithal (with Justice Ahsanuddin Amanullah concurring), rejected IOCL’s stance as legally untenable and practically disruptive. The court emphasized that Clause 1.5 of the IOCL’s policy guidelines could not override the binding contractual terms between the parties, especially when the deed permitted continuity and selective induction of heirs.

The judgment clarified the legal position under Section 42 of the Indian Partnership Act, 1932, noting that dissolution on death is not automatic if the partnership comprises more than two partners and the deed provides for continuity — as was the case here. It cited precedents including Wazid Ali Abid Ali vs. CIT Lucknow (1988), Sandersons & Morgans vs. ITO (1973), and Noor Mohammad and Co. vs. CIT (1991) to affirm that in such situations, business can be continued by surviving partners with or without heirs of the deceased.

The court further observed that the IOCL’s interpretation of its own guidelines was flawed. Nowhere did the policy mandate compulsory inclusion of all legal heirs or their no-objections. It merely envisioned reconstitution with available and willing heirs. The IOCL, according to the court, had no authority to judge heir competence or force universal participation.

Crucially, the bench rebuked IOCL for acting in an arbitrary manner contrary to the principles of equity, fairness, and good governance. By withholding supplies despite valid business continuity, it not only disrupted the functioning of a lawfully operating dealer but also jeopardized public interest — given the essential nature of kerosene supply.

In its final analysis, the Supreme Court found no fault with the High Court’s reasoning and refused to interfere. It noted that none of the legal heirs had challenged the High Court’s order, and IOCL’s narrow interpretation lacked merit. The Special Leave Petition was accordingly dismissed.

The court concluded with a cautionary note to IOCL, urging it to avoid hyper-technical or adversarial stands in matters that could be resolved through reasonable interpretation and constructive engagement, especially when dealing with partners of long-standing commercial relationships.

This judgment reiterates the judiciary's commitment to uphold the rights of small businesses against arbitrary conduct of large public corporations, emphasizing the rule of law, fairness in contractual interpretation, and the principle that public sector undertakings must always act in public interest and commercial reasonableness.