Judicial Review vis-à-vis Government Contracts/Tenders

Award of Tenders by the Government involves a tedious process undertaken by the Government in strict adherence with the terms/guidelines stipulated in the tender documents which the tenderers are required to strictly follow with no deviations in order to emerge as the successful bidder. More often than not, the unsuccessful bidders who get blacklisted by the Government or whose bids get rejected, resort to invoking the Writ Jurisdiction of the High Court and challenge the process undertaken by the Government to choose the successful bidder. This article is confined to the extent of judicial review that the High Court can exercise while adjudicating the decision-making process of the Public Authority in selecting the successful bidder. At the outset, it is pertinent to note that the Supreme Court in at least two of its recent judgments has flagged the growing concern that almost no tender goes unchallenged, how much ever big or small¹, which, in turn, affects the commercial activities of the public sectors and makes awarding of contracts by the Government a cumbersome exercise, with long drawn out litigation at the threshold.

Power of High Court to exercise Writ Jurisdiction in contractual matters

Before advancing, the fundamental question that needs to be addressed first is whether the High Court can exercise its extraordinary power of Writ Jurisdiction to intervene in purely contractual matters between State and private citizen. The State enters into a sphere governed by private law when it enters into a contract with a private tender company . In such facts and circumstances , if the private party complains of a breach of contract committed by the State, can the private party to the contract invoke the Writ Jurisdiction of High Court to set aside an arbitrary action of state or the remedy lies before the Civil Court by way of a suit for specific performance, injunction or damages as the case may be.

In Radhakrishna Agarwal and Ors. vs State of Bihar² the Supreme Court emphatically held that a dispute which is purely contractual in nature, between the State and private citizen and rights and liabilities of the parties are governed by the terms of the contract, then no writ can be issued under Article 226 of the constitution and the appropriate remedy is before the Civil Court. The Court observed that when State enters into the contractual field, it is no longer governed by the constitutional provisions but by the terms of the contract which determines the rights and obligations of the parties inter se. Therefore, in contractual sphere between the State and Private citizen, issue of violation of Article 14 cannot be invoked, being public law remedy.

The Supreme Court in Radhakrishna (supra) adopted a complete hands-off approach in contractual matters. However, the law went through a radical change after Radhakrishana (supra). In Kumari Shrilekha Vidyarthi and Ors. vs State of UP and Ors.³ the Supreme Court inter alia held that even in contractual sphere, the State is required to stand the test of Article 14 and cannot act in an arbitrary manner-

“28. Even assuming that it is necessary to import the concept of presence of some public element in a State action to attract Article 14 and permit judicial review, we have no hesitation in saying that the ultimate impact of all actions of the State or a public body being undoubtedly on public interest, the requisite public element for this purpose is present also in contractual matters. We, therefore, find it difficult and unrealistic to exclude the State actions in contractual matters, after the contract has been made, from the purview of judicial review to test its validity on the anvil of Article 14.”

The aforesaid judgment was quoted with approval by Supreme Court in ABL International Ltd. vs Export Credit Guarantee Corporation of India Ltd.⁴ wherein the Supreme Court cemented the aforesaid position of law laid down in Shrilekaha (supra) and arrived at a categoric finding that a State or its instrumentality are subject to the application of Article 14 even in contractual sphere and a writ petition against a State arising out of a contractual obligation would be maintainable in an appropriate case. Thereafter, the law laid down in Radhakrishna (supra) was overruled by the Supreme Court in M.P. Power Management Co. Ltd. Jabalpur vs Sky Power Southeast Solar India Pvt. Ltd. & Ors.⁵. The ratio of Shrilekha (supra) and ABC International Ltd. (supra) and M.P. Power (surpa) was quoted with approval by a three judge bench of the Supreme Court in Subodh Kumar Singh Rathour vs The Chief Executive Officer and Ors.⁶ wherein the Court affirmed the position of law laid down in the aforesaid judgments.

Distinction between a matter which is at threshold of a contract and a breach of contract

In Noble Resources Ltd. vs State of Orissa⁷ the Supreme Court drew out a distinction between a matter which is at the threshold and at the stage of breach. The Court observed that the court’s scrutiny would be more intrusive and expansive while at the stage of threshold of a contract as opposed to the stage when a contract is entered into between the parties, wherein the court’s scrutiny would be discretionary except where the action is found to be arbitrary or unreasonable. Therefore, at the stage of choosing the right tender after inviting bids, the Court’s jurisdiction would be Writ large for the purpose of scrutinising the acts of the government entity. However, after awarding the contract to the tenderer and in the event of a breach of a contractual term, the court’s jurisdiction would be discretionary except when a case of violation of Article 14 is made out against the State’s action.

