Shield, Not a Sword: Article 19(1)(g) and the Limits of Trader Monopolies

Introduction : With regard to the Indian commercial law framework, the issue of balancing the need to protect the established businesses and the entry of new entities in the market has always been a contentious one. While the former have always been vocal about their needs, the Judiciary has time and again held that the fundamental right to trade granted by Article 19(1)(g) of the Constitution does not allow them to take away rights of others.

A recent Punjab and Haryana High court ruling in Moga Periphery pump association v. Union of India (2024) takes the discourse on this issue even further. The judgment holds that the existing petrol pump dealers cannot utilize the judiciary and the fundamental rights to prevent state oil companies from granting dealership to new entities and thereby increase competition. Such a ruling is perfectly in line with similar previous judgments such as Nagar rice and flour mills which have time and again held that protecting the rights of established businesses to the detriment of healthy competition in the market runs counter to the interest of the India economy.

Main Article: The Conflict Between Incumbent Protections and Market Entry

In commercial activity, the inherent bias of status quo dealers is to always oppose any actions by the state that will lead to more dealers entering the market with whom they will have to share their clientele. In the case of Moga Periphery Pump association v. Union of India, 141 petrol pump dealers filed a petition in the Punjab and Haryana High Court challenging the decision of Union of India to allot 60 new dealerships in the Moga district. The petitioners argued that the sales in the said district were below the national average and hence new dealerships would lead to further reduction in sales, to the detriment of the existing dealers. However, the High Court dismissed the petition finding that commercial risks and prospects for profits could not be a ground to violate fundamental rights of others. Further, the directions given by the Union were merely goals for the existing dealers to strive to achieve, and hence could also not be grounds to deny fundamental rights.

The Constitutional Limitations of Article 19(1)(g)

However, while interpreting the petition, the Court noted several constitutional limitations with regard to the rights of existing petrol pump dealers in the district:

• the right to trade did not extend to the right to expect profits, turnover, or a particular ratio of income in connection with the trade;

• Article 19(1)(g) could not be construed to prohibit competition from other traders; or

• it could not impose on the petitioner a duty to refrain from competing with others.

The Courts’ Consensus on Competition as a Public Interest

In various past judgments, both the High Courts and the Supreme Court have made it clear that in dealing with petitions regarding the allocation of trade licenses or other similar commercial activities, the rights of the first-time applicants always outweigh those of the status quo dealers. The Courts have laid down the following guiding principles with regard to such petitions:

A trader who has been denied the allotment of a trade license cannot approach the Court merely because he was deprived of the benefits of a trade license by reason of its allotment to another dealer. In other words, a trader dealing in rice and wheat cannot approach the Court merely because he was deprived of the benefits of a trade license by reason of its allotment to another dealer Nagar rice & flour mills v. N. Teekappa Gowda. The right to carry on trade did not include a right to compete exclusively;

The argument that the State should not allot fresh licenses since the market in the area is already saturated is not a valid ground for challenging the allotment as held in Suman Yadav v. State of U.P. and C. Venugopal Reddy v. Indian Oil Corporation by the Allahabad and Andhra Pradesh High Courts respectively.

Lastly, in cases concerning the proprietary rights of a franchise or sole trader such as the Moga Periphery case, the Courts have held that the terms and conditions of a dealership agreement do not override the Constitution and statutes. By virtue of enacting statutes that allow franchising within the state by the appointment of additional dealers, the state was essentially giving commercial directions to private entities. Therefore, disputes pertaining to commercial agreements between these entities could not be treated as disputes within the Court’s jurisdiction under Article 226 of the Constitution.

The Lessons for Practitioners

The judgments passed by the Courts regarding the rights of first-time entrants and the claims of the status quo dealers provide important lessons for the practitioners:

a) Petitions by trade associations challenging the expansion of the dealer network by way of writ petitions questioning the constitutional validity of statutes or executive actions are bound to fail if they rely on the argument that the existing dealers should enjoy a right to exclude new entrants or claim that their profits or turnover will be adversely affected;

b) the public interest is best served by leaving the issues of free and open competition in the marketplace to the market forces to decide; and

c) the parties to commercial agreements should bear in mind that any provision restricting the rights of a franchise or dealership to appoint additional dealers at the discretion of the franchisor or the state-owned entity will be treated as a justiciable issue by the courts.

Conclusion

The judiciary’s interpretation of the Constitution's Article 19(1)(g) allows freedom to trade while also protecting the public interest in an open market with competition. Consequently, the Courts have ruled that the fundamental right to carry on business does not include the right to be free from competition, removing any justification for invoking a fundamental right to establish monopolistic practices.

The judgments passed by the Courts concerning the rights of first-time entrants and the claims of the status quo dealers exemplify this trend. The rulings by the Moga Periphery Pump Association show that the market determines an entity’s success by its ability and willingness to compete, which may be limited by such factors as the range of profits. As a result, businesses and their commercial representatives should understand that they will not receive constitutional rights-based protection from competition as a fundamental law of nature and have to rely on state intervention in cases of legal violations (Article 226).

Author: Namrata Chavhan in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

References

1. Constitution of India, Art. 19(1)(g) & Art. 19(6).

2. Moga Periphery Pump Association v. Union of India and Ors., (2024) MANU/PH/2082/2024.

3. Suman Yadav v. State of U.P. and Ors., (2016) MANU/UP/3355/2016.

4. Nagar Rice & Flour Mills v. N. Teekappa Gowda & Bros., (1970) 1 SCC 575: MANU/SC/0329/1970.

5. C. Venugopal Reddy v. Indian Oil Corporation, Vijayawada and Ors., (2000) MANU/AP/0400/2000.