What is the State – III: Adopting the “Instrumentality or Agency” Test

In the last post, we discussed two approaches towards interpreting the term “other authority” in Article 12, exemplified by the majority and the concurrence in Rajasthan State Electricity Board v. Mohan Lal. The “legal approach” assimilates to the State those entities that the State creates (via statute), or has extensive control over. Or, in other words, the State must, in some way, be closely connected with the workings of the entity in question. The “functional approach”, on the other hand, brings within Article 12  all entities that perform State-like functions. Justice Mathew’s concurring opinion in Sukhdev Singh v. Bhagat Ram, as we saw, shuttled back and forth between the two conceptions, and his “agency and instrumentality” test appears to be agnostic about which approach it favours.

The question came before the Court again, in the 1979 case of R.D. Shetty vs International Airport AuthorityThe International Airport Authority was a corporate body constituted under the International Airport Authority Act of 1971. It invited tenders for running restaurants and snack bars at the Bombay International Airport, and ultimately accepted the highest bid. This decision was challenged, on the ground that in awarding the contract, the Authority had failed to abide by its own stipulations, and in treating similarly situated persons differently, had violated Article 14. The first question, therefore, was whether the International Airport Authority was subject to Article 14 obligations.

The Court’s analysis can be divided into five parts (although the Court itself does not do the division). In the Part I (paragraphs 10 to 12), the Court set out some general principles constraining the action of the government, when it acts as a contractor. In Part II (paragraphs 13 to 18), it analysed the situations under which a corporation can be subjected to the same public law constraints that apply to the government, as listed out in the Part I. In the Part III (paragraphs 19 to 27), it cited precedents that also located Article 14 as the source of these constraints. In Part IV (paragraphs 28 to 32), it extended its analysis in the first and second parts to Article 12, in order to determine when Article 14 obligations would apply to corporations. And in Part V (paragraphs 33 to 36), it applied its legal findings to the case of the International Airport Authority. The key conclusion of the Court is found in paragraph 28 of the judgment, where it referred to the two lines of precedent that we have discussed before, and adopted the broader “instrumentality and agency” test Justice Mathew propounded in his concurring opinion in Sukhev Singh vs Bhagat Ram, as a “perhaps more satisfactory [test]… for determining whether a body… falls within the definition of ‘State’.”

The Court first established the unexceptionable proposition that even when the government is acting as a contractor, it is bound by public law obligations of fairness, non-discrimination and non-arbitrariness. It held that these obligations arose both from Article 14, and from general principles of public and administrative law. The basis for this, the Court found, was in the rapidly expanding functions of the State in the welfare era, where “the power of the executive Government to affect the lives of the people is steadily growing. The attainment of socio-economic justice being a conscious end of State policy, there is a vast and inevitable increase in the frequency with which ordinary citizens come into relationship of direct encounter with State power-holders. This renders it necessary to structure and restrict the power of the executive Government so as to prevent its arbitrary application or exercise.”

Having established this proposition, the Court then held “that the Government which represents the executive authority of the State, may act through the instrumentality or agency of natural persons or it may employ the instrumentality or agency of juridical persons to carry out its functions.” Once again, the Court referred to the expanding role of the State, which created the environment for the creation and flouring of the public corporation, “as incidental to or in aid of governmental functions.” Naturally, such corporations would be subject to the same public and constitutional law obligations as the State. The key question then became the question of determining when a corporation was an “instrumentality or agency” of the State.

The Court held that that there could be no “cut and dried formula” that would provide the answer, and proceeded to examine a range of alternatives. Citing the American doctrine of State action, it noted that “extensive and unusual financial assistance” from the government might be a relevant consideration. The same considerations applied to an “unusual degree of [State] control over the policies and management” of the corporation (paragraph 15).

These two considerations – financial and administrative control – are, as we can see, part of the legal approach to the meaning of State. In the next paragraph, however, the Court shifted gears: “another factor which may be regarded as having a bearing on this issue and it is whether the operation of the corporation is an important public function.” This, as we have seen before, is a deeply fraught question, and depends almost entirely upon resolving the normative question about the proper role of the State. The Court was acutely aware of the problem, referring to the difficulty in determining “what functions are governmental, and what are not”, and noting that the answer to that question was changing continuously, even as the place of the State in society changed over the years. Nonetheless, ultimately it seemed to settle upon a largely descriptive test: “the modern State operates a multitude of public enterprises and discharges a host of other public functions. If the functions of the corporation are of public importance and closely related to governmental fun ctions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.” (Paragraph 16). Of course, there is a very important problem with this: what do you do when the State retreats from functions that it used to perform (as is happening under the present, neo-liberal model?). It is quite clear that a descriptive test can be of no help in such a situation: a normative baseline of “State function” is essential.

In affirming the public function test, the Court relied upon the American case of Marsh v. Alabama, which we have discussed before on this blog. In Marsh, a privately owned company-town was required to permit a Jehovah’s Witness to exercise her First Amendment rights by preaching on the sidewalk. In Marsh, there were a number of considerations that went into the final decision: the fact that traditionally, parks, public squares and sidewalks were places for the exercise of First Amendment rights, that there was no viable alternative for the residents of the company town (leading to unequal treatment between people who lived in company towns, and those who lived in ‘regular towns’), and that First Amendment rights were deemed to be superior in importance to property rights. Therefore, Marsh was not decided solely on the ground of a “public function”, and this ambiguity is reflected in the Court’s conclusion, where it held that “the public nature of the function, if impregnated with governmental character or “tied or entwined with Government” or fortified by some other additional factor, may render the corporation an instrumentality or agency of Government.” (Paragraph 18) The exact distinction between a “public function” and “governmental character” remains unclear.

The Court then went on to cite precedents that also required the government to act fairly, when contracting, under Article 14. At this point, the Court had established the public law obligations that apply to the government when it acts as a contractor (Part I), extended those obligations to corporations that were acting as instrumentalities or agencies of the State (Part II), and located a further ground of the obligations in Article 14). Part IV, therefore, became a mirror image of Part II: also extending the Article 14 obligations – in addition to public law obligations – to corporations, by interpreting Article 12. It is here that – as we saw above – the Court simply lifted its “instrumentality or agency” discussion from Part II, and applied it to Article 12 as well, concluding that “[what is relevant and material] is  “whether the Corporation is an instrumentality of the Government in the sense that a part of the governing power of the State is located in the Corporation and though the Corporation is acting on its own behalf and not on behalf of the Government, its action is really in the nature of State action.”

In its analysis of whether or not the International Airport Authority fell within the definition of “State”, the Court undertook an extensive investigation of the nature and form of governmental control, from state financial and administrative control, to the corporation performing the erstwhile governmental function of administering airports, and so on. Crucially, the fact that the International Airports Authority was set up under a statute did not play a determinative (or even significant) role in the Court’s analysis, as it had in previous cases.

Thus, in R.D. Shettythe Court adopted the language of Justice Mathew – “instrumentality or agency” – but subsumed within it both the legal and the functional approaches, developing one composite test that took into account financial and administrative control as well as public function (the Court’s reliance upon Marsh is particularly significant, since in that case the holding turned not upon the company town’s formal association with the State, but almost entirely upon what it was doing), in a holistic, case-specific enquiry.

In the next post, we will continue to chart this development in subsequent cases.

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Filed under Article 12: Meaning of "State"

One response to “What is the State – III: Adopting the “Instrumentality or Agency” Test

  1. Pingback: Indian Judiciary and the ‘State’ in Article 12 of the Constitution: Can there be an ‘Essential’ State? – RostrumLegal

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