Government must act fairly

In Erusian Equipment & Chemicals Ltd. vs State of W.B.⁸, the Supreme Court observed that when the Government is trading with the public, “the democratic form of Government demands equality and absence of arbitrariness and discrimination in such transactions”. The activities of the Government have a public element and, therefore, there should be fairness and equality. The State need not enter into contract with anyone, but if it does so, it must do so fairly without discrimination and without unfair procedure. The actions of the Government while selecting the successful bidder must confirm to the spirit of Article 14 of the Constitution of India which accords everyone equality before law devoid of any discrimination and arbitrariness. At the same time, it is not obligatory upon the Government to select a particular bidder merely because it has complied with all the tender documents and specifications. The Government has the right to choose to enter into contract with anyone it deems fit. There can be no question of infringement of Article 14 if the Government tries to get the best person or the best quotation. The right to choose cannot be considered to be an arbitrary power⁹. Right to make a contract includes right not to make a contract¹⁰. It is a settled law that the highest bidder has no vested right to have the auction concluded in his favour. The Government or its authority can validly retain power to accept or reject the highest bid in the interest of public revenue¹¹.

Scope of Judicial Review

In tata Cellular vs union of India¹², the Supreme Court observed that it is not for the court to determine whether a particular policy decision taken in the fulfilment of that policy is fair. The court is only concerned with the manner in which those decisions have been taken. The court laid down the following grounds, upon which an administrative action of the Government can be called for scrutiny under judicial review-

Illegality- This means that the decision maker must understand correctly the law that regulates his decision-making power and must give effect to it.
Irrationality, namely, Wednesbury unreasonableness.
Procedural impropriety.

The Principle of Wednesday unreasonableness stems from an English case law viz. Associated Provincial Picture Houses Ltd. v Wednesbury Corporation¹³ wherein the court set out the standard of unreasonableness in the decision of the public body which would make it liable to be quashed on judicial review. Briefly stated, the Wednesbury Principle postulates that a decision of public authority will be liable to be quashed or otherwise dealt with by an appropriate order in judicial review proceedings where the court concludes that the decision is such that no authority properly directing itself on the relevant law and acting reasonably could have reached it. The aforesaid principle is often invoked by the Indian Courts when a decision of a public authority is called into question.

After a detailed discussion, the Supreme Court, in Tata Cellular (supra) culled out the following principles regarding scope of judicial review vis-à-vis award of tenders, viz.-

The modern Trend points to judicial restraint in administrative action.
The court does not sit as court of appeal but merely reviews the manner in which the decision was made.
The court does not have the expertise to correct the administrative decision. If a review of the administrative decision is permitted it will be substituting its own decision, without the necessary expertise which itself may be fallible.
The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. Normally speaking, the decision to accept the tender or award of contract is reached by process of negotiations through several tiers. More often than not, such decisions are made qualitatively by experts.
The Government must have freedom of contract. In other words, a fair play in ther joints is a necessary concomitant for an administrative body functioning in an administrative sphere or quasi-administrative sphere. However, the decision must not only be tested by the application of Wedenesbury principle of reasonableness but must be free from arbitrariness not affected by bias or actuated by mala fides.
Quashing decisions may impose heavy administrative burden on the administration and lead to increased unbudgeted expenditure.

The courts, as a matter of principle, abstain from interfering with the decision-making process of Government, as the same would amount to entering the realm of the executive. In Kasturi Lal Lakshmi Reddy vs State Of Jammu And Kashmir & Another¹⁴, the Supreme Court observed that there is always a presumption that the government action is reasonable and in public interest and it is for the party challenging its validity to prove otherwise. This burden is a heavy one and it has to be discharged to the satisfaction of the court by proper and adequate material. The Court cannot lightly assume that the decision taken by the government is unreasonable. In Union of India & Ors. vs Hindustan Development Corporation and Ors.¹⁵, the Supreme Court observed that the court cannot strike down a policy decision taken by the State Government merely because it feels that another policy decision would have been fairer. The court can interfere only if the policy decision is patently arbitrary, discriminatory or mala fide. As held by the Supreme Court in Tata Cellular (supra) in categoric terms, that the court is not concerned with whether the policy decision is fair.

