BSNL v. BPL Mobile Cellular: lemonade out of lemons

Adjudicating on an appeal filed by BSNL (the state telecommunication provider), the Supreme Court in the case of BSNL v. BPL Mobile Cellular (Per Sinha, J.) (2008) 13 SCC 597 addressed the applicability of internal circulars of the DoT to modify terms for telecommunication contracts entered under the Telegraph Act. Reading the case I was reminded about the asymmetry of information in markets which is popularly referred to as lemons law. It’s based on a paper by the economist George Akerlof. It discusses information asymmetry, which occurs when the seller knows more about a product than the buyer. The result of information asymmetry has a special significance with regard to the law of contracts and several States in the United States have made refinements in their state laws to protect buyers.

Guided by a similar intuition the Supreme Court held that the DoT could not increase tariffs previously agreed between the parties by a license agreement, on the basis of internal circulars. The court held that even though the Government of India had an absolute monopoly with regard to telecommunication services under the Telegraph Act, these circulars did not form part of that law. The provisions of the contract were to be governed on the basis of the terms of the contract itself, since the circulars did not have the force of law to modify the contract. The contract could only be modified by mutual agreement between the parties.

The court then went on to hold that since the circulars were internal rules and not within the knowledge of the licensee there could not be any mutual agreement or acquiescence. The court further held that even if the circulars were mentioned in some meetings and casually came to the knowledge of the licensee they would not evidence agreement as to the terms of the contract. The position is succinctly summarized in the following para :

“They [the circulars] may have been published by some publisher but indisputable they are not statutory in nature. They have not been framed under any statute. The telegraph act or the rules framed under do not provide for the issuance of such circulars. The circular letters collected at one place are loosely called rules. They are meant for office use only.”

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