2020 INSC 0646
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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.2463 OF 2015
ASSISTANT GENERAL MANAGER,
STATE BANK OF INDIA & ORS. … APPELLANTS
VERSUS
RADHEY SHYAM PANDEY … RESPONDENT
WITH
CIVIL APPEAL NOS.2287­2288 OF 2010
CIVIL APPEAL NOS.5035­5037 OF 2012
CIVIL APPEAL NO.10813 OF 2013
J U D G M E N T
ARUN MISHRA, J.
1. The   question   involved   is   whether   the   respondent­employees   are
entitled   to   pension   on   completion   of   15   years   of   service   as   per   the
State Bank of India Voluntary Retirement Scheme (for short, “the VRS
framed in 2000”).
2. The   matter   has   been   referred   to   larger   Bench   due   to   conflict   of
opinion   between   the   Judges   as   to   the   admissibility   of   pension   under
the VRS.

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3. After   obtaining   approval   of   the   Government   of   India,   the   Indian
Bank   Association   (IBA)   evolved   a   Voluntary   Retirement   Scheme.   The
Central   Board   of   Directors   of   the   State   Bank   of   India   (in   short   ‘the
SBI’)   adopted   and   approved   the   scheme   in   its   meeting   held   on
27.12.2000   for   implementing   the   VRS   for   the   employees   of   the   bank
by retiring  them  on completion of 15 years of service with the benefit
provided   in   the   scheme.   The   scheme   had   been   drawn   up,   keeping   in
view   the   guidelines   issued   by   the   IBA.     “Memorandum”   dated
26.12.2000   was   submitted   by  the   Deputy   Managing   Director   and  the
Corporate Development Officer for according approval to the proposals
contained   in   the   Memorandum   as   also   for   adopting   the   scheme   as
Annexure ‘B’ to the Memorandum.  
4. The basis of Memorandum dated 26.12.2000, was the advice by
IBA vide letter dated 31.8.2000 in which it was pointed out that they
deliberated   with   the   Government   of   India,   Ministry   of   Finance
(Banking   Division),   at   its   meeting   with   the   Finance   Minister,   with
Chief   Executives   of   public   sector   banks   on   13.6.2000.   The   human
resource   and   manpower   planning   in   public   sector   banks   were
reviewed,   and   a   Committee   was   constituted   to   examine   the   issues
concerned   to   public   sector   banks   and   to   suggest   suitable   remedial
measures.   The   Committee   considered   the   economic   reforms   set   in

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motion   in   the   year   1990,   the   high   establishment   cost   and   low
productivity in public sector banks. It was felt that the banks convert
their   human   resource   into   assets   compatible   with   the   business
strategies through a variety of measures. The data available indicated
that 43% of the employees in public sector banks were in the 46 + age
group, and only 12% were in the 25­35 age group. It was felt that this
pattern   has   severe   implications   for   the   banks   regarding   mobility,
training,   development   of   skills,   and   succession   plans   for   higher­level
positions.   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
vide letter dated 13.7.2000 sought no objection from the Government
for   circulating   the   schemes   to   the   banks   for   consideration   and
adoption   by   their   Boards.   The   Government   conveyed   on   29.8.2000
that  it  did   not  have  any  objection   for   adopting  and   implementing   the
scheme by the respective Board of Directors. It advised that the banks
may   adopt   these   schemes   for   sabbatical   leave   and   voluntary
retirement based on the essential features of the schemes given in the
annexure   to   the   letter.   The   scheme   provided   eligibility   for   all
permanent employees with 15 years of service. It provided for amount
of   ex   gratia   and   other   benefits   accepted   by   the   Government   of   India
which  were  to  be provided  (i)   gratuity   as  per  the  Gratuity  Act/service

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gratuity, as the case may be; (ii) pension (including commuted value of
pension)/bank’s   contribution   towards   provident   fund;   and   (iii)   leave
encashment as per rules.
5. After the Central Board of SBI approved the proposals contained
in   the   memorandum   on   27.12.2000,   a   circular   was   issued   on
29.12.2000 in which it was mentioned that the IBA advised that as the
Committee   constituted   by   the   Finance   Ministry   recommended
introduction   of   a   VRS   in   order   to   rationalise   the   manpower,   the
Government of  India  has  no  objection  for  adopting   and  implementing
the   VRS.   It   was   clearly   stated   in   the   Circular   dated   29.12.2000   that
the   Central   Board   of   Directors   accorded   approval   for   adopting   and
implementing   the   SBI   voluntary   Retirement   Scheme   drawn   up,
“keeping in view the guidelines issued by the IBA." Copy of the scheme
was placed as Annexure B. The scheme was open from 15.1.2001 till
31.1.2001. Specimen applications and other related forms  inter alia  for
pension   were   also   circulated,   which   formed   part   of   the   circular.   The
circular   also   made   it   clear   that   gratuity,   provident   fund   contribution
as   per   the   Provident   Fund   Rules,   pension   in   terms   of   the   SBI
Employees’   Pension   Fund   Rules,   leave   encashment   to   be   provided
beside the amount of  ex gratia .

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6. The heart and soul of the scheme were that benefits to be given
on   completion   of   15   years   of   service.   The   eligibility   for   benefits   was
provided   to   those   who   had   completed   15   years   of   service   as   on
31.12.2000.
7. The  SBI   submitted  that  it reserved  a  right under  the  scheme  to
modify, amend or cancel it or any of the clauses and to give effect to it
from   any   date   deemed   fit.   The   Deputy   Managing   Director­cum­CDO
was the competent authority for the purpose. As specific queries were
raised, a clarification was issued by the Deputy Managing Director on
15.1.2001,   in   which   about   a   query   whether   an   employee   on
completing   15  years  of  pensionable  service  as  on  the  relevant  date  of
retirement, would be entitled to pensionary benefits, in response, para
6(c)   of   the   scheme   was   reiterated,   and   it   was   also   mentioned   that   as
per   the   existing   rules,   employees   who   had   not   completed   20   years   of
pensionable service, were not eligible for pension.
8. The clarification issued by the Deputy General Manager was not
in the form of modification or amendment of the scheme. The Deputy
General   Manager   in   clarification   quoted   the   provisions   and   simply
stated the position of a rule that the pensionable service was 20 years.
The   communication   was   clarificatory   and   did   not   have   the   effect   of
modifying the SBI VRS scheme as approved and adopted.

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9. (a)   Radhey Shyam Pandey  questioned the refusal of the bank to pay
pension,   vide   communication   dated   26.9.2006   in   the   writ  application
filed   in   the   High   Court   at   Allahabad.   He   retired   on   31.3.2001   under
the   SBI   VRS.   On   18.3.2001,   the   bank   accepted   the   offer   of   the
employee to retire him voluntarily. He was aged 59 years three months
and   had   nine   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   on   completion   of   60   years,   and   would   have   put  in   a
little more than 20 years of pensionable service.  
(b) The High Court held that the case of the employee fell under the
Second Part of Rule 22(i)(a). He was in service of the bank on and after
11.11.1993   and   completed   ten   years   of   pensionable   service,   and
further, he attained the age of 58 years before the date he retired.  The
High   Court   opined   that   the   clarification   was   not   part   of   the   VRS
scheme.   The   employee   retired   outside   rule   as   per   the   contractual
retirement   scheme.   The   contract   had   to   prevail.   In   Pension   Fund
Rules, Clause (a)  in Rule 22(i) was inserted to give the employees the
benefit   of   pension   after   ten   years   of   pensionable   service   even   if   they
had joined late. The High Court found that the matter was covered by
Rule 22(i)(a).  The admissible benefit cannot be denied. If a contracting

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party is entitled to take benefit of a permissible clause, then it cannot
be denied to him. 
(c) In  the Chairman, State Bank of India & Ors. v. Mihir Kumar Nandi
&   Anr .   (C.A.   Nos.   5035­5037/2012),   a   Division   Bench   of   the   High
Court of Calcutta dismissing the intra­court appeal, affirmed the order
of   the   learned   Single   Judge   and   directed   to   make   the   payment   of
pension. The employee was appointed on 21.5.1988. He opted for VRS
on   15.1.2001.   The   acceptance   was   conveyed   on   17.3.2001   by   which
he was informed that he would be relieved of his duties on 31.3.2001.
Vide letter dated 2.8.2001, the employee was granted a pension at the
rate   of   Rs.1024   per   month.   However,   vide   communication   dated
30.8.2001,   the   pension   payment   order,   together   with   payment   of
commuted value, was stopped in view of the amendment of Rule 22 of
the   Pension   Fund   Rules.   Though   the   amendments   in   Pension   Fund
Rules   were   made   effective   with   effect   from   31.3.2001,   and   the   age   of
retirement   had   been   raised   from   58   years   to   60   years,   w.e.f.
22.5.1998,   this   had   necessitated   increase   in   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   pensionable   service   on   or   after
22.5.1998 are eligible for pension. 

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(d) The   Central   Board   of   the   SBI   in   its   meeting   held   on   30.1.2001
accorded   approval   to   the   amendment   in   Rules   8   and   22(i)(a)   of   the
Rules   as   set   out   in   Annexure   1.   The   Trustees   of   the   SBI   Employees’
Pension   Fund   in   their   meeting   on   30.10.2001   adopted   the   amended
rules.   Consequently,   a   Circular   was   issued   on   8.11.2001.   The
amendment was given effect from 31.3.2001, the date on which it was
notified,   though   it   was   adopted   by   the   Trustees   of   the   SBI   Trust
Pension Fund in October 2001. 
(e) A   Division   Bench   of   the   High   Court   held   respondent­employee,
as   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 were
published,   which   took   away   the   existing   right   to   get   the   pension.   In
VRS Scheme, it  was mentioned that the pension would be payable in
accordance   with   the   rules   as   on   31.3.2001.   The   employee   had   no
means of knowing about the future amendment of the Pension Rules,
which would be detrimental to his interest. If he had known  the fact,
then he would not have opted for the scheme. The silence maintained
by the employer in such a situation amounted to  a fraud  on its part.
The   High   Court   relied   upon   section   17   of   the   Contract   Act   and
Illustration   (d)   to   section   19   of   the   Contract   Act.   The   High   Court
further held that it was the duty of the employer to disclose that there
would   be   a   future   amendment   on   the   last   date   of   their   service   by

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which   their   right   to   pension   would   be   taken   away.   The   same   cannot
but be said to be unfair and arbitrary. Thus, the High Court held that
action   is   violative   of   Article   14   of   the   Constitution   of   India.   The
employee is entitled to the relief of pension along with interest.
10. Ramesh Prasad Nigam  (supra) had joined the services in 1984 in
the clerical cadre and was confirmed on 2.3.1985. He had applied for
VRS,   having   completed   15   years   of   service   and   57   years   of   age.   The
clarification was internal circulation. It was  not within the knowledge
of employees; as such, he was entitled to the pension.
11. (a)   In C.A. Nos.2287­88/2010,   M.P. Hallan   joined the services of
the   bank   on   18.5.1981   as   a   clerk.   The   acceptance   under   VRS   was
communicated   on   17.3.2001.   On   27.3.2001,   he   applied   to   withdraw
his request made under  VRS as retirement was  w.e.f. 31.3.2001. The
Bank   declined   application   on   18.4.2001   on   the   ground   that   the   last
date   of   withdrawal   of   the   application   was   15.2.2001.   The   employee
claimed   pension   under   Pension   Fund   Rules   in   terms   of   SBI
Employees’   Pension   Fund   Rules   (hereinafter   referred   to   as   ‘Pension
Rules’). By writing a letter on 12.4.2001, the claim of the employee for
withdrawal of application for voluntary retirement, pension, and leave
encashment was again declined on 4.7.2001. Thereafter, he filed a writ
petition in the High Court of Punjab & Haryana.

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(b) The   High   Court   rejected   the   claim   concerning   the   withdrawal
from   VRS.   As   the   last   date   for   withdrawal   was   over,   and   acceptance
had been communicated, however, considering Rule 22 of the Pension
Rules,   the   High   Court   opined   that   as   the   employee   completed   more
than 19 years and ten months of service on 31.3.2001, therefore, the
first part of clause one of Rule 22 is not applicable. Further, the third
part   of   clause   (a)   is   not   applicable   as   he   has   completed   ten   years   of
service but not attained the age of 60 years. The case of the employee
was   covered   under   the   second   part   of   clause   (a)   of   Rule   22,   which
enabled the member to  get a pension if an  employee in the service of
the bank on or after 1.11.1993, and completed ten years pensionable
service   and   attained   58   years   age.   The   employee   applied   in   terms   of
the   Pension   Rules   prevailing   in   January   2001.   Alternatively,   if   an
employee   was   in   service   of   the   bank   on   or   after   1.11.1993,   having
completed ten years of pensionable service and on attaining the age of
58   years,   shall   be   entitled   to   a   pension.   Thus,   he   fulfilled   the
requirement   of   second   part   of   clause   (a)   of   Rule   22   as   he   was   in
service   of   the   bank   on   1.11.1993   and   completed   ten   years   of
pensionable   service,   and   the   age   of   58   years,   therefore,   in   terms   of
Rule 22, he was entitled to pension as well as leave encashment dues
along with interest at the rate of 9 percent per annum. 

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12. On   behalf   of   the   bank,   it   was   submitted   that   VRS   2000
stipulated that the pension in terms of SBI Pension Fund Rules on the
relevant   date,   i.e.,   31.3.2001,   was   to   be   provided.   In   other   words,   in
case the employee was entitled to a pension in terms of Pension Rules
and not otherwise. A provision was added in Rule 22(1) of the Pension
Rules in the year 1986, accordingly, the pension was to be granted in
all cases relating to voluntary retirement on completion of 20 years of
service. The employees opting for the SBI­VRS would be governed only
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 under
clause 22(i)(c) shall be entitled to a proportionate pension, which is on
completion of 20 years of pensionable service. Eligibility  clause 3 has
nothing   to   do   with   the   admissibility   of   the   pension.   It   was   further
submitted that the employees who completed ten years of pensionable
service   and   were   60   years   of   age   were   entitled   to   pension;   while
employees   under   the   VRS   on   completion   of   15   years   would   not   get
pension and for that 20 years' service was necessary, the submission
of   employees   that   it   would   be   discriminatory   is   based   on   incorrect
premise.   There   is   no   challenge   to   the   SBI   Pension   Rules   or   SBI­VRS.
The   bank   provided   the   pensionable   service   period   of   10   years   on
attaining the age of 60 years in terms of reservation policy. The bank
appoints late entrants like ex­servicemen who, after serving in Armed

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Forces, join the bank and are left only with about ten years of service
before   they   attain   the   age   of   superannuation.   It   is   to   grant   benefit  to
such   a   particular   category   of   employees   that   a   period   of   10   years   on
attaining the age of superannuation of 60 years was provided in Rule
22(i)(a).
13. The   appellants   further   submitted   that   20   years'   period   is
provided   in   case   of   voluntary   retirement   to   ensure   that   an   employee
on whom the bank has spent a considerable amount during training,
works   for   a   substantial   period   before   he   seeks   retirement.   It   is   a
uniform   policy   followed   by   the   bank.   Regulation   28   was   amended   in
2002 providing for 15 years of service. It applies to the employees who
are   governed   by   the   Bank   Employees'   Pension   Regulations,   1995.
These   regulations   do   not   apply   to   SBI   employees   as   the   SBI   Pension
Rules   govern   them.   SBI   employees   are   entitled   to   Provident   Fund,
gratuity and pension in terms of the Rules on completion of 20 years
of   service.   Thus,   there   cannot   be   any   comparison   of   SBI   employees
with the employees of other nationalised banks. The clarification dated
11.01.2000   has   also   been   relied   on   by   the   bank.   Now   more   than   19
years   have   passed   and   to   grant   a   pension   to   all   those   who   have
retired,   w.e.f.   1.4.2001   would   cast   a   huge   financial   liability   on   the
bank.

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14. It   was   submitted   on   behalf   of   the   employees   that   the   decision
rendered by the High Court is appropriate. No case for interference is
made   out   in   appeals.   The   very   essence   of   the   VRS   was   the
admissibility of pension on completion of 15 years of service and other
benefits.   Once   the   scheme   was   adopted   and   approved   by   the   Central
Board   of   SBI,   the   clarification   could   not   have   been   made   to   the
detriment   of   employees.   The   clarification   did   not   have   effect   of   the
amendment,   modification,   or   cancellation   of   the   VRS   scheme   as
approved   and   adopted   by   Board.   The   amendment   in   the   Pension
Regulations of 1995 was carried out by other public sector banks with
retrospective   effect   in   2002,   though   the   scheme   was   floated   and
implemented   in   the   year   2000­2001.   However,   the   benefits   were
extended on the strength of the VRS scheme even before amending the
Regulations of 1995. The SBI adopted the Scheme  in  toto  and Pension
Rule   22   providing   eligibility   of   20   years   applies   only   to   those   cases
where employees seek retirement in the ordinary course of completion
of 10 years or 20 years, as the case may be. The VRS was taken in the
specific   scheme   providing   eligibility   and   benefits   on   completion   of   15
years of service, and that constituted a concluded contract. It was not
open to the bank to alter the terms. In case the bank's submission is
accepted, it would lead to a situation that employees who have already
reached   the   age   of   superannuation,   would   have   been   entitled   to   take

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VRS. The bank has misled the employees, and the action could not be
said to be fair. Once an offer was accepted and after that to amend the
rules or not to amend the rules till 31.3.2000 depended on exercise of
power by SBI which may  have the effect to  deprive the pension when
the   option   was   not  available   even   to   withdraw   the   offer   as   it  was   the
last   day   of   the   employment.   Rule   22   was   amended,   that   too   with
retrospective   effect.   Thus,   the   employees   who   joined   service   after
retirement from other services, have completed the age of 58 years and
were in employment as on 1.11.1993 were entitled to a pension. They
have   also   been   deprived   of   the   benefit   of   pension,   which   would   have
been otherwise available to them. In case pension was not to be paid,
it  was  not a  profitable  bargain   for   them   to  forego  pension   only  for   ex
gratia   benefit.   It   was   incumbent   upon   the   SBI   to   amend   the   Rule,   in
case   it   was   necessary   to   do   so.   Otherwise,   also,   the   meaning   of   the
expression   “pension”   to   be   paid   as   per   rules   was   that   proportionate
pension   to   be   awarded   to   the   employees   with   15   years’   service   who
were   eligible   for   benefits   granted   as   specified   in   the   circular   and   the
VRS   scheme.   The   clarification   issued   on   11.1.2000   only   pointed   out
the provisions of the VRS scheme as well as the existing position of the
rule.   It   could   not   have   effect   to   take   away   the   benefit   in   any   manner
which became available to the employees of obtaining  the pension on
completion of 15 years of permanent pensionable service. On the one

