Karnataka HC Issues Mandamus to OMCs on Ethanol Allocation, Holds Clause 6.8 Cannot Be Selectively Invoked
The Karnataka High Court Dharwad Bench directed BPCL, HPCL and IOCL to consider a dedicated ethanol plant's representation for full allocation under its Long-Term Offtake Agreement, holding that partial invocation of a contractual clause at the OMCs' discretion is antithetical to law.
Justice M. Nagaprasanna, sitting singly at the Dharwad Bench of the High Court of Karnataka, allowed a writ petition filed by M/S. VINP Distilleries and Sugars Pvt. Ltd., a dedicated ethanol plant in Haveri district, and issued a writ of mandamus directing respondents 2 to 4 — Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited and Indian Oil Corporation Limited — to consider the petitioner's representation dated 27 October 2025 for enhancement of ethanol procurement. The court directed that an appropriate order on the representation be passed within four weeks of receipt of a copy of the judgment, and that such consideration must precede any decision on the tender currently in issue. The judgment, pronounced on 16 June 2026 after being reserved on 27 April 2026, traverses the maintainability of writ jurisdiction in contractual disputes involving State instrumentalities, the doctrine of legitimate expectation, and the obligation of Oil Marketing Companies (OMCs) to honour Clause 6.8 of the Long-Term Offtake Agreement (LTOA) they themselves had previously invoked.
The Dispute Before the Dharwad Bench
VINP Distilleries is a Dedicated Ethanol Plant (DEP) established exclusively to manufacture and supply Denatured Anhydrous Ethanol to the OMCs. It came into existence pursuant to an Expression of Interest (EOI) floated by the OMCs on 27 August 2021 for entering into Long-Term Offtake Agreements with dedicated ethanol plants in ethanol-deficit states. The petitioner was shortlisted, received a Letter of Intent on 13 November 2021, and executed the LTOA on 13 January 2022. Its plant, located at Sy. No. 42, 43 and 53, Jakkanakatti Road, Konanakeri Village, Shiggaon Taluk, Haveri District, was designed with a production capacity of 300 KLPD — equivalent to 9.90 crore litres per annum computed over 330 operating days.
On 23 September 2025, the OMCs floated Tender No. 22376 inviting bids for supply of 1,050 crore litres of Denatured Anhydrous Ethanol for Ethanol Supply Year (ESY) 2025-26. The petitioner participated in a pre-bid meeting and sought clarification on preferential allocation. By email dated 17 October 2025, the OMCs communicated that the petitioner had been allotted only 3.92 crore litres against its bid of 9.26 crore litres — a shortfall of 6.33 crore litres. The petitioner submitted a representation on 27 October 2025 seeking allocation of the full 9.26 crore litres. The representation went unheeded, prompting the writ petition under Article 226 of the Constitution of India.
The petitioner's case rested on two clauses of the LTOA. Clause 6.2 fixed the minimum annual offtake quantity at 1.44 crore litres on a best endeavour basis. Clause 6.8 provided that where a bidder had been issued a Letter of Intent for a quantity lesser than its bid, and had set up the plant as per its bid, the OMCs may offer additional annual offtake quantity beyond Clause 6.2, up to the design capacity of the plant, through preferential allocation in the ethanol procurement process, again on a best endeavour basis. The petitioner contended that the OMCs had themselves invoked Clause 6.8 in prior ESYs to enhance procurement from 1.44 crore litres to 3.30 crore litres, and could not now retreat from that position.
Procedural History: Interim Order Set Aside by the Supreme Court
This Court had passed an interim order on 15 December 2025 directing the OMCs to revise the allotment in line with the LTOA, placing reliance on Clause 6.8. The OMCs challenged that order before a Division Bench by way of writ appeals. The Division Bench dismissed the appeals on 29 January 2026, affirming the interim order. The OMCs then approached the Supreme Court by way of SLP(C) No. 7799 of 2026.
The Supreme Court, by order dated 26 February 2026, set aside both the interim order of this Court and the Division Bench's order. The Supreme Court observed that tender allocations had stood completed on 17 October 2025, that supply agreements had been signed on 27 October 2025, that as of 15 February 2026 approximately 281 crore litres had already been supplied to the OMCs under the tender, and that the ESY 2025-26 ran only from November 2025 to October 2026. The Supreme Court held that the High Court should have been circumspect before passing an interim order that had the effect of seriously impeding execution of the tender. It directed this Court to decide the writ petition expeditiously on its own merits, kept all contentions open, and clarified that any further allocation of ethanol by the OMCs would be subject to the final outcome of the writ petition.
The matter was thereafter heard on merits before Justice Nagaprasanna.
