Karnataka High Court rules against oil marketing companies in ethanol procurement case

The Karnataka High Court recently directed Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL) to honour an agreement to procure ethanol from a dedicated ethanol plant (DEP) [VINP Distilleries and Sugars Pvt Ltd v. Union of India & Ors]..Justice M Nagaprasanna observed that the petitioner ethanol plant had a legitimate expectation after entering into an exclusive supplying contract with the oil marketing companies (OMCs)."Arbitrariness can never masquerade as discretion. In the light of the aforesaid unequivocal facts, the towering objections raised by the learned Attorney General and the learned senior counsels appearing for the respondents becomes unacceptable. Ethanol is admittedly required. The present notification seeks procurement of 1500 crore litres of ethanol. Dedicated Ethanol Plants, which have hitherto supplied ethanol exclusively to the OMCs and which are contractually prohibited from either manufacturing anything else or supplying ethanol to any third party, cannot now be relegated to the short end of the stick, thereby visiting them with grave and manifest prejudice.".The petitioner had established a DEP and manufactured ethanol to exclusively supply to the OMCs in question. The State, in accordance with the National Policy on Biofuels 2018, had identified certain companies and distilleries for the supply of ethanol and invited bids for the execution of a long term offtake agreement (LTOA). The petitioner's bid was shortlisted and was asked to establish plants that could meet the demand required in the expression of interest (EOI)..The LTOA monopolised the ethanol procurement mechanism and prohibited the plants from supplying ethanol to anyone other than BPCL, HPCL, and IOCL. The petitioner responded to the EOI with an application in 2021 proposing to set up a 300 Kilo Litre Per Day (KLPD) ethanol plant that would be operational for a total 330 days to produce 9.90 crore litres of ethanol per annum. For 3 years, both parties abided by the LTOA..However, in the 2025, tender the OMCs added a clause allowing them to depart from the terms of the LTOA, thus allowing procurement from non-DEPs. The dispute arose when the petitioner DEP was allotted a lesser quantity of 1.44 crore litres of ethanol supply against its bid for 9.26 crore litres in a tender bid.Upon raising a complaint to supply the entire production amount, the OMCs did not respond..The petitioner then approached the High Court ,which granted an interim order in its favour. The OMCs appealed the interim order before a Division Bench of the Karnataka High Court. The appeal was rejected.The Supreme Court then set aside both Karnataka High Court orders and directed the High Court to decide the issue on its own merits..The High Court observed that the conduct of the OMCs was based on a selective or partial invocation of the contract's clauses which would negate the effect of the contract."If such conduct were to be countenanced, operation of the clause would be reduced to the whims and fancies of respondents 2 to 4, an eventuality wholly antithetical to law.".It reasoned that the petitioner established the ethanol plant with the legitimate expectation of selling all its produced ethanol to the OMCs, who in turn also enjoyed a monopoly on the ethanol produced.The Court ruled that the OMCs could not back out from the assurances of the LTOA on the contention that the doctrine of promissory estoppel cannot compel a public authority or State to act inconsistently of its statutory duty, public obligation and public interest."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 further directed the OMCs to enhance their ethanol procurement from 1.44 crore to 3.92 crores..The petitioner was represented by Senior Advocate Prabhuling K Navadgi along with Advocates Ajay Kadkol, Shashank Padiyar, Sharan K and Priyanka J Sreedhara..The Union of India was represented by Attorney General of India R Venkataramani along with Central Government Counsel MB Kanavi and Advocates CV Angadi, Amit Dhingra, Kartikay Aggarwal, Rohit Mahajan and Siddharth Agarwal..BPCL, HPCL and IOCL were represented by Advocate Kesang Doma.Senior Advocate Sajan Poovayya and Advocate Manu S Kulkarni appeared for various companies and distilleries..Senior Advocate Udaya Holla along with Advocate Naman Jhabakh appeared for other companies and distilleries..Senior Advocate Dhyan Chinnappa and Advocates Aakash Sherwal and Nikita Ganesh appeared for the Indian Sugar and Bio-energy Manufacturers Association..[Read Order]