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hand,   employees   who   served   for   ten   years   and   attained   the   age   of
superannuation were entitled to pension and to deprive the same to a
permanent employee who rendered the service for 15 years, would be
per   se   discriminatory,   unfair   and   arbitrary.   Once   the   scheme   was
floated   and   approved,   the   bank   being   State   within   the   purview   of
Article 12 of the Constitution of India, it would not be permissible for
it   to   discriminate   and   act   unfairly.   The   VRS   constituted   an
independent   contract   and   was   binding   upon   the   bank.   The   benefits
could not have been taken away from eligible employees who accepted
VRS, which was implemented by the bank for its benefit to induct new
skills   as   well   as   to   rationalise   the   workforce.   Thus,   appeals   being
bereft of merit, deserve dismissal.
15. The   main   question   is   whether,   under   the   scheme   as   approved
and adopted by the Central Board of SBI, the pension is admissible to
the   employees   on   completion   of   15   years   of   permanent   service.
Connected question is whether employees have been denied benefit of
pension unfairly and arbitrarily contrary to the essential terms of the
scheme.
16. Firstly,   it   is   necessary   to   consider   the   nature   of   the   package,
which was accepted in the resolution by the Central Board of Directors
of SBI in its meeting dated 27.12.2000. As already mentioned, exercise

16
was done in order to rationalise the workforce as it was felt that banks
were   overstaffed.   The   IBA   advised   the   SBI   regarding   the   issues
confronting the public sector banks. In the memorandum submitted to
the   Central   Board   of   Directors   of   SBI,   the   following   facts   were
mentioned   as   to   the   adoption   of   Scheme   in   right   earnest   and
requirement of manpower planning:
“The   data   available   with   IBA   indicates   that   43%   of   employees
in Public Sector Banks are in the 46+ age group, and only 12%
are   in   the   25­35   age   group.   This   pattern   has   serious
implications for the Banks with reference to mobility, training,
development   of   skills,   and   succession   plans   for   higher­level
positions.   This,   coupled   with   excess   manpower   wherever   it
exists,   would   come   in   the   way   of   induction   of   new   skills   and
proper career progression.
The   Committee   has   recommended   the   introduction   of   a
Voluntary   Retirement   Scheme   that   would   assist   the   Banks   in
their   effort   to   optimise   their   human   resources   and   achieve   a
balanced   age   and   skills   profile   in   keeping  with   their  business
strategies.   IBA   has   advised   that   the   Government   of   India   has
conveyed   that   they   have   no   objection   to   the   banks'   placing
before   their   respective   Boards   of   Director's   proposals   for
adopting and implementing the Voluntary Retirement Scheme.
It   has   been   advised   that   Banks   may   adopt   the   scheme   after
obtaining   their   Boards'   approval   and   implement   it   in   right
earnest. ” (emphasis supplied)
"a)   The   high   establishment   costs   of   the   Bank   vis­à­vis   the
foreign   banks   and   new   private   sector   banks   have   been   a
matter   of   concern.   The   percentage   of   staff   expenses   to   total
expenses   in  the  Bank   is   21.85   against   the   percentage   of  7.66
and   3.04   for   foreign   banks   and   new   private   sector   banks,
respectively.   Even   if   we   compare   it   with   other   Public   Sector
Banks, our ratio is adverse.
d) With the computerisation of accounting and other work at a
large   number   of   branches,   manpower,   which   was   needed   for
balancing of books, is now rendered surplus. This indicates an
imperative   need   to   rationalize   the   manpower   at   these
branches.   While   we   have   already   initiated   steps   for   the
productive   redeployment   of   staff   at   these   branches   through
shift   banking   and   seven­day   banking,   there   still   exists   scope
for   improvement   in   this   area.   Most   of   these   branches   are
situated   in   metropolitan   and   urban   centers.   Incidentally,   the

17
experience   of   other   banks   in   respect   of   voluntary   retirement
schemes shows that a maximum number of applications have
been received from these centers.
f) As against the average of 43% of employees in Public Sector
Banks in the 46+ age group, we have 47% of the employees in
this   age   group.   Of   this,   1/5 th
  are   in   the   age   group   of   56   and
above. To put it simply, 21,824 employees will reach the age of
superannuation and retire by March 2005.
In   the   light   of   the   above­mentioned   factors,   it   will   be   seen
that the manpower of the Bank will undergo major changes in
the   ensuing   years   in   number   and   deployment.   Further,
considering  the  variety of  business   the   Bank   undertakes,  and
its   special   role   in   the   banking   sector,   over­emphasis   on
quantitative   parameters   would   be   inappropriate.   An   approach
paper on Manpower Planning is placed at Annexure­‘A’.
Considering   the   various   aspects   of   Manpower   Planning,   we
are   of   the   view   that   the   Voluntary  Retirement   Scheme   should
be employed as a moderate tool to right­size the manpower in
State Bank of India."
In   the   light   of   aforesaid,   it   is   clear   that   the   VRS   scheme   was
devised as a tool to reduce overstaffing.  The memorandum submitted
to the Central Board contained the following significant aspects:
“ Keeping   in   view   the   above,   the   IBA   guidelines   and   the
feedback   received   from   other   Banks,   the   draft   ‘SBI   Voluntary
Retirement   Scheme   (SBIVRS)’   is   prepared   and   placed   for
approval at Annexure­‘B.'
It is proposed to introduce SBIVRS for employees who have
as   on   31­12­2000,   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 any other category as ineligible. We propose to exclude
the   Watch   and   Ward   staff   as   these   positions   cannot   be
reduced.   We   also   propose   to   exclude   highly   skilled   and
qualified staff from the Scheme. 
SBIVRS   will   be   voluntary   in   nature.   The   decision   to   seek
retirement   under   the   Scheme   rests   with   the   employee   only.
The   management   will   retain   the   discretion   as   to   whether   to
accept   or   not   the   request   for   voluntary   retirement   under   the
Scheme.   We   have   to   ensure   that   while,   on   the   one   hand,   our
Bank   benefits   by   the   rightsizing   of   the   staff   strength,   on   the

18
other, any sudden exodus of a very large number of staff does
not destabilise the normal operations of the Bank. Considering
the   attractive   features   of   the   Scheme,   in   terms   of   ex­gratia
payment,   etc.,   a   large   number   of   applications   are   expected.
However,   the   Bank   will   have   to   control   the   outflow   according
to   its   requirements.   Towards   this   end,   it   will   be   necessary   to
retain the discretion with the management of the Bank to limit
the  number  of employees  allowed  to retire  in each  category of
staff   to   be   covered   under   SBIVRS,   and   we   propose   to   retain
such discretion." 
                                                               (emphasis supplied)
It   was   proposed   to   introduce   a   VRS   for   employees   who   on
31.12.2000,   completed   15   years   of   service   as   approved   by   the
Government of India and conveyed by IBA. So, it assumes significance
that   what   was   approved   and   conveyed,   in   terms   of   the   IBA   scheme,
the   Banks’   Boards   were   permitted   to   specify   any   other   category   as
ineligible. The SBI considering its requirement proposed to exclude the
Watch and Ward staff as these positions could not be reduced. It was
also proposed to exclude the highly skilled and qualified staff from the
scheme.
Funds outlay was also proposed in the memorandum submitted
to the Central Board as under:
“FUNDS OUTLAY
As per the estimate received from Bank's actuary, an outlay of
approximately   Rs.   2100   crores   would   be   required   for   the
implementation   of   SBIVRS   if   10%   of   the   employees   opt   for
retirement. The break­up being as under:
Ex­gratia Rs. 1300.00 crores
Leave encashment Rs. 180.00 crores
Additional Provision for Gratuity Rs. 140.00 crores
Additional Provision for Pension                               Rs. 480.00 crores
(These   estimates   may   undergo   a   change   on   receipt   of

19
clarification from Government of India as to the components of
‘Pay’ for the purpose of Ex­gratia)”
A   provision   was   made   for   the   pension.   The   bank   reserved   the
right   to   modify,   amend   or   cancel   any   or   all   the   clauses.   The   Deputy
Managing   Director   and   CDO   would   be   the   competent   authority.
Following is the relevant clause regarding modification of the scheme:
“MODIFICATION OF THE SCHEME
Bank reserves the right  to modify, amend  or cancel  any or all
the   clauses   of   the   Scheme   and   to   give   effect   thereto   from   any
date   it   may   deem   fit.   The   Dy.   Managing   Director   and   CDO
would be the Competent Authority for the purpose.”
The   effective   date   of   retirement   was   31.3.2001.   The   relevant
clause is extracted hereunder: 
“EFFECTIVE DATE OF RETIREMENT
While the SBIVRS will be open to employees from 15 th
 January
2001 to 31 st
 January 2001 (both days included), the retirement
under   SBIVRS   is   proposed   to   be   given   effect   from   31 st
  March
2001." 
17. The   letter   dated   31.8.2000   annexed   to   memorandum   submitted
to the Central Board of the SBI is also of utmost significance in order
to  understand what was  accepted  by  the Central  Board.  The  relevant
portion of the letter dated 31.8.2000 of IBA is extracted hereunder:
“Attention   is   invited   to   letter   DO   No.   11/1/99­IR   dated
22.05.2000,   addressed   to   the   Chief   Executive   of   public   sector
banks   by   the   Government   of   India,   Ministry   of   Finance
(Banking  Division),  wherein  banks  have  been advised  to  carry
out detailed manpower planning in order to adopt measures to
have   optimum   human   resource   at   various   levels   in   keeping
with the business strategies and requirements of each bank. 
At the meeting the Finance Minister had with Chief Executives
of public sector banks on 13 th
 June 2000, the human resource
and   man­power   planning   in   public   sector   banks   were
reviewed,   and   a   Committee   was   constituted   to   examine   the
issues   confronting   public   sector   banks   in   that   regard   and

20
suggest suitable remedial measures." 
“In   order   to   remedy   this   situation   with   the   urgency   that
circumstances   demand,   the   Committee   has   placed   before   the
Government   two   schemes,   viz.,   Sabbatical   Leave   and   a
Voluntary   Retirement   Scheme   that   would   assist   the   banks   in
their   effort   to   optimise   their   human   resource   and   achieve   a
balanced age  and  skills’  profile in keeping with their business
strategies. Salient features of the two schemes are given in the
Annexure.
IBA,   vide   its   letter   dated   13 th
  July   2000,   has   sought   no
objection   from  the   Government   for  circulating   the   schemes   to
the Banks for consideration and adoption by their Boards. The
Government   have   conveyed   to   us   that   they   have   no   objection
to   the   banks'   placing   the   two   schemes   before   their   respective
Board   of   Directors   for   adopting   and   implementing   the   above
schemes.   It has been advised that the Banks may adopt these
schemes for sabbatical and voluntary retirement based on the
essential features  of the schemes  given in the Annexure, after
obtaining their  Board’s  approval 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   under
Section   10(10C),   prior   approval   from   the   Chief   Commissioner
or  Director  General   of   Income­tax,   as   the   case   may  be,   is   not
required for VRS.
3. Income­tax shall be deducted at source in respect of ex­gratia
exceeding   Rs.5.00   lakhs   or   such   other   ceiling   as   may   be
prescribed under the Income­tax Act. 
4. Only completed years of service will be reckoned for arriving at
the   minimum   eligible   service.   Subject   to   this,   fraction   of
service   of   six   months   and   above   will   be   reckoned   as   one   year
for the purpose of calculating the ex­gratia.
5. While   exercising   discretion   to   decline   applications   for   VRS   or
to   make   exceptions   in   the   case   of   employees   categorised   as
ineligible   for   VRS,   the   decision   should   not   be   discriminatory
among   employees   who   are   similarly   placed   and   the   reasons
therefor should be recorded. 
6. The   competent   authority   for   accepting   VRS   for   the   various
categories/class   of   employee   should   be   clearly   laid   down   by
the Board of Directors. 

21
7. Banks   should   ensure   compliance   with   requirements   under
labour legislations before giving effect to the Scheme.”
18. IBA’s   letter   dated   31.8.2000   makes   clear   the   salient   features   of
the VRS scheme that all permanent employees with 15 years of service
were   eligible   to   retire.   Ineligible   persons   have   also   been   specified.   In
unqualified   terms,   it   was   mentioned   in   the   annexures   that   such
employees   would   be   entitled   to   the   amount   of   ex   gratia   of   60   days’
salary   for   each   completed   year   of   service   or   salary   for   the   number   of
months   service   is   left,   whichever   is   less.   Other   benefits   admissible
were   gratuity,   pension   including   the   commuted   value   of   pension,
bank's contribution towards provident fund, and leave encashment as
per   rules.   Thus,   scheme   was   to   grant   pension   to   all   such   employees
who   opted   for   VRS   on   completion   of   15   years   of   service   and   other
benefits   as   specified   in   the   scheme.     The   Government   of   India,
Ministry   of   Finance,   Department   of   Economic   Affairs,   (Banking
Division),   that   it   communicated   approval   vide   letter   dated   29.8.2000
to IBA, it was sent to the SBI also, the same is extracted hereunder:
“F. No. 11/1/99­IR (Vol.II)
Government of India
Ministry of Finance
Department of Economic Affairs
(Banking Division)
New Delhi, dated the 29th August 2000
To 
The Chairman
Indian Banks‘ Association 
MUMBAI

22
Sub:­   Human   Resource   Management   and  Manpower  Planning
in Public Sector Banks­Introduction of a Voluntary Retirement
Scheme/Scheme for Sabbatical Leave. 
Sir,
 I am directed to refer to IBA's letter No. PD/ACAP/GOVT/521
dated 13th  July 2000 sending  therewith  a copy of  the interim
report   of   the   Committee   on   Human   Resource   Management   in
Public   Sector  Banks   and   requesting  for  no   objection   from   the
Government   for   circulating   to   banks   Voluntary   Retirement
Scheme   and   Scheme   for   granting   Sabbatical   Leave   for
consideration   and   adoption   by   their   Boards,   and   to   say   that
Government   has   no   objection   to   the   proposals   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
banks may please be sent to Banking Division for record. 
Yours faithfully
Sd/­ (U.P. SINGH)
DIRECTOR (IR) ”
19. The   agenda   submitted   on   27.12.2000   for   consideration   of   the
Central Board of SBI along with resolution are extracted as under:
“AGENDA NO.3
Man­   Power   Planning   and   SBI   Voluntary   Retirement   Scheme
(SBI VRS)
Submitted   Memorandum   dated   the   26th   December   2000   by
the   Deputy   Managing   Director   &   Corporate   Development
Officer,   recommending   that   for   the   reasons   stated   therein,
approval   be   accorded   for   the   proposals   contained   in   the
Memorandum   as   also   for   adopting   the   stated   approach   to
manpower   planning   and   introduction   SBIVRS   in   terms   of   the
provisions   contained   in   the   Scheme   at   Annexure   ‘B‘   of   the
Memorandum.
Copies   of   the   Memorandum   were   placed   before   the   Directors
present at the Meeting. 
‘‘APPROVED ”
(SEAL)

23
20. Annexure   ‘B’   to   the   memorandum   contained   the   VRS.   The   VRS
was   prepared   in   view   of   the   guidelines   of   the   IBA.   The   amount   of   ex
gratia  and other benefits specified in the scheme under clauses 5/ 6 of
the scheme are extracted hereunder:
“5.  Amount of Ex­gratia:
The staff members whose request for retirement under SBIVRS
has   been   accepted   by   Competent   Authority   will   be   paid   an
amount   of   ex­gratia   of   60   days‘   salary   (pay   plus   stagnation
increments   plus   dearness   allowance)   for   each   completed   year
of   service   (for   this   purpose   fraction   of   service   of   six   months
and above will be taken as one year and accordingly service of
less   than   six   months   will   not   be   counted)   or   salary   for   the
number of months service is left, whichever is less. Fraction of
a month, if any, will be ignored.
‘Relevant  Date‘  means  the  date on which  the employee  ceases
to   be   in   service   of   the   Bank   as   a   consequence   of   the
acceptance of the Bank as a consequence of the acceptance of
the   request   for   voluntary   retirement   under   the   Scheme.   For
the   purpose   of   calculation   of   ex­gratia,   60   days‘   salary
mentioned   in   the   Scheme   is   to   be   taken   as   equivalent   to   2
months‘ salary (with reference to salary for the month in which
employee is relieved from service on Voluntary Retirement.
Income Tax shall be deducted at source in respect of ex­gratia
exceeding   Rs.   5.00   lakhs   or   such   other   ceiling   as   may   be
prescribed under the Income Tax Act on the relevant date.“
The benefits were as under:
“6.  Other benefits
(a) Gratuity   as   payable   under   the   extant   instructions   on   the
relevant date.
(b) Provident   Fund   contribution   as   per   State   Bank   of   India
Employees‘ Provident Fund Rules as on relevant date. 
(c) Pension   in   terms   of   State   Bank   of   India   Employees‘   Pension
Fund Rules on the relevant date (including commuted value of
pension).
(d) Encashment of balance of Privilege Leave, as applicable, on the
relevant date.