A constitution bench of the Supreme Court in Shri Sitaram Sugar Company Limited vs Union of India¹⁶ while hearing a challenge to notifications issued by the Central Government, having a bearing on the sugar industry, inter alia observed that What is best for the sugar industry and in what manner the policy should be formulated and implemented is entirely in the province of Central Government. Such matters do not ordinarily attract the power of judicial review. In Afcons Infrastructure Ltd. vs Nagpur Metro Rail Corporation¹⁷, the Supreme Court reiterated that the decision making process while accepting or rejecting the bid should not be interfered with. Interference is only permissible if the decision is arbitrary. The court further emphasised that the author of the document is the best person to understand and appreciate its requirements. It is possible that the owner or employer of a project may give an interpretation to the tender documents that is not acceptable to the constitutional Courts but that by itself is not a reason for interfering with the interpretation given.

In Jagdish Mandal vs State of Orissa and Ors.¹⁸, the Supreme Court laid down two tests to determine the extent of judicial interference in tender matters viz.

“22. (i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone; or Whether the process adopted or decision made is so arbitrary and irrational that the court can say:“the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached;”

(ii) Whether public interest is affected.

If the answers are in the negative, there should be no interference under Article 226. Cases involving blacklisting or imposition of penal consequences on a tenderer/contractor or distribution of State largesse (allotment of sites/shops, grant of licences, dealerships and franchises) stand on a different footing as they may require a higher degree of fairness in action.”

Bidder cannot be punished for not complying with non-essential terms of Tender

In Poddar Steel Corporation vs Ganesh Engineering Works & Ors.¹⁹, the Supreme Court observed that a public authority is not bound to meticulously implement the tender terms and conditions. The court culled out the following two requirements in a ternder notice viz. –

Those which lay down the essential conditions of eligibility, and
The others which are merely ancillary or subsidiary with the main object to be achieved by the condition.

The Court observed that in the first case, the authority issuing the tender may be required to enforce the said conditions rigidly. However, in other cases, it must be open to the authority to deviate from and not insist upon strict literal compliance of the condition in appropriate cases. In Tata Cellular (supra) the Supreme Court referred to the above decision and in the facts and circumstances of the case before it, the court observed that the mistake committed by the bidder is in relation to a non-essential matter, otherwise, the bidder has shown every intention to comply with the terms of the bid.

In N.G. Projects Ltd. vs Vinod Kumar Jain & Ors.²⁰, the Supreme Court held that whether a term of the contract is essential or not is to be viewed from the perspective of the employer and by the employer.

Blacklisting

The Government, apart from having the liberty to accept and reject the bid, as it may deem fit, also exercises powers to Blacklist a bidder from taking part in future tenders floated by the Government. The reasons for blacklisting may vary from case-to-case basis viz. bidder committing forgery, breach of contract causing losses to the Government, etc. Therefore, the Government, to protect its own interests, debars or blacklists a particular Bidder/Contractor. In Erusian Equipment & Chemicals Ltd. vs State of W.B.²¹, the Supreme Court explained ‘blacklisting’ as follows-

“Blacklisting has the effect of preventing a person from privilege and advantage of entering into lawful relationship with the Government for purposes of gains.”

Like any other decision of the Government, while dealing with public, is required to pass the test of Article 14 of the Constitution, the action of blacklisting also is subjected to the test of Article 14.

Power of Public Authority to Blacklist is inherent

In Kulja Industries Ltd. vs Chief General Manager, Western Telecom BSNL & Ors.²², the Government blacklisted the entity for allotment of future contracts on the account of committing fraud. The entity opposed it on the ground that its case does not fall in various instances as enumerated in the bid document, upon which the Government is entitled to blacklist. The Supreme Court held that the power to blacklist a contractor is inherent in the party allotting the contract. There is no need for any such power being specifically conferred by statute or reserved by contractor. However, the court reiterated the caveat, that such power should pass the test of Article 14 and must be devoid of malafide or arbitrariness. A similar view was taken in Patel Engineering vs Union of India²³. In M/s Sabharwal Medicos Pvt. Ltd vs UOI²⁴, the Government blacklisted two companies based upon the chargesheet filed by CBI against the two companies pertaining to fraudulent activities. The Delhi High Court held that the decision of the Government cannot be said to be arbitrary, illegal or perverse.

Duration of Blacklisting

In State of Odisha and Ors vs Panda Infra projects Ltd.²⁵, the Government had formulated guidelines for duration of blacklisting which inter alia provided that blacklisting period per offence shall be limited to 3 years subject to an overall maximum cumulative period of 10 years for multiple offences. The Supreme Court however, disapproved of the aforesaid guidelines and observed as follows-

“Duration of blacklisting cannot be solely per offence. Seriousness of the lapse and the incident and/or gravity of the commission on the part of the contractor which led to the incident should be relevant considerations.”

