1. What Constitutes Failure?

A. Subsidy Scheme is the Parent Document:
Every subsidy has pre-conditions - e.g.

• Investment threshold, employment generation, location in backward area
• Utilization certificate within X months
• No diversion of funds, no change of shareholding
• Repayment / recovery clause if conditions breached
• Lock-in period, production commencement deadline

B. Agreement is the Binding Document:
If the final MOU, Concession Agreement, Loan Agreement, PPA, or Allotment Letter does not include those conditions verbatim or by incorporation by reference, there is a gap.

This happens due to:

• Use of standard form contracts
• Negligence by drafting officers
• Deliberate omission by beneficiary
• Assumption that scheme itself is binding

2. Legal Principle - Why Incorporation Matters

Under Indian Contract Law:

1. Section 7, Indian Contract Act, 1872 - Acceptance must be absolute and unqualified. If a conditional offer of subsidy is accepted with additional or different conditions, no contract is concluded.

2. Doctrine of Incorporation vs Reference - Supreme Court in Mahanadi Coalfields Ltd. vs Sri Ram Construction (2023) and NBCC (India) Ltd vs Zillion Infraprojects
Supreme Court has drawn a sharp line:

Mere reference to another document in a contract is not enough. To make subsidy conditions binding, the contract must say "the said document shall form part and parcel of the contract" or "terms of GO No. ___ dated ___ are incorporated herein".

If language is "subject to guidelines" or "as per scheme" - it is only a reference, not incorporation.

3. No Discretion Outside Contract - State of M.P. vs M/s Sew Construction (2019):

"According to the provisions of the contract itself, obligations and rights of the parties subsist or perish. There is no room for discretion... unless the discretion has been expressly incorporated by the parties as part of the contract."

If recovery power is in Scheme but not in Agreement, Government cannot exercise discretion to recover.

3. Legal Consequences

If subsidy conditions are not incorporated:

For Government / Subsidy Grantor:

• Cannot enforce recovery, penalty, interest
• Cannot cancel allotment on that ground
• Action will be struck down as arbitrary under Article 14
• Must rely on promissory estoppel, which is hard to prove

For Beneficiary / Private Party:

• Can claim subsidy is vested right, not conditional
• Can resist recovery notices
• But cannot claim new benefits not in agreement either
• May lose protection of promissory estoppel if he altered position knowing conditions

For Lenders / Third Parties:

A subsidy sanctioned or expected under a government scheme is not automatically an assignable debt or an enforceable security interest. If bank finance agreement does not incorporate subsidy conditions, bank cannot enforce charge on subsidy.

4. Important Case Laws

A. Supreme Court Against Recovery When Conditions Not Incorporated

1. Sun Beverages (P) Ltd. v. State of U.P. & Ors.
Fact: State granted subsidy under industrial policy, later sought recovery saying central definition of industry scale changed.
Held: The subsidy agreement between the appellant and the State outlined specific conditions under which the subsidy could be recovered. Since change in central definition was NOT a recovery condition in agreement, recovery was quashed as arbitrary.

2. Pawan Alloys & Casting Pvt. Ltd. v. U.P. State Electricity Board
Fact: Industry entered standard form electricity supply contract while U.P. Govt. had promised development rebate of 10% to new industries.
Board argued: By signing standard contract, rebate waived.
Supreme Court Held: These contracts pertained to general rate schedules and did not implicitly or explicitly waive the development rebate promises. Promissory estoppel protected industry because rebate was not waived in agreement.

3. Motilal Padampat Sugar Mills v. State of U.P. (1979) - Foundation case
Even if conditions not incorporated, if Government makes clear promise of exemption and industry acts on it, Government bound by promissory estoppel. Failure to incorporate conditions cannot be used by Government to go back.

4. Edcons (MKS) Castings Pvt. Ltd. v. West Bengal State Electricity Board (Supreme Court, 2025 INSC 1006)
Held: Can a State electricity board revoke or dilute a tariff concession after it has sanctioned, contracted for, and begun to implement? Court's answer is no — barring fraud, post-sanction change undermining granted benefits is arbitrary.

B. Supreme Court Against Private Party When Conditions NOT Met

5. Kasinka Trading v. Union of India (1995) & V.V.F. Ltd. v. Union of India (2020)
Principle: Promissory estoppel cannot be invoked if assurance is held out but not incorporated in the agreement between parties.
Also: Doctrine cannot be invoked to claim benefit under a government policy which was never aimed to benefit a specific class.

If beneficiary fails to incorporate eligibility conditions into his application/agreement, he cannot later claim subsidy as a matter of right.

6. Ras Resorts v. Union of India
Draft Five Year Plan mentioning 5% interest subsidy did NOT constitute firm offer or binding promise. Because no concluded agreement incorporated it, no enforceable right.

7. State of Chhattisgarh v. Sal Udyog Pvt Ltd (Arbitration)
Court identified arbitrator's oversight as patent illegality as it ignored fundamental contractual terms and governmental circular. If circular contains subsidy condition and contract says circular applicable, arbitrator must consider it. Failure leads to award being set aside.

5. How to Draft Correctly - To Avoid Failure

1. Incorporation Clause: "Government Order G.O.Ms.No.123 dated ___, including all conditions, eligibility criteria, repayment and recovery clauses, shall form an integral part of this Agreement and shall be read as if set out herein."
2. Schedule Annexure: Attach full scheme as Annexure-I.
3. Condition Precedent Clause: "Disbursement is subject to CPs including..."
4. Acknowledgement Clause: Beneficiary acknowledges he has read scheme.
5. Non-waiver: "Failure to enforce any subsidy condition shall not amount to waiver."

6. Practical Remedy if Already Failed

• If you are Government: Issue addendum/amendment under Section 62 of Contract Act (novation). Get consent. Or rely on promissory estoppel + public interest + fraud exception.
• If you are Beneficiary: Challenge recovery notice as beyond agreement, violation of Article 14 & 19(1)(g), and principles in Sun Beverages.
• If in arbitration: Argue under Section 28(3) of Arbitration Act - tribunal must take into account usage of trade and contract terms. Non-incorporated subsidy circulars cannot override express terms.

Rule of Thumb: What is not in the Agreement, does not exist for a Court. A subsidy scheme is policy, an Agreement is contract. Policy becomes enforceable only when incorporated.