24
(e) Respective   facilities   extended   to   officers/others   such   as
retention   of   accommodation,   telephone,   car,   continuation   of
housing   loan,   etc.   will   be   extended   to   officers.   Others   retiring
under  SBIVRS   as   per   present   dispensations,   at   the   discretion
of Competent Authority. However, in such cases of retention of
physical facilities, 50% of the amount of ex­gratia payable will
be released only after the employee surrenders the facility. No
interest, however, will be paid for the amount so withheld. All
other outstanding loans/advances will have to be repaid before
date of retirement under SBIVRS, failing which the amount of
ex­gratia   and   other   terminal   benefits   payable   to   the   employee
will be appropriated towards the outstanding loans/advances;
and the balance only will be payable to the employee. ”
21. Most significantly, the scheme of the IBA, accepted by the Board
on 27.12.2000, was for providing pension on completion of 15 years of
service. The pension specified in clause 6 of scheme was to be worked
out in terms of the Pension Fund Rules including the commuted value
of   the   pension.   It   was   not   mentioned   in   the   VRS   adopted   by   the   SBI
that the person on completion of 15 years would not be entitled to the
benefit of pension. On the other hand, proposal of IBA, as approved by
the Government of India, was accepted  in toto  by SBI .  When gauged in
terms   of   the   proposals   of   the   IBA,   the   essential   feature   was   that   an
employee   was   entitled   to   get   pension   on   completion   of   15   years   of
service. The meaning of the expression "pension” in terms of the rules
would be proportionate pension on completion of 15 years of service as
per the terms of calculation provided in Rule 23 of the Pension Rules.
VRS   is   an   independent  contract   and   the   background   in   which   it   was
floated, pension on completion of 15 years of service was an essential

25
part of the scheme of VRS 2000, as approved by the Government and
floated   by   the   IBA   and   adopted   by   all   the   Banks,   and   Pension   Rules
were to be amended accordingly.
22. The   Government   of   India   suggested   to   the   IBA   to   amend
Regulation 29 of the Regulations of 1995 so that the employees do not
lose   the   benefit   of   pension,   the   IBA   may   work   out   modalities   and
suggest   amendments,   if   any,   required   to   be   made   in   the   Pension
Regulations   to   ensure   that   the   employees   get   the   benefit   of   pension.
The   letter   dated   5.9.2000   of   Government   of   India   is   extracted
hereunder:
“F. No. 4/8/4/2000­IR
Government of India,
Ministry of Finance,
Department of Economic Affairs
(Banking Division)
New Delhi, 5­9­2000
To
The Personnel Advisor,
Indian Banks’ Association,
Mumbai
Sub. : Amendment to Regulation 29 of the Pension Regulations.
Sir,
I  am directed   to  refer  to  this  Division's   Letter  No.  11/1/99   IR
dated 29­8­2000, conveying the Government's no objection for
circulation   of   Voluntary   Retirement   Scheme   in   public   sector
banks.   The   Scheme,   inter   alia,   provides   that   employees   with
15   years   of   service   or  40   years   of   age   shall   be   eligible   to   take
voluntary retirement under the Scheme. As per the provisions
contained   in   Regulation   29   of   the   Pension   Regulations,   an
employee   can   take   voluntary   retirement   after   20   years   of
qualifying   service   and   thereafter   becomes   eligible   for   pension.
Thus,   employees   having   rendered   15   years   of   service   or
completing 40 years of age but not having completed 20 years

26
of service shall not be eligible for pensionary benefits on taking
voluntary retirement under the Scheme.
In order to ensure that such employees do not lose the benefit
of   pension,   IBA   may   work   out   modalities   and   suggest
amendments,   if   any,   required   to   be   made   in   the   Pension
Regulations to ensure that these employees also get the benefit
of pension.
Yours faithfully,
sd/­
(U.P. Singh)
Director (IR)”
23. SBI   issued   a   circular   on   10.1.2001   with   respect   to   the
withdrawal   of   the   application   submitted   under   the   scheme.   It   was
decided that the employee could withdraw the application on or before
15.2.2001 by making a written request.
24. Clarification was issued on  15.1 .2001 to a query raised, whether
or   not   the   employees   on   completing   15   years   of   pensionable   service
would   be   entitled   to   pensionary   benefits.   Following   is   a   relevant
portion:
“ 3.   Whether   or   not   the   employees,   completing   15   years   of
pensionable   service   as   on   relevant   date   (date   of   retirement
under SBIVRS), will be entitled for pension benefits?
In   this   connection,   we   invite   a   reference   to   para     6(c)   of   the
Scheme   forwarded   under   the   cover  of   Staff   Circular   letter   No.
CDO/81   dated   30/12/2000.   The   payment   of   pension   to   the
employee   retiring   under   SBIVRS   would   be   governed   by   State
Bank   of  India   Employees   Pension   Fund  Rules  on  the  relevant
date   (including   commuted   value   of   pension).   However,   as   per
existing  rules,  employees  who  have  not  completed  20  years  of
Pensionable Service are not eligible for pension. ”
It   is   clear   from   answer   that   the   staff   circular   dated   30.12.2000
was reiterated. Payment of pension to an employee retiring under VRS
would   be   governed   by   rules   on   the   relevant   date,   i.e.,   31.3.2001.   At

27
the   same   time,   the   position   of   the   existing   rule   was   indicated   that
those   employees   who   had   not   completed   20   years   of   pensionable
service   were   not   eligible   for   a   pension.   It   was   not   clarified   what   was
the   meaning   and   purport   of   para   6(c)   of   the   scheme.   It   was   not
mentioned   that   an   employee   would   not   be   entitled   to   pension   on   15
years   of   service   as   per   the   scheme   approved   by   the   Government   of
India and floated by the IBA and adopted by the Central Board of SBI.
The   above   clarification   being   in   form   of   opinion,   could   not   be   said   to
have caused a modification, amendment, or cancellation of any of the
clauses of VRS or resolution passed by the Board, nor it was so stated.
It   was   necessary   to   state   that   on   completion   of   15   years   of   service,
employees would not be paid pension.   The existing rule position was
known   to   everybody,   whereas   the   scheme   was   framed   for   providing
pension on completion of 15 years of service.
25. Rule 22 of the Pension Rules of SBI as it existed up to 9.3.2001
and amended are extracted hereunder:
Existing Rule
“22(i)   A   member  shall  be   entitled   to   a  pension  under  these
rules on retiring from the Bank’s service­
(a) After having  completed 20  years' pensionable  service provided
that   he   has   attained   the   age   of   50   years   or   if   he   is   in   the
service   of   the   Bank   on   or   after   01.11.93,   after   having
completed   ten   years   pensionable   service   provided   that   he   has
attained the age of  58 years.
(b) After having completed twenty years' irrespective of the age he
shall  have  attained  if  he  shall satisfy  the  authority  competent
to   sanction   his   retirement   by   approved   medical   certificate   or

28
otherwise that he is incapacitated for further active service;
(c) After   having   completed   twenty   years   pensionable   service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twenty­five years' pensionable service.“
Amended Rule
“22(i)   A   member   shall   be   entitled   to   a   pension   under   these
rules on retiring from the Bank’s service­
(a) After   having   completed   twenty   years'   pensionable   service
provided that he has attained the age of fifty years or if he is in
the   service   of   the   Bank   on   or   after   01.11.93,   after   having
completed   10   years,   pensionable   service   provided   that   he   has
attained the age of fifty­eight years or if he is in the service of
the   bank   on   or   after   22.05.1998.   After   having   completed   ten
years,   pensionable   service   provided   that   he   has   attained   the
age of sixty years.
(b) After   having   completed   twenty   years'   pensionable   service,
irrespective of the age he shall have attained if he shall satisfy
the   authority   competent   to   sanction   his   retirement   by
approved   medical   certificate   or   otherwise   that   he   is
incapacitated for further active service;
(c) After   having   completed   twenty   years   pensionable   service,
irrespective of the age he shall have attained at his request in
writing;
(d) After twenty­five years' pensionable service."
26. It   is   clear   from   Rule   22   that   pension   is   admissible   to   an
employee thus:
1) After   having   completed   20   years’   pensionable   service   provided
that 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,   after
having completed 10 years pensionable service provided that he
has attained the age of 50 years; or
3) If   he   is   in   the   service   of   the   Bank   on   or   after   22.05.1998,   after
having completed 10 years pensionable service provided that he
has attained the age of 60 years.

29
27. Rule 22(1)(c) was incorporated in the Pension Fund Rules   w.e.f.
20.9.1986   when   the   bank   decided   inter   alia   to   introduce   VRS   on
completion   of   20   years   of   service.   The   unamended   rule   22(i)(a)
provided   the   normal   age   of   retirement   to   be   58   years.   Thereafter,   as
per the guidelines issued by the Government on 22.5.1998, the age of
retirement was increased from 58 to 60 years. Accordingly, Rule 22(i)
(a)   was   proposed   to   be   amended   on   30.1.2001,   and   instead   of   58
years,   the   age   of   retirement   of   60   years   was   to   be   incorporated.   On
28.5.1998,   the   Executive   Committee   of   the   Central   Board   of   SBI
pending   amendment   to   the   related   service   rules   adopted   the   age   of
retirement   as   60   years.   The   amendment   was   notified   on   31.3.2001
and approved by the Trustees of the SBI Employees’ Pension Fund on
30.10.2001.
28. Similar   scheme   of   VRS   concerning   nationalised   banks   was
implemented according to the decision of the Government of India. In
Punjab   &   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:   15.11.2000   to   14.12.2000;   Union   Bank   of   India:   1.12.2000   to
31.12.2000; United Bank of India: 1.1.2001 to 31.1.2001. In SBI, the
said scheme was adopted by the Central Board on 27.12.2000.

30
29. The   State   Bank   of   India   was   constituted   under   the   SBI   Act,
1955. The nationalised banks were taken over in terms of the Banking
Companies   (Acquisition   and   Transfer   of   Undertakings)   Act,   1970.
Under the Act of 1970, the Punjab National Bank (Employees) Pension
Regulations,   1995,   were   framed.   Regulation   28,   provided   pension   on
attaining   the   age   of   superannuation,   and   Regulation   29   provided
pension   on   voluntary   retirement   on   completion   of   20   years   of
qualifying service. Regulation 29(5), applicable to the banks mentioned
above,   provided   that   the   qualifying   service   of   an   employee   retiring
voluntarily   under   the   Regulation   shall   be   increased   by   a   period   not
exceeding  five  years,  subject to  the  condition  that the  total  qualifying
service rendered by such employee shall not exceed 33 years.
30. The   VRS   2000   came   up   for   consideration   before   this   Court   in
Bank   of   India   &   Ors.   v.   O.P.   Swarnakar   &   Ors .,   (2003)   2   SCC   721   in
the   context   of   Regulation   29(5)   of   Regulations,   1995.   The   Court   held
that the scheme is contractual and provided for pensionary benefits on
completion   of   15   years   of   service.   The   decision   was   followed   in   HEC
Voluntary   Retd.   Employees   Welfare   Society   v.   Heavy   Engineering
Corporation Ltd ., (2006) 3 SCC 708.
31. Due   to   introduction   of   Scheme,   Regulation   28   of   Regulations   of
1995 was proposed to be amended. It was amended in the year 2002

31
with   a   retrospective   effect   from   1.9.2000.   By   way   of   amendment,   a
proviso has been inserted in Regulation 28 thus:
“28.   Superannuation   pension .—Superannuation   pension   shall
be granted to an employee who has retired on his attaining the
age   of   superannuation   specified   in   the   Service   Regulations   or
Settlements.”
“ Provided   that   pension   shall   also   be   granted   to   an   employee
who opts to retire  before  attaining the age of superannuation,
but   after   having   served   for   a   minimum   period   of   15   years   in
terms   of   any   scheme   that   may   be   framed   for   the   purpose   by
the Bank’s Board with the concurrence of the Government .”
          (emphasis supplied) 
32. The   employees   who   opted   for   VRS   on   completion   of   15   years   of
service   within   the   specified   period   in   2000/2001,   were   given   the
benefit of pension. The Regulations came to be amended in 2002 with
the   retrospective   effect.   However,   the   benefit   under   Regulation   29(5)
was not extended to the optees/employees who completed 20 years of
service  by  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   1st
day   of   November   1993   at   any   time,   after   an   employee   has
completed twenty years of qualifying service he may, by giving
notice   of   not   less   than   three   months   in   writing   to   the
appointing authority retire from service:
      Provided   that   this   sub­regulation   shall   not   apply   to   an
employee   who   is   on   deputation   or   on   study   leave   abroad
unless   after   having   been   transferred   or   having   returned   to
India   he   has   resumed   charge   of   the   post   in   India   and   has
served for a period of not less than one year:
      Provided   further  that  this   sub­regulation  shall  not  apply  to
an   employee   who   seeks   retirement   from   service   for   being
absorbed   permanently   in   an   autonomous   body   or   a   public
sector undertaking or company or institution or body, whether
incorporated or not to which he is on deputation at the time of
seeking voluntary retirement:

32
Provided   that   this   sub­regulation   shall   not   apply   to   an
employee   who   is   deemed   to   have   retired   in   accordance   with
clause (1) of Regulation 2.
 x x x 
(5)   The   qualifying   service   of   an   employee   retiring   voluntarily
under   this   Regulation   shall   be   increased   by   a   period   not
exceeding   five   years,   subject   to   the   condition   that   the   total
qualifying  service  rendered by such employee shall not in any
case exceed thirty­three years and it does not take him beyond
the date of superannuation.”
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.3561­65/2002,   the   appeals   were   decided   by   this   Court   by   a
common judgment. It noted that reference to pension as per rules was
made   for   computation   of   pension,   and   the   employees   who   had
completed  15  years  of  service  were  to   be  extended  the  benefit  of  VRS
2000   along   with   pension   and   other   benefits.   IBA   wrote   a   letter   dated
11.12.2000   to   all   public   sector   banks   for   amending   Pension
Regulations, 1995. The IBA mentioned that pension was to be paid to
the   employees   as   per   VRS   2000.   They   would   be   eligible   for   pro­rata
pension;   as   such,   Regulation   28   be   amended.   The   employees   who
applied   for   voluntary   retirement   after   having   rendered   15   years’
service,   under   a   special/ad   hoc   scheme   formulated   with   the   specific
approval   of   the   Government   and   the   Board   of   Directors   would   be
eligible for  pro­rata  pension for the period of service rendered as if they
were to retire on attaining the age of superannuation on that date. The
letter made it clear that the Government of India approved the pension

33
to be given on completion of 15 years of service.   The scheme was for
extending   the   benefit   of   pension   to   the   employees   retiring   on
completion   of   15   years   of   permanent   service,   and   the   Government   of
India   also   desired   that   the   IBA   advised   banks   to   make   necessary
amendments   to   their   pension   regulations,   as   mentioned   in   the
Annexure.   Thus,   the   essence   of   the   VRS   scheme   was   the   benefit   of
pro­rata   pension   as   per   the   rules   on   completion   of   15   years   of
pensionable service.
34. It   is   apparent   that   the   very   fulcrum   of   the   scheme   was   a   felt
need   for   inducting   new   workforce,   with   adequate   knowledge   of   new
skills such as modern technology, foreign exchange, venture capital, e­
commerce, money management, etc. as pointed out by the Ministry of
Finance in its letter dated 22.5.2000. The banks were overstaffed and
for   effective   management   and   manpower   planning,   the   desirability   of
introducing   VRS   was   felt   in   order   to   rationalise   the   workforce   and
skill. Hence a Committee was constituted by the Central Government.
In pursuance of report of the Committee, a policy decision was taken
to frame the VRS. The scheme applied to employees who, on the date
of   the   application,   completed   15   years   of   service.   The   employees
specified   therein   were   otherwise   not   eligible   to   seek   voluntary
retirement   on   completion   of   15   years   under   the   rules/regulations.
Under   the   scheme   floated   by   the   other   banks,   identical   reliefs   were

34
admissible,   as   in   SBI   VRS.   The   Scheme   of   Punjab   National   Bank   is
extracted hereunder:
 “7.  x x x “ Amount of ex gratia
An   employee   seeking   voluntary   retirement   under   the
Scheme   will   be   entitled   to   the   ex   gratia   amount   mentioned
below in para ( a ) or ( b ), whichever is less:
( a )   60   days’   salary   (pay   plus   stagnation   increments   plus
special   pay   plus   dearness   relief)   for   each   completed   year   of
service;
OR
( b ) salary for the number of months of service left;
Other benefits
An   employee   seeking   voluntary   retirement   under   the
Scheme will be eligible for the following benefits in addition to
the   ex   gratia   amount   mentioned   in   para   6   above   of   this
Scheme:
( i )   Gratuity   as   per   the   Payment   of   Gratuity   Act,   1972   or
gratuity payable under the Service Rules, as the case may be,
as per existing rules.
( ii )( a )  Pension (including commuted value of pension) as per
PNB (Employees) Pension Regulations, 1995 .
OR
( b ) Bank’s contribution towards PF as per existing rules.
( iii ) Leave encashment as per existing rules.”
(emphasis supplied)
35. The   eligibility   criteria   in   all   the   schemes,   including   SBI   VRS,
clearly provided that employees who completed 15 years of service and
particular   age   shall   be   eligible   to   apply.   The   benefits   to   which   they
were entitled, were culled out.  In other banks, the pension was as per
Pension   Regulation,   1995.     Thus,   on   eligibility   of   an   employee,
admissibility   of   the   available   reliefs   in   Scheme   followed   i.e.,   the
amount of   ex gratia   and other benefits, including pension, were to be
paid   as   provided   in   the   scheme.   Otherwise,   there   was   no   purpose   of
retiring an employee with 15 years of service as they were not eligible

35
for retirement as per the rules before completion of 20 years of service
in   all   nationalised   banks   as   well   as   SBI.   A   reference   to   the
admissibility of the pension as per rules/ regulations was made in all
the   VRS   to   mean   that   proportionate   pension   shall   be   admissible   as
provided   in   rules,   this   Court   has   noted   it   in   O.P.   Swarnakar   (supra),
thus:
“49.   An offer indisputably can be made  to  a group of  persons
collectively which is capable of being accepted individually, but
the   question   which   has   to   be   posed   and   answered   is   as   to
whether   having   regard   to   the   service   jurisprudence;   the
principles   of   the   Indian   Contract   Act   would   be   applicable   in
the instant case.   It is the specific case of the “banks” that the
Schemes had been floated by 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 .”
(emphasis supplied)
36. Significantly in  O.P. Swarnakar  (supra), this Court observed that
employees   must   have   proceeded   to   apply   for   VRS   on   the   basis   even
though they have merely completed 15 years of service, which was not
a   qualifying   service,   under   the   Pension   Regulations   of   Bank,   they
would   be   entitled   to   benefits   in   terms   of   the   VRS   scheme.   The   Court
observed thus:
“89.   Furthermore,   a   large   number   of   employees   have
withdrawn   their   offer   only   when   a   proviso   was   sought   to   be
added   to   Regulation   28   aforementioned.   In   terms   of   the
Scheme   the   employees,   who   expected   to   get   benefits   of   sub­
regulation (4) of Regulation 29 would be deprived therefrom. It
is   not   in   this   dispute   that   the   qualifying   period   for   receiving
pension   was   20   years.   Only   upon   completion   of   20   years,   in
terms   of   the   statutory   regulation   contained   in   Regulation   29,
an   employee   could   opt   for  voluntary  retirement,   and   in   terms

36
thereof,   he   would   be   entitled   to   the   benefits   specified   therein.
The   said   Regulations   had   specifically   been   mentioned   for   the
purpose   of   computation,   which   would   include   invocation   of
sub­regulation (4) of Regulation 29, providing for relaxation of
5   years   towards   the   qualifying   period.   The   employees   must
have   proceeded   on   the   basis   that   despite   the   fact   that   they
have   merely   rendered   15   years   of   service,   which   was   not   a
qualifying   service   under   the   Regulations,   they   would   be
entitled to the pensionary benefits in terms of the Scheme.   By
introducing   the   proviso   to   Regulation   28   pension   was   sought
to   be   made   pro   rata   in   place   of   full   pension.”
(emphasis supplied)
37. In   O.P.   Swarnakar   &   Ors .   (supra),   it   was   held   that   the   scheme
was 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 same
before   Parliament;   and   secondly,   if   the   same   was   a   regulation,   the
laying­down   rule   is   merely   directory   and   not   mandatory.   This   Court
relied upon the decisions in   Jan Mohd. Noor Mohd. Bagban v. State of
Gujarat ,   AIR   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 bad in 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   necessary   for   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 in
the following terms: (AIR pp. 394­95, para 18)
“ 18 . Finally, the validity of the rules framed under Bombay
Act 22 of 1939 was canvassed. By Section 26(1) of the Bombay
Act,   the   State   Government   was   authorised   to   make   rules   for
the   purpose   of   carrying   out   the   provisions   of   the   Act.   It   was
provided by sub­section (5) that the rules made under Section
26   shall   be   laid   before   each   of   the   Houses   of   the   Provincial