Therefore, the gravity of offence committed by the contractor should be a guiding factor in determination of period of blacklisting.

Show cause notice precedes action of blacklisting

The Supreme Court, in a catena of judgments has held that a show cause notice must precede an action of blacklisting. The Government must comply with the principles of natural justice before completely debarring an entity from taking part in future tenders of the Government. In Gorkha Security Services vs Govt.²⁶, the Supreme Court observed that blacklisting amounts to “civil death” of a person who is foisted with the order of blacklisting. Therefore, it is imperative, that an opportunity must be afforded to an entity, to show cause, as to why it should not be blacklisted. In Raghunath v. State of Bihar²⁷, the Supreme Court observed that even if the rules do not provide for issuing a show cause notice, a show cause notice must be issued as it is an elementary principle of natural justice that parties affected by any order should have the right of being heard and making representations against the order. A show cause notice should be unambiguous, clearly disclosing the intention of the public authority to blacklist the entity if it fails to show any cause. In UMC Technologies Pvt. Ltd. vs Food Corporation of India²⁸, the Supreme Court held that the show cause notice issued by the authority was completely silent upon blacklisting and therefore, action of blacklisting in pursuance of the said show cause notice was bad in law.

Can Government Blacklist a Company without issuing showcause notice?

Issuance of a showcause notice before blacklisting a company is predicated upon the principles of natural justice. Everyone needs to be afforded an opportunity to present their case before an adverse action is taken against them. However, in some cases, courts have observed that principles of natural justice are very flexible principles, and they cannot be applied in a straight jacket formula. There may be cases when blacklisting of a company was completely warranted in law and even otherwise, given the facts and circumstances, so much so that even if show cause notice is issued and a fair hearing is accorded to the party, it would not make any difference and result in a blacklisting order nevertheless. In that eventuality, can a party against which the blacklisting order has been issued, seek quashing of the same merely on the technicality that show cause notice was not issued? If the court remits the matter back to the authority solely on this ground, then it would result in a empty formality resulting in blacklisting of the company again.

In Dharampal Satyapal Ltd vs CCE²⁹, the Government issued a notification granting tax benefits. However, after some time, by way of subsequent notification, the government withdrew the notification passed earlier and further ordered that any benefit obtained by an individual under the previous notification viz. tax exemptions, be refunded to the Government, which resulted in recovery proceedings against the Appellant. The Appellant opposed the action on the ground that a show cause notice ought to have been issued before initiation of recovery proceedings. After detailed discussion on the principles of natural justice, the court applied the useless formality theory, explicating that if the matter is remitted back to the authority for procedural compliance of issuing show cause notice, it would amount to an empty formality, resulting in the same outcome, viz order of refund, since the Government has withdrawn the notification and such action of withdrawal with retrospective effect has been upheld by the Court in separate proceedings.

Every violation of a facet of natural justice may not lead to the conclusion that the order passed is always null and void. The validity of the order has to be decided on the touchstone of “prejudice”.

The court however added a caveat that the authority cannot take upon itself to decide that granting of a fair hearing would be useless and proceed with blacklisting of the company directly. However, the court clarified that while the public authority is not equipped with such power, the court is very much empowered to consider whether any purpose would be served in remanding the case keeping in mind whether any prejudice is caused to the person against whom action is taken. Therefore, in the facts and circumstances of the above case, the court although stated that show cause notice ought to have been issued, however, in the facts and circumstances of the case, the court observed that issuance of show cause notice would be covered by “useless formality theory”. Issuance of show cause notice would be of no use if it amounts to completing a mere ritual of hearing without possibility of any change in the decision of the case on merits.

Therefore, the public authority is required to act in conformity with principles of natural justice. However, if the authority has taken a decision in violation of principles of natural justice, viz. blacklisting a company without issuing a show cause notice, the authority can always persuade the court to consider that issuance of show cause notice would have been an empty formality given the facts and circumstances of the case.

Conclusion

Article 14 of the Constitution of India forms the touchstone upon which the Courts can adjudicate the decision-making process of a public authority. The courts, as a matter of principle, abstain from interfering with the decision-making process of a public authority as it amounts to entering into the sphere of the executive. When the decision-making process is challenged, the party challenging has to discharge a heavy burden, as observed by Supreme Court in Kasturi Lal Lakshmi Reddy (supra), that the decision of the public authority was beset with arbitrariness.

By Daksh Pandit