The Legal Issue: Writ Jurisdiction Over Contractual Disputes Involving State Instrumentalities
The learned Attorney General of India, appearing for the OMCs, raised a threshold objection to maintainability. His submission was that the dispute arose from a contract between the parties, that it involved seriously disputed questions of fact relating to allocation methodology, quarter-wise zone requirements, quantum of bids received and national blending targets, and that the appropriate remedy was arbitration under the LTOA's arbitration clause. He further argued that Clause 6.8 was directory and not mandatory, that the phrase “best endeavour basis” could not be converted into an enforceable right, and that the doctrines of legitimate expectation and promissory estoppel could not compel a public authority to act inconsistently with statutory duty, public obligation and public interest. He contended that Karnataka was not an ethanol-deficit state, and that acceding to the petitioner's representation would amount to modifying the Government's allocation policy.
The court rejected these contentions. Drawing on a line of Supreme Court decisions — including Gujarat State Financial Corporation v. Lotus Hotels Pvt. Ltd., ABL International Limited v. Export Credit Guarantee Corporation of India Limited, Noble Resources Limited v. State of Orissa, and Mahabir Auto Stores v. Indian Oil Corporation — the court held that a writ petition against a State or its instrumentality arising out of a contractual obligation is maintainable where the action of the State is arbitrary or violates Article 14 of the Constitution. The court held that the OMCs, being public sector enterprises, answer the description of “State” under Article 12, and that once the State enters a contractual relationship, judicial review is not eclipsed merely because the controversy has its genesis in contract.
The court also addressed the doctrine of legitimate expectation, drawing on the Supreme Court's analysis in Army Welfare Education Society v. Sunil Kumar Sharma. It noted that legitimate expectation must be founded on a right arising from an express or implied promise, or a consistent past practice of a public authority. It must be reasonable, logical and valid. In the present case, the court found that the petitioner's expectation of continuance of the prevailing policy arose directly from the LTOA itself and from the consistent past conduct of the OMCs in invoking Clause 6.8 to enhance procurement.
How the Bench Reasoned on the Merits
The court identified several uncontested facts that it considered determinative. First, the petitioner's plant was established solely pursuant to the EOI floated by the OMCs and the consequent LTOA. The production capacity of 9.90 crore litres per annum was disclosed from inception in the petitioner's response to the EOI. The petitioner had neither expanded nor altered the unit thereafter.
Second, the petitioner was contractually prohibited from supplying ethanol to any entity other than the OMCs, save with their prior written permission. The EOI itself stipulated that all quantity produced by a dedicated ethanol plant would be supplied to the OMCs only for the Ethanol Blended Petrol programme. Clause 23.11 of the LTOA further engrafted this exclusivity, interdicting the supplier from entering into any similar agreement with any third party. The court described this as forging “an exclusive bond” between the plant and the OMCs, who admittedly enjoyed an overwhelming monopoly over procurement and distribution of ethanol.
Third, and the court treated this as particularly significant, the OMCs had themselves invoked Clause 6.8 in prior ESYs to enhance procurement from 1.44 crore litres to 3.30 crore litres. Even subsequent to the impugned tender, Clause 6.8 had been invoked to permit enhancement from 1.44 crore litres to 3.92 crore litres. The court held that the OMCs could not now contend that the LTOA was wholly discretionary or that they could distribute procurement through preferential allocation unfettered by prior assurances.
The court then applied the principle drawn from Mahabir Auto Stores: when an instrumentality of the State enjoys monopoly power, fairness and reasonableness are not matters of grace but constitutional obligation. The State cannot, by a sudden change of position, dismantle a long-standing course of conduct or defeat solemn assurances upon which parties have altered their positions and invested colossal sums. The court observed that arbitrariness can never masquerade as discretion.
On the specific question of Clause 6.8, the court held that the OMCs' selective or partial invocation of the clause — using it to enhance procurement to 3.92 crore litres but refusing to consider the full 9.90 crore litres — was impermissible. If such conduct were countenanced, the operation of Clause 6.8 would be reduced to the whims and fancies of the OMCs, an outcome wholly antithetical to law. The court also noted that the present notification sought procurement of 1,500 crore litres of ethanol, and that dedicated ethanol plants, contractually prohibited from manufacturing anything else or supplying to any third party, could not be relegated to a position of grave and manifest prejudice.
Outcome
The writ petition was allowed. A writ of mandamus issued to respondents 2 to 4 (BPCL, HPCL and IOCL) directing them to consider the petitioner's representation dated 27 October 2025 for enhancement of procurement, bearing in mind the observations made in the course of the order. The court directed that the consideration must precede any decision on the tender currently in issue, and that an appropriate order on the representation be passed within four weeks from the date of receipt of a copy of the order. All impleading applications and other pending applications were disposed of as a consequence.