37
Legislature   at   the   session   thereof   next   following   and   shall   be
liable to be modified or rescinded by a resolution in which both
Houses   concur,   and   such   rules   shall,   after   notification   in   the
Official Gazette, be deemed to have been modified or rescinded
accordingly.   It   was   urged   by   the   petitioner   that   the   rules
framed   under   Bombay   Act   22   of   1939   were   not   placed   before
the  Legislative  Assembly  or  the  Legislative  Council  at  the  first
session,   and   therefore   they   had   no   legal   validity.   The   rules
under   Act   22   of   1939   were   framed   by   the   Provincial
Government   of   Bombay   in   1941.   At   that   time,   there   was   no
Legislature in session, the Legislature  having been suspended
during the emergency arising out of World War II. The session
of the Bombay Legislative Assembly was convened for the first
time after 1941 on 20­5­1946, and that session was prorogued
on   24­5­1946.   The   second   session   of   the   Bombay   Legislative
Assembly   was   convened   on   15­7­1946,   and   that   of   the
Bombay   Legislative   Council   on   3­9­1946   and   the   rules   were
placed on the Assembly Table in the second session before the
Legislative   Assembly   on   2­9­1946   and   before   the   Legislative
Council on 13­9­1946. Section 26(5) of Bombay Act 22 of 1939
does   not   prescribe   that   the   rules   acquired   validity   only   from
the   date   on   which   they   were   placed   before   the   Houses   of
Legislature.   The   rules   are   valid   from   the   date   on   which   they
are   made   under   Section   26(1).   It   is   true   that   the   Legislature
has prescribed that the rules shall be placed before the Houses
of Legislature, but failure to place the rules before the Houses
of   Legislature   does   not   affect   the   validity   of   the   rules,   merely
because   they   have   not   been   placed   before   the   Houses   of   the
Legislature.   Granting   that   the   provisions   of   sub­section   (5)   of
Section 26 by reason of the failure to place the rules before the
Houses   of   Legislature   were   violated,   we   are   of   the   view   that
sub­section (5) of Section 26 having regard to the purposes for
which it is made, and in the context in which it occurs, cannot
be   regarded   as   mandatory.   The   rules   have   been   in   operation
since the year 1941, and by virtue of Section 64 of Gujarat Act
20 of 1964, they continue to remain in operation."
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   in
question cannot be said to be bad in law.”
38. The   Court   concerning   the   provision   of   withdrawal   held   that   the
relevant clause of the scheme created an enforceable right in case the
State Bank failed to adhere to its preferred policy.

38
39. In   our   opinion,   the   reference   in   the   SBI   VRS   to   the   admissible
benefits,   like   pension   shall   be   as   per   the   pension   rules,   was   for   the
purpose   of   computation   of   pension.   It   is   apparent   from   a   reading   of
the   scheme   that   proportionate   pension   was   admissible   to   employees
as   noted   in   para   49   of   O.P.   Swarnakar   &   Ors .   (supra).   A   similar
expression was used in the schemes of nationalised banks also.   This
Court has noted expression in the scheme that pension as per rules to
mean for computation of pension.   The formula for computation for a
pension is provided in Rule 23 of the SBI Pension Rules.  
40. It is of utmost significance that the Central Board in its meeting
dated   27.12.2000   accorded   approval   “for   the   proposals   contained   in
the Memorandum.” A bare perusal of the memorandum makes it clear
that   the   letter   of   IBA   dated   31.8.2000   was   enclosed   as   part   of   the
memorandum submitted to the Central Board. In the memorandum, it
was mentioned "that the Government of India conveyed that they had
no   objection   to   the   banks'   placing   before   their   respective   Boards   of
Director's   proposals   for   adopting   and   implementing   the   Voluntary
Retirement   Scheme.   It   advised   that   Banks   may   ‘adopt’   the   scheme
after   obtaining   their   Boards'   approval   and   implement   it   in   ‘right
earnest’."   The   memorandum   also   contained   that   the   employees   who
completed   15   years   of   service   were   to   be   the   beneficiaries   of   VRS   as
approved   by   the   Government   of   India   and   conveyed   by   the   IBA.   The

39
approval by Government of India and scheme, conveyed by IBA, was to
provide for the benefit of pension on completion of 15 years of service.
The   same   was   an   essential   condition   of   the   scheme.   The   Annexure,
which was part of the memorandum, provided inter alia the benefit of
pension, including the commuted value of pension without any rider of
completion   of   20   years   period   of   service.   Once   SBI   accepted   the
proposals contained in the memorandum, when we gauge the scheme
in   the   light   of   the   subject   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 rules was only for  providing the
proportionate pensionary benefit of the qualifying service on and above
15 years, rendered by an employee.  
41. The   IBA   advised   the   banks   for   amending   the   rules.   The
Government   of   India,   Ministry   of   Finance,   also   issued   a   letter   dated
5.9.2001   to   the   Bank   to   amend   the   rules.   There   was   a   proposal   to
amend   the   rules.     After   the   scheme   was   implemented   in   2000,   the
nationalised   banks,   including   the   Punjab   National   Bank,   amended
their rules in 2002 with retrospective effect. However, the fact remains
the   VRS   schemes   were   implemented   by   banks   governed   by   the
Banking Companies Act, 1970, by making payment of pension though
Regulation 28 of Regulation of 1995 provided for 20 years of qualifying

40
service   at  the   relevant  time.  Once   a  particular   scheme   of   VRS,  based
on   the   recommendations   of   Committee   formed   by   Government   of
India,   was   formulated   and   floated   by   IBA.   In   all   fairness,   it   was
required   to   be   implemented   in   right   earnest   in   that   form   in   which   it
was   approved   and   adopted   by   the   Board   of   Directors   of   SBI   on
27.12.2000. In case the Board of Directors were of the opinion that the
scheme   was   not   acceptable   to   them,   they   could   have   rejected   it   or
could   have   stated   they   reject   the   proposal   for   paying   pension   on
completion   of   15  years   of   service   which   was   the  essence  of  a  scheme
formed to reduce workforce of Bank and for achieving other objectives.
Nonetheless,   on   the   contrary,   resolution   dated   27.12.2000   indicates
that the proposals of IBA/Government was approved unconditionally.
Thus, in case it was so necessary to amend the pension rules as done
by   other   banks,   it   was   incumbent   upon   the   State   Bank   of   India   to
amend its rules either after implementation of the scheme as was done
by other banks or before giving effect to VRS.
42. It is also significant to mention that SBI accepted the scheme as
approved   by   the   Government   and   floated   by   IBA.   In   case   SBI   had
declined to accept or wanted to modify, it was necessary for it to take
approval   of   Government  of   India  as   to   its   scheme.   As   per   section   49,
the Central Government has the power to make rules. Section 50 deals
with   the   power   of   Central   Government   to   make   regulations.   Section

41
50(1)   provides   that   the   Central   Board,   after   consultation   with   the
Reserve   Bank   of   India   and   with   the   previous   sanction   of   the   Central
Government,   can   make   Regulations.   Under   Section   50(2)(o),   the
Regulations   can   be   made   by   the   Central   Board   with   the   previous
sanction   of   the   Central   Government   with   respect   to   superannuation
pension and  other funds  for the benefit of the employees of the State
Bank. Section 50(2)(o) reads:
“50.   Power   of   Central   Board   to   make   regulations.—(1)   The
Central Board may, after consultation with the Reserve Bank and
with   the   previous   sanction   of   the   Central   Government   [by
notification   in   the   Official   Gazette,]   make   regulations,   not
inconsistent   with   this   Act   and   the   rules   made   thereunder,   to
provide   for   all   matters   for   which   provision   is   expedient   for   the
purpose of giving effect to the provisions of this Act.
      (2) In particular, and without prejudice to the generality of the
foregoing power, such regulations may provide for—
x x x
(o)   the   establishment   and   maintenance   of   superannuation
pension, provident or other funds for the benefit of the employees
of   the   State   Bank   or   of   the   State   Bank   or   of   the   dependents   of
such   employees   or   for   the   purposes   of   the   State   Bank,   and   the
granting   of   superannuation   allowances,   annuities   and   pensions
payable out of any such fund;]”
43. Thus, it is apparent that the Central Board of SBI could not have
framed   a   scheme   different   than   the   one   approved   by   the   Central
Government   on   its   own,   nor   could   have   implemented   it   without
approval   of   the   Central   Government.   In   case   it   wanted   to   modify   or
amend   the   scheme,   as   approved   by   the   Government   of   India,   it   was
incumbent   upon   it   to   send   its   modified   scheme   to   the   Central

42
Government for approval. No scheme for VRS could have been framed
without   approval   of   the   Government   of   India.   In   fact,   the   Central
Board accepted the proposal of IBA, as approved by the Government of
India.   In   case   SBI’s   stand   is   accepted,   its   scheme   would   have   been
valid as no modification could have been made without approval of the
Government of India.  In fact, no such modification was made, as held
above.
44. Once   it   approved   the   Scheme   SBI   being   an   instrumentality   of
State   under   Article   12,   is   bound   by   the   principle   of   fairness   and
representation     made   that   it   accepted   the   contents   of   memorandum
and  the  scheme   floated  by  IBA  and  invited  the  applications  based  on
approving   the   memorandum   which   contained   proposal   of   pension   on
rendering 15 years of permanent pensionable service, it could not later
on  wriggle   out of  its  obligation  taking   a rigmarole  by   claiming   shelter
of the Rules or by not amending the Rules or by issuing a clarification
which   was   fanciful,   irrational   and   contrary   to   the   spirit   of   the
resolution   of   the   Board.   It   would   amount   to   an   unfair   and
unreasonable action to deprive the employees of the benefit of pension
because of the decision taken by the 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   and

43
accepted, implemented by all the banks in true spirit except by SBI. It
cannot   be   permitted   to   act   unfairly   by   virtue   of   having   superior
bargaining power by issuing vague clarification to the detriment of the
economic   interest   of   the   employees.   Clarification   did   not   have   the
effect of re­writing or superseding the resolution of the Central Board
nor   effect   of   making   modifications   in   the   resolution   passed   by   the
Central Board of the SBI.
46. The VRS scheme was not floated by the SBI on its own volition.
It was pursuant to an exercise that was undertaken by the IBA in view
of  the   recent  developments  of  modern  technology   considering   the  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   decided   at
the   Government  level   to   provide   pension   after   completion   of   15   years
of service as a special measure, the banks were bound to implement it
in that manner or not at all. The Central Board of Directors of the SBI
accepted   the   VRS   proposal   of   Government   and   IBA   without   any
reservation   of   not   providing   pension   along   with   other   benefits,   as
mandated in the VRS scheme. The action of the instrumentality of the
State   cannot   be   violative   of   Article   14.   It   cannot   be   permitted   to   act
arbitrarily.  Articles  15  and  16  provide  for  equality  and  provide  for  an
umbrella against discrimination.

44
47. Though   the   Deputy   General   Manager   was   authorised   by   the
Central  Board of Directors to  amend,  modify  or cancel  the VRS.    The
Rules were amended by other banks later in 2002. It was not stated in
answer   to   the   query   that   under   the   VRS   scheme,   a   person   who   has
rendered   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   Board   of   SBI.     That   apart,   Deputy   General   Manager   tried   to
interpret   VRS   scheme   in   isolation   without   considering   what   was
approved   by   the   Board.   Not   only   the   scheme   but   also   the
memorandum   have   to   be   read   together   to   understand   resolution   of
Board.   Once   the   memorandum   containing   the   IBAs   proposal   of
providing   pension   was   approved   in   absolute   terms,   the   clarification
could   not   be   of   any   value   to   dilute   the   otherwise   clear   and
unambiguous   resolution   of   the   Board   of   Directors.   The   Deputy
General   Manager   did   not   have   any   such   wide   and   arbitrary   power   to
defeat   the   claim   of   the   employees   for   pension   on   completion   of   15
years   of   permanent   service,   which   was   their   right.     The   action   of
D.G.M. could not be said to be in accordance with the resolution. The
pension was the essence of the scheme, depriving it could not be said
to   be   authorised,   such   action   can   only   be   termed   as   unfair   and
unreasonable   and   patently   violative   of   Articles   14,   16,   and   21   of   the
Constitution of India.

45
48. Yet   another   aspect   which   cannot   be   lost   sight   is   that   the   bank
mentioned in the scheme that the benefit would be admissible as per
the rule which prevails on the appointed day, i.e., 31.3.2001. Thus, it
is   apparent   that   when   VRS   scheme   was   floated,   it   was   in
contemplation of amendment of rules which was suggested by the IBA
and the Government of India in its communication dated 5.9.2001 so
that employees were not deprived of the benefit of pension. 
49. The   question   arises   in   case   the   bank   accepts   the   proposal   of
VRS,   and   does   not   alter   its   rules,   can   employees   be   deprived   of   the
benefit of pension in such an unconscionable manner over an event on
which   they   had   no   control.   It   would   be   nothing,   but   an   outcome   of
unfair and arbitrary act in case the SBI never intended to act upon the
scheme it ought not to have accepted it, and once it approved VRS, it
was incumbent upon it to amend its rule, if necessary, as was done by
other banks in 2002 after scheme worked out in the year 2000. Even
otherwise once it accepted the proposal of the Government of India, it
would   be   violative   of   provisions   of   Articles   14   and   16   to   permit   it   to
wriggle   out   of   its   obligation   under   the   guise   that   the   bank   did   not
amend   its   rules   or   pension   was   not   admissible   as   per   existing   rules,
mainly   when   the   scheme   provided   for   eligibility   for   pension   on
completion of 15 years, that formed independent contract. If the bank

46
is   permitted   to   get   rid   of   the   scheme   due   to   Rule   position,   then   the
scheme itself would become void and unenforceable. Bank cannot act
in   a   fanciful   manner,   particularly   with   respect   to   retirement   under
VRS   which   was   contractual   and   deny   benefit   of   pension,   a   right
accrued   to   the   employees   for   receiving   the   pension   in   view   of   the
memorandum   and   the   resolution   passed   by   the   Central   Board   of
Directors adopting memorandum and the SBI­VRS.
50. (a).     The   rights   under   contract   cannot   be   taken   away,   and   they
become   enforceable   by   a   court   of   law.   Bank   cannot   be   permitted   to
make   a   representation   and   later   on   wriggle   out   of   its   obligation.   It   is
not   permissible   to   make   a   “misrepresentation”.   Under   section   19   of
the   Contract   Act,   when   consent   is   obtained   by   coercion,   fraud,   or
‘misrepresentation,'   the   agreement   is   voidable   at   the   option   of   the
aggrieved  party.   In   Central   Inland   Water   Transport   Corporation   Ltd.   &
Anr.   v.   Brojo   Nath   Ganguly   &   Anr .,   (1986)   3   SCC   156,   this   Court
considered   the   contract   of   employment   between   the   Central   Inland
Water Transport Corporation and its employees and also the rules. In
that context, observed thus:
“75.   Under   Section   19   of   the   Indian   Contract   Act,   when
consent   to   an   agreement   is   caused   by   coercion,   fraud   or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused . It is not the
case of either of the contesting respondents that there was any
coercion   brought   to   bear   upon   him   or   that   any   fraud   or
misrepresentation   had   been   practiced   upon   him.   Under
Section   19­A,   when   consent   to   an   agreement   is   caused   by

47
undue   influence,   the   agreement   is   a   contract   voidable   at   the
option of the party whose consent was so caused and the court
may   set   aside   any   such   contract   either   absolutely   or   if   the
party   who   was   entitled   to   avoid   it   has   received   any   benefit
thereunder,   upon   such   terms   and   conditions   as   to   the   court
may   seem   just.   Sub­section   (1)   of   Section   16   defines   "Undue
influence" as follows:
“16. ‘ Undue influence’ defined.— (1) A  contract is  said to be
induced   by   ‘undue   influence’   where   the   relations   subsisting
between   the   parties   are   such   that   one   of   the   parties   is   in   a
position   to   dominate   the   will   of   the   other   and   uses   that
position to obtain an unfair advantage over the other.”
The material provisions of sub­section (2) of Section 16 are as
follows:
“(2) In particular and without prejudice to the generality of
the foregoing principle, a person is deemed to be in a position
to dominate the will of another—
( a ) where he holds a real or apparent authority over the 
other ....”
We   need   not   trouble   ourselves   with   the   other   sections   of   the
Indian   Contract   Act   except   Sections   23   and   24.   Section   23
states   that   the   consideration   or   object   of   an   agreement   is
lawful   unless   inter   alia   the   court   regards   it   as   opposed   to
public   policy.   This   section   further   provides   that   every
agreement   of   which   the   object   or   consideration   is   unlawful   is
void. Under Section 24, if any part of a single consideration for
one   or   more   objects,   or   anyone   or   any   part   of   any   one   of
several   considerations   for   a   single   object   is   unlawful,   the
agreement is void. The agreement is, however, not always void
in   its   entirety   for   it   is   well   settled   that   if   several   distinct
promises are made for one and the same lawful consideration,
and  one  or  more   of   them  be  such   as  the   law  will   not  enforce,
that   will   not   of   itself   prevent   the   rest   from   being   enforceable.
The   general   rule   was   stated   by   Willes,   J.,   in   Pickering   v.
Ilfracombe Ry. Co . (1868) LR 3 CP 235 (at p. 250) as follows:
"The general rule is that, where you cannot sever the illegal
from   the   legal   part   of   a   covenant,   the   contract   is   altogether
void;   but   where   you   can   sever   them,   whether   the   illegality   be
created   by  statute   or  by  the   common   law,   you   may  reject   the
bad part and retain the good."
(emphasis supplied)
(b). In   Brojo Nath Ganguly     (supra), this Court considered the concept
of   unconscionable   bargain   and   as   to   actions   showing   no   regard   for
conscience;   irreconcilable   with   what   is   right   or   reasonable,   observed
thus:

