The Government in a welfare state is the regulator and provides large number of benefits and dispenses of services to its people. In the process of dispensing the benefits and services, the Government enters into contracts i.e. contracts between private individuals, on the one hand and Government or its instrumentalities on the other. A large body of individuals seek to deal with the Government as the modern welfare state, the Government is increasingly assuming the role of dispenses of large monetary benefits including jobs, contracts, licenses, quotas, mineral rights out sourcing, the services of many individuals and many more business enjoy the largesse in the form of contracts. Many enterprises set up primarily to do business with Government. The basic question is to regulate and discipline the Government discretion to confer such benefits. Simentously it is necessary to ensure that injustices are not done to an individual by the state or its instrumentalities. As such, wealth assumes greater and greater importance in the life of the nation, there is going to be greater competition amongst the seeking of such wealth. The constitutional reorganization of Government contracts is to be found in Article 298 and 299(1) of Constitution. Article 298 provides that the executive power of the union and each state shall extend to the making contracts for any purpose. So it provides the state can enter into a contract in exercise of its executive power. Article 299(1) mandates the requisite conditions which contracts in exercise of the executive power of the union each state is required to fulfill. These provisions in the constitution relating to form of contract on behalf of the Government is mandatory
As pointed out by the Supreme Court of India in R.D.Shetty Vs. International Airport Authority 1979 (3) SCC 489, that “The Government cannot be permitted to say that it will give jobs or enter into contracts or issue quotas or licenses only in favor of those having grey hair or belonging to a particular political party or professing a particular religious faith. The Government is still the Government when it acts in the matter of grating largesse and it cannot act arbitrarily. It does not stand in the same position as a private individual”. The Hon’ble Supreme Court while agreeing with the observations made in the case of V. Punnah Thomas Vs. State of
Since the Government no longer enjoys the absolute discretion to enter into contract with anyone the Government must choose the party in a non – discriminatory manner. The state must act fairly and make a choice in the selection of a contracting party by affording equal opportunity to all contenders by examining their claims fairly. Government discretion is not unlimited that it can give or withhold largess in its arbitrarily but its action must be confirm with some principle which meets the test of reason and relevance. Hon’ble Supreme Court in Rammanna’s Case followed the Judgment as held in E.P.Rayappa Vs. State of Tamilnadu (1974 (4) SCC3) and Maneka Gandhi Vs. Union of India (1978 (1) SCC 248) that Article 14 strikes arbitrariness in state action and ensures fairness and equality of treatment. The court further observed in
“ It must, therefore follow as a necessary corollary from the principle of equality enshrined in Article 14 that though the state is entitled to refuse to enter into relationship with any one, yet if it does so, it cannot arbitrarily choose any person it likes for entering into such relationship and discriminate between persons similarly circumstanced but it must act in conformity with some standard or principle which meets the test of reasonableness and non – discrimination and any departure from such standard or principle would be invalid unless it can be supported or justified on some rational and non – discriminatory ground”
The above principle laid down by the Hon’ble Supreme Court was subsequently affirmed in Kasturilal Vs. Jammu & Kashmir reported in 1980(4) SCC page 1 held that “Every activity of the Government has a public element in it and it must, therefore be informed with reason and guided by public interest. Every action taken by the Government must be in public interest. The Government cannot act arbitrarily and without reason and if it does, its action would be liable to be invalidated.”
Therefore, there is restriction of Government power in respect of the persons, with whom the Government may enter into a contract. The Government or its instrumentalities are not free, as an ordinary individual, as it selects the party with absolute and unfettered discretion.
Another application of Article 14 of Constitution was considered in Becil Vs. Arraycom
The Supreme Court further in Siemens public communication Net Work(P) Ltd Vs. Union of India AIR 2009 SC 1204 unambiguously observed that the decision making process of Government or its instrumentality should exclude remote possibility of discrimination, arbitrariness and favoritism. It should be transparent, bona fide and in public interest. In another case, the Supreme Court approved the Swiss challenge method under taken by the state in the case of Rani Development Vs. Shre Krishna Prathisthan 2009(7) SCC 462. The Supreme Court further examined the award of contract in light of Article 14, and held that the action taken by authorities in awarding contract can be judged and tested in the light of Article 14 as in the case of Meerat Development Authorities Vs. Ass. Of Management Studies 2009 (6) SCC 171. Concerning binding nature of tender conditions (NIT condition)the Supreme Court in Ramanna Case held that “It is well settled rule of administrative law that an executive authority must be rigorously held to the standards by which it professes its action to be judged and it must scrupulously observe those standards on pain of invalidation or violation of them”. This rule was enunciated by U.S. Supreme Court in Vitervalli Vs. Saton 359 U.S. 535 in the following words.