48
“76.  Under which head would an unconscionable bargain fall?
If   it   falls   under   the   head   of   undue   influence,   it   would   be
voidable   but   if   it   falls   under   the   head   of   being   opposed   to
public   policy,   it   would   be   void.   No   case   of   the   type   before   us
appears   to   have   fallen  for  decision   under  the   law  of   contracts
before   any   court   in   India   nor   has   any   case   on   all   fours   of   a
court   in   any   other   country   been   pointed   out   to   us.   The   word
“unconscionable”   is   defined   in   the      Shorter   Oxford   English
Dictionary    ,   Third   Edition,   Volume   II,   page   2288,   when   used
with   reference   to   actions,   etc.   as   "showing   no   regard   for
conscience; irreconcilable with what is right or reasonable." An
unconscionable   bargain   would,   therefore,   be   one   which   is
irreconcilable with what is right or reasonable .”
(emphasis supplied)
(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
say   about   the   old   ideas   of   freedom   of   contract   in   modern
times.   The   relevant   passages   are   to   be   found   in   Chitty   on
Contracts ,   25th   Edn.,   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   social
ideal   only   to   the   extent   that   equality   of   bargaining   power
between contracting parties can be assumed, and no injury is
done   to   the   economic   interests   of   the   community   at   large.'
Freedom   of   contract   is   of   little   value   when   one   party   has   no
alternative   between   accepting   a   set   of   terms   proposed   by   the
other   or   doing   without   the   goods   or   services   offered.   Many
contracts   entered   into   by   public   utility   undertakings   and
others take the form of a set of terms fixed in advance by one
party and not open to discussion by the other. These are called
' contracts   d’adhesion ’   by   French   lawyers.   Traders   frequently
contract,   not   on   individually   negotiated   terms,   but   on   those
contained   in   a   standard   form   of   contract   settled   by   a   trade
association.   And   the   terms   of   an   employee’s   contract   of
employment   may   be   determined   by   agreement   between   his
trade   union   and   his   employer,   or   by   a   statutory   scheme   of
employment.   Such   transactions   are   nevertheless   contracts
notwithstanding   that   freedom   of   contract   is   to   a   great   extent
lacking.
      Where   freedom   of   contract   is   absent,   the   disadvantages
to  consumers   or  members   of  the  public   have,   to  some   extent,
been offset by administrative procedures for consultation, and

49
by   legislation.   Many   statutes   introduce   terms   into   contracts
which   the   parties   are   forbidden   to   exclude,   or   declare   that
certain   provisions   in   a   contract   shall   be   void.   And   the   courts
have developed a number of devices for refusing to implement
exemption clauses imposed 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 clause will not be enforced unless it
is   reasonable.   Again,   more   recently,   certain   of   the   judges
appear   to   have   recognized   the   possibility   of   relief   from
contractual   obligations   on   the   ground   of   'inequality   of
bargaining power.'" 
What the French call “ contracts d’adhesion ," the American 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   offered   to
consumers of goods and services on essentially ‘take it or leave
it’   basis   without   affording   consumer   realistic   opportunity   to
bargain   and   under   such   conditions   that   consumer   cannot
obtain   desired   product   or   services   except   by   acquiescing   in
form   contract.   Distinctive   feature   of   adhesion   contract   is   that
weaker party has no realistic choice as to its terms. Not every
such contract is unconscionable.”
80.   The   position   under   the   American   law   is   stated   in
Reinstatement   of   the   Law   —   Second   as   adopted   and
promulgated   by   the   American   Law   Institute,   Volume   II   which
deals with the law of contracts, in Section 208 at page 107, as
follows:
“§ 208.  Unconscionable Contract or Term
                      If a contract or term thereof is unconscionable at the
time   the   contract   is   made   a   court   may   refuse   to   enforce   the
contract, or may enforce the remainder of the contract without
the   unconscionable   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  to
a   wide   variety   of   types   of   conduct .   The   determination   that   a
contract   or   term   is   or   is   not   unconscionable   is   made   in   the
light of its setting, purpose and effect. Relevant factors include
weaknesses   in   the   contracting   process   like   those   involved   in
more specific rules as to contractual capacity, fraud and other
invalidating   causes;   the   policy   also   overlaps   with   rules   which
render particular bargains or terms unenforceable on grounds
of   public   policy.   Policing   against   unconscionable   contracts   or
terms   has   sometimes   been   accomplished   by   adverse
construction of language, by manipulation of the rules of offer

50
and acceptance or  by determinations that the clause is contrary
to   public   policy   or   to   the   dominant   purpose   of   the   contract.
Uniform Commercial Code § 2­302 Comment 1 .... A bargain is
not   unconscionable   merely   because   the   parties   to   it   are
unequal   in   bargaining   position,   nor   even   because   the
inequality results in an allocation of risks to the weaker party.
But   gross   inequality   of   bargaining   power,   together   with   terms
unreasonably   favourable   to   the   stronger   party    ,   may   confirm
indications that the transaction involved elements of deception
or   compulsion,   or   may   show   that   the   weaker   party   had   no
meaningful choice, no real alternative, or did not in fact assent
or appear to assent to the unfair terms .”
(emphasis supplied)
There   is   a   statute   in   the   United   States   called   the   Universal
Commercial  Code,   which applies   to  contracts  relating  to  sales
of   goods.   Though   this   statute   is   inapplicable   to   contracts   not
involving sales of goods, it has proved very influential in what
is   called   in   the   United   States,   "non­sales"   cases.   It   has   many
times   been   used   either   by   analogy   or   because   it   was   felt   to
embody   a   generally   accepted   social   attitude   of   fairness   going
beyond   its   statutory   application   to   sales   of   goods.   In   the
Reporter's Note to said Section 208, it is stated at p. 112:
"It   is   to   be   emphasized   that   a   contract   of   adhesion   is   not
unconscionable   per   se ,   and   that   all   unconscionable   contracts
are   not   contracts   of   adhesion.   Nonetheless,   the   more
standardised  the  agreement  and  the  less  a  party   may  bargain
meaningfully, the more susceptible the contract or a term will be
to a claim of unconscionability .”
(emphasis supplied)
The   position   has   been   thus   summed   up   by   John   R.   Peden   in
‘ The   Law   of   Unjust   Contracts ’   published   by   Butterworths   in
1982, at pages 28­29:
“...   Unconscionability   represents   the   end   of   a   cycle
commencing   with   the   Aristotelian   concept   of   justice   and   the
Roman law   laesio enormis , which in turn formed the basis for
the   medieval   church’s   concept   of   a   just   price   and
condemnation   of   usury.   These   philosophies   permeated   the
exercise,   during   the   seventeenth   and   eighteenth   centuries,   of
the   Chancery   court’s   discretionary   powers   under   which   it
upset   all   kinds   of   unfair   transactions.   Subsequently   the
movement   towards   economic   individualism   in   the   nineteenth
century hardened the exercise of these powers by emphasising
the   freedom   of   the   parties   to   make   their   own   contract.   While
the   principle   of   pacta   sunt   servanda   held   dominance,   the
consensual   theory  still  recognized  exceptions  where   one  party
was   overborne   by   a   fiduciary,   or   entered   a   contract   under
duress   or   as   the   result   of   fraud.   However,   these   exceptions
were limited and had to be strictly proved. 
It is suggested that the judicial and legislative trend during
the   last   30   years   in   both   civil   and   common   law   jurisdictions
has   almost   brought   the   wheel   full   circle.   Both   courts   and

51
parliaments   have   provided   greater   protection   for   weaker
parties   from   harsh   contracts.   In   several   jurisdictions   this
included   a   general   power   to   grant   relief   from   unconscionable
contracts, thereby providing a launching point from which the
courts   have   the   opportunity   to   develop   a   modern   doctrine   of
unconscionability.   American   decisions   on   Article   2.302   of   the
UCC have already gone some distance into this new arena....”
The   expression   “ laesio   enormis ”   used   in   the   above   passage
refers   to   “ laesio   ultra   dimidium   vel   enormis ”   which   in   Roman
law   meant   the   injury   sustained   by   one   of   the   parties   to   an
onerous   contract  when  he   had  been   overreached   by the  other
to the extent of more than one­half of the value of the subject­
matter,   as   for   example,   when   a   vendor   had   not   received   half
the   value   of   property   sold,   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."
(emphasis supplied)
This   Court   held   that   due   to   inequality   of   bargaining   power,
unreasonable   terms,   unreasonable   favour   to   the   stronger   party   may
involve an  element of deception or compulsion, or may show that the
weaker   party   had   no   meaningful   choice.     The   Court   in   Brojo   Nath
Ganguly   (supra)   also   observed   that   in   the   sphere   of   the   law   of
contract, the test of reasonableness or fairness has emerged. Even an
unreasonable   clause   cannot   be   enforced   as   that   would   be
unconscionable.
Here   the   reasonable   construction   in   the   matter   is   that   the
pension   is   clearly   admissible   as   per   the   resolution   passed   by   the
Central Board of Directors of SBI, which is sought to be denied, it was
for SBI to amend Rules. Such an action would be unconscionable, and
courts   cannot   be   said   to   be   powerless   in   such   a   situation   to   enforce
the SBI VRS with an obligation to make payment of pension.

52
(d). This   Court   considered   the   enforcement   of   unreasonable
contracts   and   enforceability   thereof   in   Brojo   Nath   Ganguly     (supra)
thus:
“83.   Yet   another   theory   which   has   made   its   emergence   in
recent years in the sphere of the law of contracts is the   test of
reasonableness   or   fairness   of   a   clause   in   a   contract   where
there   is   inequality   of   bargaining   power .   Lord   Denning,   MR,
appears   to   have   been   the   propounder,   and   perhaps   the
originator   —at   least   in   England,   of   this   theory.   In   Gillespie
Brothers   &   Co.   Ltd.   v.   Roy   Bowles   Transport   Ltd.,   (1973)   QB
400, where the question was whether an indemnity clause in a
contract,   on   its   true   construction,   relieved   the   indemnifier
from   liability   arising   to   the   indemnified   from   his   own
negligence, Lord Denning said (at pages 415­416):
“ The   time   may   come   when   this   process   of   ‘construing’   the
contract can be pursued no further. The words are too clear to
permit of it.      Are the courts      then powerless? Are  they      to permit
the party to enforce his unreasonable clause, even when it is so
unreasonable,   or   applied   so   unreasonably,   as   to   be
unconscionable    ?   When   it   gets   to   this   point,   I   would   say,   as   I
said many years ago :
‘there   is   the   vigilance   of   the   common   law   which,   while
allowing   freedom   of   contract,   watches   to   see   that   it   is   not
abused’:  John Lee & Son  ( Grantham )  Ltd.  v.  Railway Executive,
(1949) 2 All ER 581.
It will not allow a party to exempt himself from his liability at 
common law when it would be quite unconscionable for him to
do so.”
(emphasis supplied)
In the above case, the Court of Appeal negatived the defense of
the   indemnifier   that   the   indemnity   clause   did   not   cover   the
negligence   of   the   indemnified.   It   was   in   Lloyds   Bank   Ltd.   v.
Bundy   (1974)   3   All   ER   757   that   Lord   Denning   first   clearly
enunciated   his   theory   of   "inequality   of   bargaining   power."   He
began   his   discussion   on   this   part   of   the   case   by   stating   (at
page 763) :
“There are cases in our books in which  the courts will set aside
a contract , or a transfer of property,   when the parties have not
met   on   equal   terms,   when   the   one   is   so   strong   in   bargaining
power   and   the   other   so   weak   that,   as   a   matter   of   common
fairness, it is not right that the strong should be allowed to push
the   weak   to   the   wall .   Hitherto   those   exceptional   cases   have
been  treated  each  as a  separate  category in  itself.  But  I  think
the time has come when we should seek to find a principle to

53
unite them. I put on one side contracts or transactions which
are   voidable   for   fraud   or   misrepresentation   or   mistake.   All
those   are   governed   by   settled   principles.   I   go   only   to   those
where  there  has  been  inequality  of  bargaining power,  such  as
to merit the intervention of the court.”
(emphasis supplied)
He   then   referred   to   various  categories   of  cases   and   ultimately
deduced therefrom a general principle in these words (at page
765):
          “Gathering   all   together,   I   would   suggest   that   through   all
these   instances   there   runs   a   single   thread .   They   rest   on
‘ inequality  of bargaining power.' By virtue of it, the English law
gives relief to one who, without independent advice,  enters into
a contract on terms which are very unfair or transfers property
for   a   consideration   which   is   grossly   inadequate ,   when   his
bargaining   power  is   grievously  impaired   by  reason   of   his   own
needs or desires, or  by his own ignorance or infirmity, coupled
with undue influences or 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 that the principle depends on proof of
any   wrongdoing .   The   one   who   stipulates   for   an   unfair
advantage   may   be   moved   solely   by   his   own   self­interest,
unconscious of the distress he is bringing to the other. I have
also   avoided   any   reference   to   the   will   of   the   one   being
‘dominated’   or  ‘overcome’   by  the  other.   One  who is  in  extreme
need   may   knowingly   consent   to   a   most   improvident   bargain,
solely to relieve the straits in which he finds himself . Again, I do
not   mean   to   suggest   that   every   transaction   is   saved   by
independent   advice.   But   the   absence   of   it   may   be   fatal.   With
these   explanations,   I   hope   this   principle   will   be   found   to
reconcile the cases.”
(emphasis supplied)
(e). The Court clearly held that the contracts, which are the outcome
of misrepresentation, cannot be enforced, and inequality of bargaining
power   merit   the   intervention   of   the   court.   In   A.   Schroeder   Music
Publishing Co. Ltd. v. Macaulay (formerly Instone)   (1974) 1 WLR 1308,
Lord Diplock made the following observations at pp. 1315­16 thus:
"84.   ….   "My   Lords,   the   contract   under   consideration   in   this
appeal   is   one   whereby   the   respondent   accepted   restrictions
upon the way in which he would exploit his earning power as a
songwriter   for   the   next   ten   years.   Because   this   can   be

54
classified   as   a   contract   in   restraint   of   trade   the   restrictions
that   the   respondent   accepted   fell   within   one   of   those   limited
categories   of   contractual   promises   in   respect   of   which   the
courts still retain the power to relieve the promisor of his legal
duty to fulfill them. In order to determine whether this case is
one   in   which   that   power   ought   to   be   exercised,   what   your
Lordships   have   in   fact   been   doing   has   been   to   assess   the
relative   bargaining   power   of   the   publisher   and   the   songwriter
at  the   time   the   contract   was   made   and  to  decide   whether  the
publisher   had   used   his   superior   bargaining   power   to   exact
from   the   songwriter   promises   that   were   unfairly   onerous   to
him.   Your   Lordships   have   not   been   concerned   to   inquire
whether the public have in fact been deprived of the fruit of the
song   writer's   talents   by   reason   of   the   restrictions,   nor   to
assess   the   likelihood   that   they   would   be   so   deprived   in   the
future if the contract were permitted to run its full course.
    It is, in my view, salutary to acknowledge that in refusing to
enforce   provisions   of   a   contract   whereby   one   party   agrees   for
the   benefit   of   the   other   party   to   exploit   or   to   refrain   from
exploiting  his   own  earning  power,   the  public   policy  which   the
court   is   implementing   is   not   some   19th   century   economic
theory   about   the   benefit   to   the   general   public   of   freedom   of
trade,   but   the   protection   of   those   whose   bargaining   power   is
weak against being forced by those whose bargaining power is
stronger to enter into bargains that are unconscionable. Under
the influence of Bentham and of   laissez faire   the courts in the
19th   century   abandoned   the   practice   of   applying   the   public
policy against unconscionable bargains to contracts generally,
as   they   had   formerly   done   to   any   contract   considered   to   be
usurious;   but   the   policy  survived   in   its   application   to   penalty
clauses   and   to   relief   against   forfeiture   and   also   to   the   special
category   of   contracts   in   restraint   of   trade.   If   one   looks   at   the
reasoning   of   19th­century   judges   in   cases   about   contracts   in
restraint of trade one finds lip service paid to current economic
theories, but if one looks at what they said in the light of what
they   did,   one   finds   that   they   struck   down   a   bargain   if   they
thought it was unconscionable as between the parties to it and
upheld it if they thought that it was not.
   So I would hold that the question to be answered as respects
a   contract   in   restraint   of   trade   of   the   kind   with   which   this
appeal   is   concerned   is:   ‘ Was   the   bargain   fair ?’   The   test   of
fairness   is,   no   doubt,   whether   the   restrictions   are   both
reasonably   necessary   for   the   protection   of   the   legitimate
interests   of   the   promisee   and   commensurate   with   the   benefits
secured   to   the   promisor   under   the   contract.   For   the   purpose   of
this   test,   all   the   provisions   of   the   contract   must   be   taken   into
consideration .”
(f). A   term   which   exempts   the   stronger   party   from   his   ordinary
common   law   liability   should   not   be   given   effect   except   when   it   is

55
reasonable,   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
Levison   v.   Patent   Steam   Carpet   Co.   Ltd.   are   also   useful
and   require   to   be   quoted.   These   observations   are   as
follows (at page 79) :
"In   such   circumstances   as   here   the   Law   Commission   in
1975   recommended   that   a   term   which   exempts   the   stronger
party   from   his   ordinary   common   law   liability   should   not   be
given   effect   except   when   it   is   reasonable:   see   The   Law
Commission   and   the   Scottish   Law   Commission   Report,
Exemption   Clauses,   Second   Report   (1975)   (August   5,   1975),
Law   Com.   No.   69   (H.C.   605),   pp.   62,   174;   and   there   is   a   Bill
now   before   Parliament,   which   gives   effect   to   the   test   of
reasonableness.   This   is   a   gratifying   piece   of   law   reform:   but   I
do   not   think   we   need   wait   for  that   Bill   to   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 clause should not be
given   effect   if   it   was   unreasonable,   or   if   it   would   be
unreasonable to apply it in the circumstances of the case. I see
no reason why this should not be applied today, at any rate in
contracts   in   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  considered  the
question thus:
“87.   In   Photo   Production   Ltd.   v.   Securicor   Transport
Ltd.   (1980)   AC   827,   a   case   before   the   Unfair   Contract
Terms Act, 1977, was enacted, the House of Lords upheld
an   exemption   clause   in   a   contract   on   the   defendants'
printed   form   containing   standard   conditions.   The
decision   appears   to   proceed   on   the   ground   that   the
parties   were   businessmen   and   did   not   possess   unequal
bargaining   power.   The   House   of   Lords   did   not,   in   that
case,   reject   the   test   of   reasonableness   or   fairness   of   a
clause   in   a   contract   where   the   parties   are   not   equal   in
bargaining   position.   On   the   contrary,   the   speeches   of
Lord Wilberforce, Lord Diplock, and Lord Scarman would

56
seem to show that the House of Lords in a fit case would
accept   that   test.   Lord   Wilberforce,   in   his   speech,   after
referring to the Unfair Contract Terms Act, 1977, said (at
page 843) :
“This   Act   applies   to   consumer   contracts   and   those   based
on standard terms and enables exception clauses to be applied
with regard to what is just and reasonable. It is significant that
Parliament   refrained   from   legislating   over   the   whole   field   of
contract. After this Act,   in commercial matters generally, when
the   parties   are   not   of   unequal   bargaining   power ,   and   when
risks are normally borne by insurance, not only is the case for
judicial   intervention   undemonstrated,   but   there   is   everything
to be said, and this seems to have been Parliament’s intention,
for leaving the parties free to apportion the risks as they think
fit and for respecting their decisions.”
(emphasis supplied)
Lord Diplock said (at page 850­51):
“Since   the   obligations   implied   by   law   in   a   commercial
contract are those which, by judicial consensus over the years
or   by   Parliament   in   passing   a   statute,   have   been   regarded   as
obligations which a reasonable businessman would realise that
he was accepting when he entered into a contract of a particular
kind ,   the   court’s   view   of   the   reasonableness   of   any   departure
from   the   implied   obligations   which   would   be   involved   in
construing   the   express   words   of   an   exclusion   clause   in   one
sense that they are capable of bearing rather than another, is
a   relevant   consideration   in   deciding   what   meaning   the   words
were intended by the parties to bear.”
(emphasis supplied)
Lord Scarman, while agreeing with Lord Wilberforce, described
(at   page   853)   the   action   out   of   which   the   appeal   before   the
House   had   arisen   as   “a   commercial   dispute   between   parties
well able to look after themselves”   and then added: “ In such a
situation   what   the   parties   agreed   (expressly   or   impliedly)   is
what   matters,   and   the   duty   of   the   courts   is   to   construe   their
contract according to its tenor."
88.  As seen above, apart from judicial decisions, the United
States and the United Kingdom have statutorily recognised, at
least in certain areas of the law of contracts, that there can be
unreasonableness   (or   lack   of   fairness,   if   one   prefers   that
phrase)   in   a  contract   or  a   clause   in   a   contract   where   there   is
inequality   of   bargaining   power   between   the   parties   although
arising   out   of   circumstances   not   within   their   control   or   as   a
result   of   situations   not   of   their   creation.   Other   legal   systems
also permit judicial review of a contractual transaction entered
into   in   similar   circumstances.   For   example,   Section   138(2)   of
the   German   Civil   Code   provides   that   a   transaction   is   void
"when   a   person"   exploits   "the   distressed   situation,
inexperience,   lack   of   judgmental   ability,   or   grave   weakness   of

57
will   of   another   to   obtain   the   grant   or   promise   of   pecuniary
advantages   ...   which   are   obviously   disproportionate   to   the
performance   given   in   return".   The   position,   according   to   the
French law, is very much the same." 
(h). In   Brojo   Nath   Ganguly   (supra),   it   was   pointed   out   what   court
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
and   outworn   ideologies?   Should   we   not   adjust   our
thinking caps to match the fashion of the day? Should all
jurisprudential   development   pass   us   by,   leaving   us
floundering   in   the   sloughs   of   19th­century   theories?
Should   the   strong   be   permitted   to   push   the   weak   to   the
wall?   Should  they  be  allowed  to ride  roughshod  over   the
weak?   Should   the   courts   sit   back   and   watch   supinely
while   the   strong   trample   underfoot   the   rights   of   the
weak?   We   have   a   Constitution   for   our   country.   Our
judges   are   bound   by   their   oath   to   "uphold   the
Constitution and the laws." The Constitution was enacted
to   secure   to   all   the   citizens   of   this   country   social   and
economic   justice.   Article   14   of   the   Constitution
guarantees to all persons equality before the law and the
equal protection of the laws. The principle deducible from
the   above   discussions   on   this   part   of   the   case   is   in
consonance   with   right   and   reason,   intended   to   secure
social and economic justice and conforms to the mandate
of the great equality clause in Article 14. This principle is
that   the   courts   will   not   enforce   and   will,   when   called
upon   to   do   so,   strike   down   an   unfair   and   unreasonable
contract,   or   an   unfair   and   unreasonable   clause   in   a
contract, entered into between parties who are not equal
in   bargaining   power.   It   is   difficult   to   give   an   exhaustive
list of all bargains of this type. No court can visualize the
different situations which can arise in the affairs of men.
One   can   only   attempt   to   give   some   illustrations.   For
instance,   the   above   principle   will   apply   where   the
inequality   of   bargaining   power   is   the   result   of   the   great
disparity   in   the   economic   strength   of   the   contracting
parties.  It  will  apply  where the inequality  is the result  of
circumstances,   whether   of   the   creation   of   the   parties   or
not. It will apply  to situations in which the weaker party
is in a position in which he can obtain goods or services
or   means   of   livelihood   only   upon   the   terms   imposed   by
the   stronger   party   or   go   without   them.   It   will   also   apply

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where   a   man   has   no   choice,   or   rather   no   meaningful
choice,  but   to  give  his  assent  to a  contract  or   to  sign  on
the   dotted   line   in   a   prescribed   or   standard   form   or   to
accept   a   set   of   rules   as   part   of   the   contract,   however
unfair,   unreasonable   and   unconscionable   a   clause   in
that   contract   or   form   or   rules   may   be.   This   principle,
however, will not apply where the bargaining power of the
contracting   parties   is   equal   or   almost   equal.   This
principle   may   not   apply   where   both   parties   are
businessmen,   and   the   contract   is   a   commercial
transaction.   In   today’s   complex   world   of   giant
corporations with their vast infrastructural organizations
and   with   the   State   through   its   instrumentalities   and
agencies   entering   into   almost   every   branch   of   industry
and   commerce,   there   can   be   myriad   situations   which
result   in   unfair   and   unreasonable   bargains   between
parties   possessing   wholly   disproportionate   and   unequal
bargaining   power.   These   cases   can   neither   be
enumerated   nor   fully   illustrated.   The   court   must   judge
each case on its own facts and circumstances.”
(i). The Court in   Brojo Nath Ganguly   (supra)  held that the contract,
which  affected  a  large  number  of  persons  if  they   are  unconscionable,
unfair,   and   unreasonable,   the   contract   is   voidable.   The   court   would
not compel each person with whom the party with superior bargaining
power   had   contracted   to   go   to   court   to   adjudge   the   contract   voidable
and would result in a multiplicity of litigation. It observed: 
“91.   Is a contract of the type mentioned above to be adjudged
voidable   or   void?   If   it   was   induced   by   undue   influence,   then
under   Section   19­A   of   the   Indian   Contract   Act,   it   would   be
voidable.   It   is,   however,   rarely   that   contracts   of   the   types   to
which   the   principle   formulated   by   us   above   applies   are
induced by undue influence as defined by Section 16(1) of the
Indian   Contract   Act,   even   though   at   times   they   are   between
parties   one   of   whom   holds   a   real   or   apparent   authority   over
the   other.   In   the   vast   majority   of   cases,   however,   such
contracts are entered into by the weaker party under pressure
of   circumstances,   generally   economic,   which   results   in
inequality   of   bargaining   power.   Such   contracts   will   not   fall
within   the   four   corners   of   the   definition   of   “undue   influence”
given in Section 16(1). Further, the majority of such contracts
are   in   a   standard   or   prescribed   form   or   consist   of   a   set   of

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rules.   They   are   not   contracts   between   individuals   containing
terms   meant   for   those   individuals   alone.   Contracts   in
prescribed   or   standard   forms   or   which   embody   a   set   of   rules
as   part   of   the   contract   are   entered   into   by   the   party   with
superior bargaining power with a large number of persons who
have   far   less   bargaining   power   or   no   bargaining   power   at   all.
Such   contracts   which   affect   a   large   number   of   persons   or   a
group or groups of persons, if they are unconscionable, unfair,
and unreasonable,  are injurious to the public  interest. To say
that such a contract is only voidable would be to compel each
person   with   whom   the   party   with   superior   bargaining   power
had   contracted   to   go   to   court   to   have   the   contract   adjudged
voidable.   This   would   only   result   in   multiplicity   of   litigation,
which no court should encourage and would also not be in the
public interest. Such a contract or such a clause in a contract
ought,   therefore,   to   be   adjudged   void.   While   the   law   of
contracts   in   England   is   mostly   judge­made,   the   law   of
contracts   in   India   is   enacted   in   a   statute,   namely,   the   Indian
Contract   Act,   1872.   In   order   that   such   a   contract   should   be
void,   it   must   fall   under   one   of   the   relevant   sections   of   the
Indian  Contract Act.  The only relevant provision  in the Indian
Contract   Act,   which   can   apply   is   Section   23,   when   it   states
that   "The   consideration   or   object   of   an   agreement   is   lawful,
unless ... the court regards it as ... opposed to public policy." 
(j). The Court also considered the “public policy”. The same is not the
policy   of   a   particular   Government.   It   connotes   some   matter   which
concerns   the   public   good   and   the   public   interest.   Action   has   to   be
subservient to public policy. This Court in the context of Contract Act
and 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   nature   of   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   the   public   interest.   The   concept   of   what   is   for   the
public   good   or   in   the   public   interest   or   what   would   be
injurious   or   harmful   to   the   public   good   or   the   public
interest   has   varied   from   time   to   time.   As   new   concepts
take   the   place   of   old,   transactions   which   were   once
considered against public policy are now being upheld by
the   courts,   and   similarly,   where   there   has   been   a   well­

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recognized   head   of   public   policy,   the   courts   have   not
shirked   from   extending   it   to   new   transactions   and
changed   circumstances   and   have   at   times   not   even
flinched from inventing a new head of public policy. There
are   two   schools   of   thought—   "the   narrow   view"   school
and   "the   broad   view"   school.   According   to   the   former,
courts cannot create new heads of public policy, whereas
the latter countenances judicial law­making  in this area.
The   adherents   of   "the   narrow   view"   school   would   not
invalidate   a   contract   on   the   ground   of   public   policy
unless   that   particular   ground   had   been   well­established
by  authorities. Hardly ever  has the voice of the timorous
spoken   more   clearly   and   loudly   than   in   these   words   of
Lord   Davey   in   Janson   v.   Driefontein   Consolidated   Gold
Mines   Ltd. :   "Public   policy   is   always   an   unsafe   and
treacherous   ground   for   legal   decision."   That   was   in   the
year   1902.   Seventy­eight   years   earlier,   Burrough,   J.,   in
Richardson   v.   Mellish,   (1824­34)   All   ER   258,   described
public policy as "a very unruly horse, and when once you
get astride it you never know where it will carry you." The
Master   of   the   Rolls,   Lord   Denning,   however,   was   not   a
man   to   shy   away   from   unmanageable   horses   and   in
words which conjure up before our eyes the picture of the
young   Alexander   the   Great   taming   Bucephalus,   he   said
in   Enderby Town Football Club Ltd.   v.   Football Assn. Ltd.
(1971)   Ch   591:   "With   a   good   man   in   the   saddle,   the
unruly   horse   can   be   kept   in   control.   It   can   jump   over
obstacles."   Had   the   timorous   always   held   the   field,   not
only   the   doctrine   of   public   policy   but   even   the   Common
Law or the principles of Equity would never have evolved.
Sir   William   Holdsworth   in   his   " History   of   English   Law ,"
Volume III, page 55, has said:
"In   fact,   a   body   of   law   like   the   common   law,   which   has
grown up gradually  with the  growth  of the nation, necessarily
acquires   some   fixed   principles,   and   if   it   is   to   maintain   these
principles,   it   must   be   able,   on   the   ground   of   public   policy   or
some   other   like   ground,   to   suppress   practices   which,   under
ever new disguises, seek to weaken or negative them."
It is thus clear that the principles governing public policy must
be   and   are   capable,   on   proper   occasion,   of   expansion   or
modification. Practices which were considered perfectly normal
at   one   time   have   today   become   obnoxious   and   oppressive   to
public   conscience.   If   there   is   no   head   of   public   policy   which
covers a case, then the court must in consonance with public
conscience and in keeping with public good and public interest
declare such practice to be opposed to public policy. Above all,
in   deciding   any   case   which   may   not   be   covered   by   authority,
our courts  have  before  them the  beacon  light  of  the  Preamble
to   the   Constitution.   Lacking   precedent,   the   court   can   always

61
be   guided   by   that   light   and   the   principles   underlying   the
Fundamental Rights and the Directive  Principles  enshrined in
our Constitution.
93.   The   normal   rule   of   Common   Law   has   been   that   a   party
who seeks to enforce an agreement which is opposed to public
policy   will   be   non­suited.   The   case   of   A.   Schroeder   Music
Publishing   Co.   Ltd.   v.   Macaulay   (1974)   1   WLR   1308,   however,
establishes that where a contract is vitiated as  being  contrary
to   public   policy,   the   party   adversely   affected   by   it   can   sue   to
have   it   declared   void.   The   case   may   be   different,   where   the
purpose   of   the   contract   is   illegal   or   immoral.   In   Kedar   Nath
Motani   v.   Prahlad   Rai ,   AIR   1960   SC   213,   reversing   the   High
Court   and   restoring   the   decree   passed   by   the   trial   court
declaring the appellants’ title to the lands in suit and directing
the   respondents   who   were   the   appellants’   benamidars   to
restore   possession,   this   Court,   after   discussing   the   English
and Indian law on the subject, said: (at page 873) :
"The   correct   position   in   law,   in   our   opinion,   is   that   what
one   has   to   see   is   whether   the   illegality   goes   so   much   to   the
root   of   the   matter   that   the   plaintiff   cannot   bring   his   action
without relying upon the illegal transaction into which he had
entered.   If   the   illegality   be   trivial   or   venial,   as   stated   by
Williston and the plaintiff is not required to rest his case upon
that   illegality,   then   public   policy   demands   that   the   defendant
should   not   be   allowed   to   take   advantage   of   the   position.   A
strict view, of course, must be taken of the plaintiff's conduct,
and   he   should   not   be   allowed   to   circumvent   the   illegality   by
resorting   to   some   subterfuge   or   by   misstating   the   facts.   If,
however, the matter is clear and the illegality is not required to
be   pleaded   or   proved   as   part   of   the   cause   of   action,   and   the
plaintiff recanted before the illegal purpose was achieved, then,
unless   it   be   of   such   a   gross   nature   as   to   outrage   the
conscience   of   the   court,   the   plea   of   the   defendant   should   not
prevail."
The types of contracts to which the principle formulated by us
above applies are not contracts which are tainted with illegality
but are contracts which contain terms which are so unfair and
unreasonable   that   they   shock   the   conscience   of   the   court.
They   are   opposed   to   public   policy   and   require   to   be   adjudged
void.”
51. This   Court   also   considered   the   law   of   contract   and   its
interpretation   in   changing   times   in   Delhi   Transport   Corporation   v.
D.T.C. Mazdoor Congress & Ors ., (1991) Supp 1 SCC 600 thus:

62
“279.   In paragraph 4 of   Chitty on Contracts   (25th edn., vol. 1)
it   is   stated   that   "freedom   of   contract   is   a   reasonable   social
ideal   only   to   the   extent   that   equality   of   bargaining   power
between   contracting  parties   can   be   assumed   and   no  injury  is
done to the economic interest of the community at large."
280.   In   Anson’s   Law   of   Contract   at   pages   6   and   7   stated   the
scope   of   freedom   of   contract   in   the   changing   circumstances
thus:
    "Today the position is seen in a very different light. Freedom
of  contract   is  a  reasonable  social  ideal  only to  the   extent  that
equality   of   bargaining   power   between   contracting   parties   can
be assumed, and no injury is done to the economic interests of
the   community   at   large.   In   the   more   complicated   social   and
industrial   conditions   of   a   collectivist   society,   it   has   ceased   to
have   much   idealistic   attraction.   It   is   now   realised   that
economic   equality   often   does   not   exist   in   any   real   sense   and
that individual interests have to be made to subserve those of
the   community   hence   there   has   been   a   fundamental   change
both   in   our   social   outlook   and   in   the   policy   of   the   legislature
towards   contract   and   the   law   today   interferes   at   numerous
points   with   the   freedom   of   the   parties   to   make   what   contract
they   like.   The   relation   between   employers   and   employed,   for
example,   have   been   regulated   by   statutes   designed   to   ensure
that   the   employee’s   condition   of   work   are   safe,   that   he   is
properly protected against redundancy, and that he knows his
terms   of   service.   The   public   has   been   protected   against
economic   pressure   by   such   measures   as   the   Rent   Acts,   the
Supply   of   Goods   (Implied   Terms)   Act,   the   Consumer   Credit
Act, and other similar enactments. These legislative provisions
will   override   any   contrary   terms   which   the   parties   may   make
for   themselves.   Further,   the   legislature   has   intervened   in   the
Restrictive Trade Practices Act, 1956, and the Fair Trading Act,
1973 to promote competition in industry and to safeguard the
interests of consumers. This intervention is specially necessary
today when most contracts entered by ordinary people are not
the   result   of   individual   negotiation.   It   is   not   possible   for   a
private   person   to   settle   the   terms   of   his   agreement   with   a
British Railways Board or with a local electricity authority.”
The 'standard form' contract is the rule. He must either accept
the   terms   of   this   contract   in   toto   or   go   without.   Since,
however, it is not feasible to deprive oneself of such necessary
services, the individual is compelled to accept on those terms.
In view of this fact, it is quite clear that freedom of contract is
now largely an illusion."
52. (a).     It   has   been   emphasised   in   D.T.C.   (supra)   that   the   period   of
contract is to be reasonable and the employee has a right to know the

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conditions   of   work   and   he   is   properly   protected   against   redundancy.
Approving decision in   Central Inland Water Transport Corporation Ltd.
&   Anr.   v.   Brojo   Nath   Ganguly   &   Anr .   (1983)   3   SCC   156   Court   held
thus:
“282.   In   Brojo   Nath   case   (1986)   3   SCC   156,   Madon,   J.
elaborately   considered   the   development   of   law   relating   to
unfair or unreasonable terms of the contract or clauses thereof
in  extenso,  and  it  is   unnecessary for  me  to  traverse  the  same
grounds   once   over.   The   learned   Judge   also   considered   the
arbitrary,   unfair,   and   unbridled   power   on   the   anvil   of
distributive   justice   or   justness   or   fairness   of   the   procedure
envisaged   therein.   The   relevant   case   law   in   that   regard   was
dealt with in  extenso in  the light of the development  of  law in
the Supreme Court of United States of America and the House
of Lords in England and in the continental countries. To avoid
needless   burden   on   the   judgment,   I   do   not   repeat   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   of
Government   contracts   and   the   right   of   the   State   to   impose
unconstitutional conditions, observed:
  “283.   The   problem   also   could   be   broached   from   the   angle
whether   the   State   can   impose   unconstitutional   conditions   as
part   of   the   contract   or   statute   or   rule   etc.   In   (1959­60)   73
Harvard   Law   Review ,   in   the   Note   under   the   caption
‘Unconstitutional  Condition’   at  pages   1595­96   it   is   postulated
that   the   State   is   devoid   of   power   to   impose   unconstitutional
conditions  in the contract that the power to withhold largesse
has been asserted by the State in four 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.   It   was   further   adumbrated
at pages 1602­03 thus:
"The   sovereign's   constitutional   authority   to   choose   those   with
whom   it   will   contract   for   goods   and   services   is,   in   effect,   a
power   to   withhold   the   benefits   to   be   derived   from   economic
dealings   with   the   government.   As   government   activity   in   the
economic  sphere  increases,  the  contracting power  enables  the
government   to   control   many  hitherto   unregulated   activities   of

64
contracting parties through the imposition of conditions. Thus,
regarding the government, as a private entrepreneur, threatens
to   impair   constitutional   rights.   The   government,   unlike   a
private   individual,   is   limited   in   its   ability   to   contract   by   the
Constitution. The federal contracting power is based upon the
Constitution's   authorisation   of   these   acts   'necessary   and
proper' to the carrying out of the functions which it allocates to
the   national   government.   Unless   the   objectives   sought   by
terms   and   conditions   in   government   contracts   requiring   the
surrender   of   rights   are   constitutionally   authorised,   the
conditions must fall as ultra vires exercise of power.”
Again at page 1603, it is further emphasised thus:
      “When   conditions   limit   the   economic   benefits   to   be   derived
from   dealings   with   the   government   to   those   who   forego   the
exercise   of   constitutional   rights,   the   exclusion   of   those
retaining   their   rights   from   participation   in   the   enjoyment   of
these   benefits   may   be   violative   of   the   prohibition,   implicit   in
the due process clause of Fifth Amendment and explicit in the
equal  protection  clause of the Fourteenth Amendment against
unreasonable   discrimination   in   the   governmental   bestow   of
advantages.   Finally,   disabling   those   exercising   certain   rights
from   participating   in   the   advantages   to   be   derived   from
contractual   relations   with   the   government   may   be   a   form   of
penalty lacking in due process. To avoid invalidation for any of
the   above   reasons,   it   must   be   shown   that   the   conditions
imposed   are   necessary   to   secure   the   legitimate   objectives   of
the   contract,   ensure   its   effective   use,   or   protect   society   from
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
in   his   “ Retroactivity,   Paramount   Power   and   Contractual
Changes ” (1961­62) 71 Yale Law Journal 1191, stated that the
government can make contracts that are necessary and proper
for carrying out any of the specific clauses of the Constitution
or power to spend for general welfare. The Federal Government
has   no   power,   inherent   or   sovereign,   other   than   those
specifically   or   explicitly   granted   to   it   by   the   Constitution.   At
page 1197, it is further stated thus:
“The   government   acts   according   to   due   process   standards   for
the   due   process   clause   is   quite   up   to   that   task   without   the
rule. Alterations of government contracts are not desirable in a
free   country   even   when   they   do   not   constitute   a   ‘taking’   of
property   or   impinge   on   questions   of   fundamental   fairness   of
the   type   comprehended   in   due   process.   The   government   may
make changes, but only if war or commerce require them and
not   on   the   broader   and   more   ephemeral   grounds   that   the
general welfare would be served by the change. Any other rule
would allow the government to welch almost at will.”
x x x 

65
286.  In  Brojo Nath case  (supra, after elaborate consideration of
the   doctrine   of   “reasonableness   or   fairness”   of   the   terms   and
conditions   of   the   contract   vis­a­vis   the   relative   bargaining
power of the contracting parties this Court   laid down that the
principles   deducible   from   the   discussion   made   therein   is   in
consonance   with   right   or   reason   intended   to   secure   socio­
economic   justice   and   conform   to   mandate   of   the   equality
clause in Article 14 . The principle laid was that courts will not
enforce   and   will,   when   called   upon   to   do   so,   strike   down   an
unfair   and   unreasonable   contract   or   an   unfair   and
unreasonable   clause   in   a   contract,   entered   into   between
parties who are not equal in bargaining power …. It will apply
to   situations   in   which   the   weaker   party   is   in   a   position   in
which   he   can   obtain   goods   or   services   or   means   of   livelihood
only   upon   the   terms   imposed   by   the   stronger   party   or   go
without them. It will also apply where a man has no choice, or
rather   no   meaningful   choice,   but   to   give   his   assent   to   a
contract   or   to   sign   on   the   dotted   line   in   a   prescribed   or
standard   form   or   to   accept   a   set   of   rules   as   part   of   the
contract,   however  unfair,  unreasonable   and   unconscionable  a
clause in that contract or form or rules may be. This principle,
however,   will   not   apply   where   the   bargaining   power   of   the
contracting   parties   is   equal   or   almost   equal   or   where   both
parties   are   businessmen,   and   the   contract   is   a   commercial
transaction.
287.   In today’s complex world of giant corporations with their
vast   infrastructural   organisations   the   State   through   its
instrumentalities   and   agencies   has   been   entering   into   almost
every   branch   of   industry   and   commerce   and   field   of   service,
there   can   be   myriad   situations   which   result   in   unfair   and
unreasonable   bargains   between   parties   possessing   wholly
disproportionate   and   unequal   bargaining   power .   These   cases
can   neither   be   enumerated   nor   fully   illustrated.   The   court
must judge each case on its own facts and circumstances.”
(emphasis supplied)
  The Court held that there can be myriad situations which result in
unfair   and   unreasonable   bargains,   which   are   the   outcome   of   an
unequal bargaining power. Each case has to be seen on its own facts
and circumstances.
(c). In   D.T.C.   (supra), the Court also held that Article 14 sheds light
on public policy to curb arbitrariness thus: 

66
“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   policy
recognised   and   valued   in   all   States,   and   it   admonishes   the
State   when   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 genus
while   Article   16   is   a   specie.   Article   16   gives   effect   to   the
doctrine   of   equality   in   all   matters   relating   to   public
employment.   The   basic   principle   which,   therefore,   informs
both   Articles   14   and   16   is   equality   and   inhibition   against
discrimination.   "Equality   is   a   dynamic   concept   with   many
aspects   and   dimensions,   and   it   cannot   be   “cribbed,   cabined
and confined” within traditional and doctrinaire limits. From a
positivistic   point   of   view,   equality   is   antithetical   to
arbitrariness.   In   fact,   equality   and   arbitrariness   are   sworn
enemies; one belongs to the rule of law in a republic while the
other, to the whim and caprice of an absolute monarch. Where
an   act   is   arbitrary,   it   is   implicit   in   it   that   it   is   unequal   both
according   to   political   logic   and   constitutional   law   and   is
therefore   violative   of   Article   14,   and   if   it   affects   any   matter
relating to public employment, it is also violative of Article 16.
Articles   14   and   16   strike   at   arbitrariness   in   State   action   and
ensure   fairness   and   equality   of   treatment .   In   Maneka   Gandhi
case  (1978) 1 SCC 248, it was further held that the principle of
reasonableness, which legally as well as philosophically,  is an
essential   element   of   equality   or   non­arbitrariness   pervades
Article   14   like   a   brooding   omnipresence.   In   Ramana   case
(1979)   3   SCC   489,   it   was   held   that   it   is   merely   a   judicial
formula   for   determining   whether   the   legislative   or   executive
action   in   question   is   arbitrary   and   therefore   constituting
denial   of   equality.   If   the   classification   is   not   reasonable   and
does   not   satisfy   the   two   conditions,   namely,   rational   relation
and nexus, the impugned 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,  whether  it  be  of  legislature   or of
the executive or of an "authority" under Article  12,  Article 14,
"immediately   springs   into   action   and   strikes   down   such   State
action."   In   fact,   the   concept   of   reasonableness   and   non­
arbitrariness pervades the entire constitutional scheme and is
a golden thread which runs through the whole of the fabric of
the constitution .
302.   Article 14 is the general principle, while Article 311(2)  is
a   special   provision   applicable   to   all   civil   services   under   the
State. Article 311(2) embodies the principles of natural justice,
but  proviso  to  clause  (2)  of  Article  311  excludes  the  operation
of principles of natural justice engrafted in Article 311(2) as an
exception   in   the   given   circumstances   enumerated   in   three

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clauses   of   the   proviso   to   Article   311(2)   of   the   Constitution.
Article   14   read   with   Articles   16(1),   and   311   are   to   be
harmoniously   interpreted   that   the   proviso   to   Article   311(2)
excludes the application of the principles of natural justice as
an   exception;   and   the   applicability   of   Article   311(2)   must,
therefore,   be   circumscribed   to   the   civil   services   and   be
construed   accordingly.   In   respect   of   all   other   employees
covered   by   Article   12   of   the   Constitution,   the   dynamic   role   of
Article   14   and   other   relevant   articles   like   Article   21   must   be
allowed   to   have   full   play   without   any   inhibition,   unless   the
statutory   rules   themselves,   consistent   with   the   mandate   of
Articles   14,   16,   19   and   21   provide,   expressly   such   an
exception .”
(emphasis supplied)
(d). Arbitrariness   in   State   action   whether   of   the   legislature   or   the
executive  or  of  an  authority   under  Articles  12,  14  and  21 comes  into
play   to   strike   down   such   an   action.   The   Court   in   D.T.C.   (supra)   held
thus:
“ 303.   Article   19(1)(g)   empowers   every   citizen   the   right   to
avocation   or   profession   etc.   which   includes   right   to   be
continued in employment under the State unless the tenure is
validly terminated consistent with the scheme enshrined in the
fundamental   rights   of   the   Constitution.   Therefore,   if   any
procedure   is   provided   for   deprivation   of   the   right   to
employment  or right to the  continued  employment  till  the age
of superannuation as is a source to right to livelihood, such a
procedure   must   be   just,   fair   and   reasonable.   This   Court   in
Fertilizer   Corporation   Kamgar   Union   (Regd.),   Sindri   v.   Union   of
India   (1981)   1   SCC   568,   held   that   Article   19(1)(g)   confers   a
broad and general right which is available to all persons to do
works   of   any   particular   kind   and   of   their   choice.   Therefore,
whenever there is arbitrariness in State action — whether it be
of   the   legislature   or   of   the   executive   or  of   an   authority   under
Article   12,   Articles   14   and   21   spring   into   action   and   strikes
down such an action. The concept of reasonableness and non­
arbitrariness   pervades   the   entire   constitutional   spectrum   and
is a golden thread which runs through the whole fabric of the
Constitution .   Therefore,   the   provision   of   the   statute,   the
regulation   or   the   rule   which   empowers   an   employer   to
terminate   the   services   of   an   employee   whose   service   is   of   an
indefinite   period   till   he   attains   the   age   of   superannuation,   by
serving a notice or pay in lieu thereof must be conformable to
the   mandates   of   Articles   14,   19(1)(g)   and   21   of   the
Constitution. Otherwise, per se, it would be void. In   Moti Ram
Deka  case ,   AIR  1964   SC 600,   Gajendragadkar,  J.   (as   he   then

68
was)   after   invalidating   the   Rules   149(3)   and   148(3)   under
Article 311(2) which are in pari materia with Regulation 9( b ) of
the   Regulations   also   considered   their   validity   in   the   light   of
Article 14 and held thus: (SCR p. 731)
“Therefore,   we   are   satisfied   that   the   challenge   to   the
validity   of   the   impugned   Rules   on   the   ground   that   they
contravene Article 14 must also succeed.”
This   was   on   the   test   of   reasonable   classification   as   the
principle then was applied. Subba Rao, J. (as he then was) in a
separate but concurring judgment, apart from invalidating the
rule   under   Article   311(2)   also   held   that   the   rule   infringed
Article   14   as   well,   though   there   is   no   elaborate   discussion   in
that regard. But, Das Gupta, J. considered elaborately on this
aspect and held: (SCR p. 770)
        “Applying the principle laid down in the above case to the
present Rule, I find on the scrutiny of the Rule that it does not
lay   down   any   principle   or   policy   for   guiding   the   exercise   of
discretion   by   the   authority   who   will   terminate   the   service   in
the   matter   of   selection   or   classification.   Arbitrary   and
uncontrolled   power   is   left   in   the   authority   to   select   at   its   will
any   person   against   whom   action   will   be   taken.   The   rule   thus
enables   the   authority   concerned   to   discriminate   between   two
railway   servants   to   both   of   whom  Rule   148(3)   equally  applied
by taking action in one case and not taking it in the other. In
the   absence   of   any   guiding   principle   in   the   exercise   of   the
discretion   by   the   authority,   the   Rule   has,   therefore,   to   be
struck down as contravening the requirements of Article 14 of
the Constitution."
 
308.  In  Ramana case   (1979) 3 SCC 489, it has been held 
that: (SCC p. 504, para 10)
“ It is indeed unthinkable that in a democracy governed by 
the rule of law, the executive government or any of its officers 
should possess arbitrary power over the interests of the 
individual.”
The   procedure   adopted   should   match   with   what   justice
demands. History shows that it is always subtle and insidious
encroachments   made   ostensibly   for   a   good   cause   that
imperceptibly but surely erode the foundations of liberty .”
(emphasis supplied)
(e). An employer cannot act in a manner that is in the negation of just,
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 but do have power to mend it so as to be in

69
conformity   with   the   intendment   of   the   legislature.
Doctrine   of   reading   down   is   one   of   the   principles   of
interpretation   of   statute   in   that   process.   But   when   the
offending   language   used   by   the   legislature   is   clear,
precise,   and   unambiguous,   violating   the   relevant
provisions   in   the   Constitution,   resort   cannot   be   had   to
the doctrine of reading down to blow life into the void law
to   save   it   from   unconstitutionality   or   to   confer
jurisdiction   on   the   legislature.   Similarly,   it   cannot   be
taken aid of to emasculate the precise, explicit, clear and
unambiguous language to confer arbitrary, unbridled and
uncanalised power on an employer which is a negation to
just,   fair   and   reasonable   procedure   envisaged   under
Articles   14   and   21   of   the   Constitution   and   to   direct   the
authorities   to   record   reasons,   (    sic    )   unknown   or
unintended   procedure,   in   the   manner   argued   by   the
learned counsel for the appellants .”   (emphasis supplied)
(f). In   D.T.C.   (supra)  this  Court also  relied  upon   S.G.  Jaisinghani v.
Union of India , AIR 1967 SC 1427 :
“331.   x   x   x     “In   this   context   it   is   important   to
emphasise that the absence of arbitrary power is the first
essential   of   the   rule   of   law   upon   which   our   whole
constitutional   system   is   based.   In   a   system   governed   by
rule   of   law,   discretion,   when   conferred   upon   executive
authorities,   must   be   confined   within   defined   limits.   The
rule   of   law   from   this   point   of   view   means   that   decisions
should   be   made   by   the   application   of   known   principles
and   rules   and,   in   general,   such   decisions   should   be
predictable, and the citizen should know where he is.  If a
decision   is   taken   without   any   principle   or   without   any
rule,   it   is   unpredictable,   and   such   a   decision   is   the
antithesis 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. in   United States   v.   Wunderlich   342 US
98, ‘ when it has freed man from the unlimited discretion
of   some   ruler   ….   Where   discretion   is   absolute,   man   has
always   suffered .’   It   is   in   this   sense   that   the   rule   of   law
may be said to be the sworn enemy of caprice. Discretion,
as Lord Mansfield stated it in classic terms in the case of
John Wilkes  (1770) 4 Burr 2528, ‘means sound discretion
guided   by   law.   It   must   be   governed   by   rule,   not   by
humour: it must not be arbitrary, vague and fanciful’”.
(emphasis supplied)

70
(g). The   Court   emphasised   that   the   decision   has   to   be   predictable
and   it   cannot   be   uncertain.   The   decision   has   to   be   taken   by
application   of   known   principles   and   rules.   The   exercise   of   power
cannot be whimsical or capricious. This Court in  D.T.C.  (supra) held:
“332.   In an appropriate case where there is no sufficient
evidence   available   to   inflict   by   way   of   disciplinary
measure,   penalty   of   dismissal   or   removal   from   service
and   to   meet   such   a   situation,   it   is   not   as   if   that   the
authority   is   lacking   any   power   to   make   rules   or
regulations   to   give   a   notice   of   opportunity   with   the
grounds or the material on records on which it proposed
to take action, consider the objections and record reasons
on   the   basis   of   which   it   had   taken   action   and
communicate   the   same.   However,   scanty   the   material
may be, it must form foundation. This minimal procedure
should be made part of the procedure   lest the exercise of
the   power   is   capable   of   abuse   for   good   as   well   as   for
whimsical or capricious purposes for reasons best known
to   the   authority   and   not   germane   for   the   purpose   for
which   the   power   was   conferred .   The   action   based   on
recording   reasoning   without   communication   would
always   be   viewed   with   suspicion.   Therefore,   I   hold   that
conferment   of   power   with   wide   discretion   without   any
guidelines, without any just, fair or reasonable procedure
is constitutionally anathema 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 once the
Central   Board   of   Directors   accepted   the   memorandum   for   making
payment   of   pension,   in   case   it   was   not   accepting   the   proposal   in   the
memorandum,   it   ought   to   have   said   clearly   that   it   was   not   ready   to
accept   the   proposals   of   the   Government   and   the   IBA   and   rejects   the
same. Once it approved the proposals referred to in the memorandum,

71
which   were   on   the   basis   of   IBA's   letter   and   Government   of   India's
decision   it   was   bound   to   implement   it   in   true   letter   and   spirit.   By
accepting   the   same,   binding   obligation   was   created   upon   the   SBI   to
make   payment   of   pension   on   completion   of   15   years   of   service.   It
cannot invalidate its own decision by relying on fact it failed to amend
the rule, whereas other Banks did it later on with retrospective effect.
They   cannot  invalidate   otherwise   valid   decision   by   virtue   of   exclusive
superior   power   to   amend   or   not   to   amend   the   rule   and   act   unfairly
and   make   the   entire   contract   unreasonable   based   on
misrepresentation.   It was open to the Board of Directors to reject the
proposal.   Once   it   accepted   the   proposal   to   make   payment   of   pension
on completion of 15 years of service as proposed in the memorandum,
though  the   scheme   is   tried  to   be  interpreted  by   the   SBI   that  pension
was   to   be   admissible   as   provided   in   the   rule   that   refers   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 in the
backdrop   of   facts   and   what   has   been   resolved   by   the   Board   of
Directors.   There   is   no   ambiguity   with   respect   to   the   admissibility   of
pension when the memorandum and the scheme are read together. In
case   of   ambiguity   and   even   if   two   interpretations   are   possible   in   the

72
backdrop of facts of the case, one in favour of the employees has to be
adopted and so­called clarification dated 11.1.2000 even if considered
in the manner so as to deny the benefit of pension, has to be held to
be unenforceable, illegal and contrary to law.
54. It is apparent from the eligibility clause of the VRS scheme that
eligibility is provided for the employees having 15 years of pensionable
service 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
makes it clear that employees with 15 years of service were treated as
eligible   to   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   service   would   be   entitled   for   pensionary   benefits.   The
scheme   was   carved   out   specially   for   attracting   the   employees   by
providing pension and other benefits to eligible persons like ex gratia,
gratuity, pension and leave encashment. Deprivation of pension would
make them ineligible for the benefits and would run repugnant to the
eligibility clause.
55. The submission raised on behalf of the SBI that the draft scheme
nowhere   stipulated   that   15   years’   service   would   be   the   eligibility   or
that   on   completion   of   15   years'   service,   the   incumbent   would   be

73
eligible   for   pension,   is   factually   incorrect.   It   is   apparent   from   the
material   circumstances,   documents,   and   correspondence   that   the
decision was taken at all levels including the one by the Central Board
of Directors of SBI, that the benefit of pension was to be given to the
employees   on   completion   of   15   years   of   service.   In   that   perspective,
vagueness   of   scheme   of   SBI,   if   any,   can   be   of   no   advantage   as   it   is
clear beyond the pale of doubt that pension was heart and soul of the
scheme with ex gratia on completion of 15 years of service.  It is due to
the   reason   that   the   benefit   was   to   be   accorded   to   the   incumbents
having   completed   15   years   of   service,   Regulation   28   as   applicable   to
other   nationalised   banks   was   proposed   to   be   modified   as   reflected   in
the   letter   of   IBA   dated   11.12.2000   and   Government   of   India   letter
dated   5.9.2000.   Later   on,   the   regulation   was   amended   in   2002   after
the scheme had already been implemented in right earnest. There was
not even  an  iota of  doubt  that  VRS  was  to  give   benefits  to  all   eligible
employees having completed 15 years of service. It was apparent from
the   letter   dated   29.12.2000   of   SBI   that   the   guidelines   of   IBA   were
approved   by   the   Central   Board   of   Directors   in   its   meeting   dated
27.12.2000.   Para   2   of   the   letter   dated   29.12.2000   of   SBI   Deputy
Managing Director­cum­SDO is extracted hereunder:
"2.   Accordingly,   the   Central   Board   of   Directors,   in   its
meeting   held   on   27.12.2000,   has   accorded   approval   for
adopting   and   implementing   the   Voluntary   Retirement
Scheme   for   the   employees   of   the   Bank,   namely   "SBI

74
Voluntary   Retirement   Scheme   (SBIVRS).”   The   Scheme
"SBIVRS"   has   been   drawn   up,   keeping   in   view   the
guidelines issued by IBA . A copy of the Scheme is placed
at Annexure ‘B’.”   
(emphasis supplied)
56. As   noted   in   O.P.   Swarnakar   &   Ors .,   (supra),   the   case   of   bank
itself was that it was a contractual  scheme. The expression "pension"
as per rules was only for the purpose of working out the proportionate
pension. It was clearly decided to open the scheme to employees who
have put in 15 years of service. It was not provided in the scheme that
the   incumbent   was   required   to   render   a   pensionable   service   of   20
years   as   per   the   rules   in   order   to   acquire   eligibility   for   the   pension.
The submission made on behalf of SBI is too tenuous to be accepted.
It   was   observed   in   para   89   of   O.P.   Swarnakar   &   Ors .,   (supra)   quoted
above that the employee must have proceeded on the basis of 15 years
of service then they were entitled to pensionary benefits.
The   Court   further   observed   in   O.P.   Swarnakar   &   Ors .,   (supra)
that the scheme is enforceable thus:
“92.   However,   the   case   of   the   State   Bank   of   India   stands
slightly   on   a   different   footing.   Firstly,   the   State   Bank   of   India
had not amended the Scheme. It, as noticed hereinbefore, even
permitted   withdrawal   of   the   applications   after   ( sic   by)   15th
February.   The   Scheme   floated   by   the   State   Bank   of   India
contained   a   clause   (clause   7)   laying   down   the   mode   and
manner in which the application for voluntary retirement shall
be considered. The relevant clause, as referred to hereinbefore,
creates an enforceable right. In the event the State Bank failed
to   adhere   to   its   preferred   policy,   the   same   could   have   been
specifically   enforced   by   a   court   of   law.   The   same   would,
therefore, amount to some consideration." 

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57. While   construing   a   contract,   the   language   and   surrounding
circumstances of the overall scheme, memorandum and letters are to
be   read   conjointly   to   find   out   whether   any   departure   made   by   the
Board   of   Directors   in   its   Resolution   dated   27.12.2000   is   of   pivotal
significance.   In   this   case,   the   decision   was   taken   by   it   of   approval   of
the IBA scheme as proposed. Its binding effect cannot be changed on
the   basis   what   parties   choose   to   say   afterward,   nor   they   can   be
permitted   to   wriggle   out.   The   contract   is   required   to   be   read   as   a
whole. It is apparent on a bare reading that optees will be eligible for
proportionate pension under the Pension Regulations of the bank and
therefore, the bank bears the risk of lack of clarity, if any.
58. In  Bank of India & Anr. v. K. Mohandas & Ors ., (2009) 5 SCC 313
wherein several other banks were also parties, the question arose as to
the   nature   of   VRS,   2000.   The   Court   noted   the   objectives,   the
amendment made in Regulation 28 in 2002, providing for 15 years of
service.   The   scheme   was   open   in   November­December,   2000   and   in
Union   Bank   of   India   in   January,   2001.   The   employees   claimed   that
those who completed 20 years of service, were entitled to the benefit of
provisions   contained   in   Regulation   29(5)   of   Employees’   Pension
Regulations,   1995   applicable   to   the   said   banks.   They   claimed   having
completed the qualifying service of 20 years under Regulation 29, were
entitled   for   5   years’   increase   in   the   service   tenure   subject   to   the

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maximum of 33 years which was not given to them on the ground that
the   benefit   of   VRS   was   available   to   incumbents   having   completed   15
years of service as provided in amended Regulation 28, and Regulation
29   was   not   applicable.   This   Court   held   that   the   benefit   of   VRS   was
available   to   the   employees   having   completed   15   years   of   service,   but
the additional benefit which was available on completion of 20 years of
service was also admissible as provided in Regulation 29(5).
59. While   considering   the   aforesaid   similar   scheme   of   VRS,   this
Court observed with respect to the construction of the contract on the
basis of the import of the words. The intention of the parties must be
ascertained   from   the   language   they   have   used   and   considered   in   the
light   of   surrounding   circumstances,   and   the   meaning   cannot   be
changed by a course of conduct adopted by the parties in acting under
it. This Court in  K. Mohandas  (supra) held  thus:
“28.   The   true   construction   of   a   contract   must   depend   upon
the   import   of   the   words   used   and   not   upon   what   the   parties
choose to say afterwards. Nor does subsequent conduct of the
parties in the performance of the contract affect the true effect
of the clear and unambiguous words used in the contract. The
intention of the parties must be ascertained from the language
they   have   used,   considered   in   the   light   of   the   surrounding
circumstances  and  the  object  of  the   contract.  The  nature  and
purpose   of   the   contract   is   an   important   guide   in   ascertaining
the intention of the parties .
29.   In   Ottoman   Bank   of   Nicosia   v.   Ohanes   Chakarian ,   Lord
Wright made these weighty observations: (AIR p. 29)
“…   that   if   the   contract   is   clear   and   unambiguous,   its   true
effect   cannot   be   changed   merely   by   the   course   of   conduct
adopted by the parties in acting under it .”

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30.   In   Ganga Saran   v.   Firm Ram Charan Ram Gopal   AIR 1952
SC 9, a four­Judge Bench of this Court stated: (AIR p. 11, para
6)
“ 6 .   …   Since   the   true   construction   of   an   agreement   must
depend upon the import of the words used and not upon what
the parties choose to say afterwards, it is unnecessary to refer
to what the parties have said about it.”
31.   It   is   also   a   well­recognised   principle   of   construction   of   a
contract that it  must  be  read as a whole in order to  ascertain
the true meaning  of  its  several  clauses and the words  of each
clause should be interpreted so as to bring them into harmony
with the other provisions if that interpretation does no violence
to the meaning of which they are naturally susceptible . ( North
Eastern Railway Co.  v.  Lord Hastings,  1900 AC 260)”
60. With   respect   to   lack   of   clarity   in   the   scheme,   this   Court   in   K.
Mohandas  (supra)  relied on maxim  verba chartarum fortius accipiuntur
contra   proferentem   to   hold   that   banks   who   were   responsible   for
formulation   of   the   terms   in   the   contractual   Scheme,   bear   the   risk   of
lack   of   clarity.   Thus,   the   benefit  has   to   be   given   to   the   employees   by
making interpretation against the banks. The Court held :
“32.  The fundamental position is that  it is the banks who were
responsible   for   formulation   of   the   terms   in   the   contractual
Scheme   that   the   optees   of   voluntary   retirement   under   that
Scheme   will   be   eligible   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 terms applied by one party are unclear, an
interpretation against that party is preferred (    verba chartarum
fortius accipiuntur contra proferentem    ) .
33.  What was, in respect of pension, the intention of the banks
at   the   time   of   bringing   out   VRS   2000?   Was   it   not   made
expressly   clear   therein   that   the   employees   seeking   voluntary
retirement   will   be   eligible   for   pension   as   per   the   Pension
Regulations?   If   the   intention   was   not   to   give   pension   as
provided   in   Regulation   29   and   particularly   sub­regulation   (5)
thereof, they could have said so in the Scheme itself. After all,
much thought had gone into the formulation of VRS 2000, and

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it   came   to   be   framed   after   great   deliberations.   The   only
provision   that   could   have   been   in   mind   while   providing   for
pension   as   per   the   Pension   Regulations   was   Regulation   29.
Obviously,   the   employees,   too,   had   the   benefit   of   Regulation
29(5)   in   mind   when   they   offered   for   voluntary   retirement   as
admittedly Regulation 28, as was existing at that time, was not
applicable at all. None of Regulations 30 to 34 was attracted." 
          (emphasis supplied)
61. In   K. Mohandas   (supra) t he Court   considered   the argument that
Regulation   28   would   be   applicable   only   for   providing   15   years   of
eligibility as provided by way of amendment of Regulation of 1995, and
held that as the banks are “State” within the meaning of Article 12, it
would   be   an   arbitrary   action   on   their   part   to   deny   the   benefit   of
section   29(5),   and   there   has   to   be   harmonious   construction   to   the
scheme and Pension Regulations, thus:
“35.   We   are   afraid;   it   would   be   unreasonable   if   amended
Regulation 28 is made applicable, which had not seen the light
of the day and which was not the intention of the banks when
the   Scheme   was   framed.   The   banks   in   the   present   batch   of
appeals   are   public   sector   banks   and   are   "State"   within   the
meaning of Article 12 of the Constitution and their action even
in contractual matters  has to be  reasonable, lest,  as observed
in  O.P. Swarnakar  (2003) 2 SCC 721, it must attract the wrath
of Article 14 of the Constitution.
36.   Any   interpretation   of   the   terms   of   VRS   2000,   although
contractual in nature, must meet the test of fairness. It has to
be   construed   in   a   manner   that   avoids   arbitrariness   and
unreasonableness   on  the  part   of   the   public   sector  banks  who
brought   out   VRS   2000   with   an   objective   of   rightsizing   their
manpower. The banks decided to shed surplus manpower. By
formulation   of   the   special   scheme   (VRS   2000),   the   banks
intended   to   achieve   their   objective   of   rationalising   their   force
as   they   were   overstaffed.   The   special   Scheme   was,   thus,
oriented   to   lure   the   employees   to   go   in   for   voluntary
retirement.   In   this   background,   the   consideration   that   was   to
pass   between   the   parties   assumes   significance   and   a
harmonious   construction   to   the   Scheme,   and   the   Pension
Regulations, therefore, has to be given .

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37.   The   amendment   to   Regulation   28   can,   at   best,   be   said   to
have   been   intended   to   cover   the   employees   with   15   years   of
service   or   more   but   less   than   20   years   of   service.   This
intention  is reflected from the communication dated 5­9­2000
sent   by   the   Government   of   India,   Ministry   of   Finance,
Department   of   Economic   Affairs   (Banking   Division)   to   the
Personnel Advisor, Indian Banks’ Association .”
(emphasis supplied)
It   opined   that   the   amendment   to   Regulation   28   of   1995
Regulation   intended   to   cover   15   years   of   service,   i.e.,   employees   with
15   years   of   service   who   have   not   completed   20   years   of   service.   A
similar action to amend the Rule was required to be taken by the SBI,
but it failed to take it after having floated a similar scheme. It kept it
uncertain what would be the position of the rule as on the appointed
date,   i.e.,   31.3.2001.   Be   that   as   it   may.   But   it   was   crystal   clear   that
the  incumbent  with  15  years  of  service  was  eligible  for   the  benefit as
provided in the scheme itself.   The benefit clause has to be read with
the   eligibility   criteria.   Once   VRS   was   formulated   and   adopted   by   the
SBI  in toto , it constituted a complete contractual package in itself.
62. As   urged   on   behalf   of   SBI   if   section   23   of   the   Contract   Act   is
applied, then how it is helpful to the bank, is not understandable.   In
case it is held that the very scheme was opposed to the law/rules, the
entire   scheme   would   fall   down.   Once   it   adopted   the   scheme,   invited
applications and the employees acted upon it and retired on the basis
of the  scheme, they  cannot be left in  lurch.  In case its  submission  is
accepted,  the  Scheme  becomes  violative  of  Section  23 of  Contact  Act,

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the   bank   would   have   to   suffer   the   consequences   of   striking   down   of
the very scheme and would be required to reinstate the employees and
to pay them the salary and other benefits.  However, SBI accepted the
scheme,   it   was   incumbent   upon   it   to   bring   the   rules   in   consonance
with   the   similar   VRS   scheme   as   was   done   by   other   banks.   The   SBI
accepted the scheme on 27.12.2000 without any  ifs and buts.   Thus,
the   anomaly   was   the   outcome   of   the   bank's   inaction   to   propose   and
make   amendment   of   rules.   In   such   a   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   bank   to   lend   support   to
arbitrary   action.   The   bank   was   bound   to   extend   the   benefits   by
amending   the   rules,   if   necessary,   to   salvage   the   situation   for   itself.
Breach   of   law   has   been   committed   by   the   SBI   itself,   its   action   is
arbitrary   and   it   cannot   be   permitted   to   take   advantage   of   its   own
wrong.
63. The   pension   cannot   be   dealt   with   arbitrarily   and   cannot   be
denied   in  an  unfair  manner.     The   concept  of   pension  was  considered
in  D.S. Nakara & Ors. v. Union of India , (1983) 1 SCC 305. The right to
a pension can be enforced through the court, it observed :
“20.   The   antequated   notion   of   pension   being   a   bounty,   a
gratuitous payment depending upon the sweet will or grace of
the  employer  not  claimable   as   a  right  and,   therefore,   no  right
to   pension   can   be   enforced   through   Court   has   been   swept
under the carpet by the decision of the Constitution Bench in

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Deokinandan   Prasad   v.   State   of   Bihar   (1971)   2   SCC   330
wherein this Court authoritatively ruled that pension is a right
and the payment of it does  not depend upon  the discretion  of
the   Government   but   is   governed   by   the   rules   and   a
government   servant   coming   within   those   rules   is   entitled   to
claim   pension.   It   was   further   held   that   the   grant   of   pension
does   not   depend   upon   anyone’s   discretion.   It   is   only   for   the
purpose   of   quantifying   the   amount   having   regard   to   service
and   other   allied   matters   that   it   may   be   necessary   for   the
authority to pass an order to that effect but the right to receive
pension flows to the officer not because of any such order but
by   virtue   of   the   rules.   This   view   was   reaffirmed   in   State   of
Punjab  v.  Iqbal Singh,  (1976) 2 SCC 1.
22.   In   the   course   of   transformation   of   society   from   feudal   to
welfare   and   as   socialistic   thinking   acquired   respectability.
State obligation to provide security in old age, an escape from
undeserved   want   was   recognised   and   as   a   first   step   pension
was   treated   not   only   as   a   reward   for   past   service   but   with   a
view   to   helping   the   employee   to   avoid   destitution   in   old   age.
The  quid pro  quo  was  that when the employee  was  physically
and   mentally   alert,   he   rendered   unto   master   the   best,
expecting him to look after him in the fall of life. A retirement
system,   therefore,   exists   solely   for   the   purpose   of   providing
benefits.   In   most   of   the  plans   of  retirement   benefits,   everyone
who qualifies for normal retirement receives the same amount
(see   Retirement   Systems   for   Public   Employees   by   Bleakney,   p.
33).”
This Court observed that the principal aim of the socialist State
as   envisaged   in   the   Preamble   is   to   eliminate   inequality.   The   basic
framework   of   socialism   is   to   provide   security   in   the   fall   of   life   to   the
working people and especially provides security from the cradle to the
grave   when   employees   have   rendered   service   in   heydays   of   life,   they
cannot   be   destituted   in   old   age,   by   taking   action   in   an   arbitrary
manner and for omission to complete obligation assured one.  Though
there   cannot   be   estoppel   against   the   law   but   when   a   bank   had   the
power to amend it, it  cannot  take shelter of its own  inaction  and  SBI

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ought to have followed the pursuit of other banks and was required to
act in a similar fair manner having accepted the scheme.
64. Resultantly,   we   are   of   the   opinion   that   the   employees   who
completed 15 years of service or more as on cut­off date were entitled
to   proportionate   pension   under   SBI   VRS   to   be   computed   as   per   SBI
Pension   Fund   Rules.   Let   the   benefits   be   extended   to   all   such   similar
employees   retired   under   VRS   on   completion   of   15   years   of   service
without requiring them to rush to the court. However, considering the
facts   and   circumstances,   it   would   not   be   appropriate   to   burden   the
bank   with   interest.     Let   order   be   complied   with   and   arrears   be   paid
within three months, failing which amount to carry interest at the rate
of 6 per cent per annum from the date of this order.   The appeals are
accordingly disposed of.  No costs.
…………………………J.
(Arun Mishra)
………………….……..J.
(M.R. Shah)
New Delhi; …….…………………..J.
March 2, 2020.    (B.R. Gavai)