“An executive agency must be rigorously held to the standards by which it professes its action to be judged --------
This Judicially evolved rule of administrative law is now firmly established ------------
He that takes procedural sword shall perish with the sword.”
The Supreme Court accepted this rule as valid and applicable in India in A. S. Ahmewalia Vs. Punjab 1975(3) SCC 503, in Sukhadev Vs. Bhaghathram 1975(1) SCC 421. The above said rule subsequently affirmed in B.S. Minhas Vs. Indian Statistical Institute 1983(4) SCC 582.
In Harmindar singh Arora Vs. Union of India 1986(3) SCC 247 the court dealt with a case, in which Tenders were invited for supply of milk the contract was awarded to state undertaking by rejecting the offer of a private party which was more suitable in that situation, the Supreme Court cancelled the grant of tender by holding that the instrumentalities of state cannot act arbitrarily. If it chooses invite tenders, it must abide by the conditions specified in the tender notice. If the party fails to fulfill the conditions of the tender notice, it cannot be accepted.
However, in respect of conditions of eligibility, its strict compliance is required, in other words the state, and its instrumentalities are required to adhere norms. Standards and procedures cannot be departed from, arbitrarily. The award of contract, its action would be tested for its validity.
In another case wherein it is reported in AIR 1982 Gahuathi 37 in the case of Omega Advertising Agency Vs. State Electricity Board where the state Electricity Board issued a notice inviting offers from advertisements fulfilling certain conditions as per NIT. One of applicants fulfilled the essential conditions, while the others had not, in this situation, the state electricity board decided to split its work between the two. The Assam High Court set aside the division of splitting the work by declaring the action of instrumentalities as being against the tenor of notice inviting offer, and further declared that the action amounts to discrimination under Article 14, as authority had awarded the contract to a person who was not qualified according to the prescribed standards.
The Hon’ble High Court of A.P. examined the law in the case of M/s.Nandini Deluxe 2005 (6) ALT 748 wherin the court held that “the state is bound to adhere to the norms, standards and procedures laid down by them and cannot depart from them arbitrarily. If the Government indicates preconditions of eligibility and evaluates the technical bid ignoring such norms and standards, the entire decision making process must suffer the wrath of Article 14 of constitution of
However, the Supreme Court classified the requirement in NIT into two categories, those which lay down the essential conditions of eligibility and others which are merely ancillary or subsidiary to the main object to be achieved by this condition. If there are essential tender conditions, the same must be adhered to and in other cases it must be open to the state or its instrumentality to deviate from and not to insist upon strict compliance. In the case of Poddar Steel Corporation Vs. Ganesh Engineering Works (1991 (3) Sec. 273) the question arose concerning conditions of the tender as the successful bidder made payment of the earnest money by sending a cheque drawn on Union Bank of India not of State bank of India. The Supreme Court held that ‘as a matter of general proposition it cannot be held that an authority inviting tenders is bound to give effect to every terms mentioned in the notice in meticulous detail and is not entitled to waive even a technical irregularity of little or of no significance”.
If the action complained of is shown to be violative of constitutional or mandatory statutory provisions or is initiated due to mala fides or patent arbitrariness, the Court has always interfered with such decision and laid limitation on judicial review while reviewing the decision making process and not just the merits of the decision. The Hon’ble Supreme Court after considering the Judgment on the subject held in TATA Cellular Vs. Union of India (1994 (6) SCC 651) held.
“It cannot be denied that the principles of judicial review would apply to the exercise of contractual powers by Government bodies in order to prevent arbitrariness and favoritism. However, it must be clearly stated that there are inherent limitations in exercise of that power of judicial review. Government is the guardian of the finances of the state. It is expected to protect the financial interest of the state. The right to refuse the lowest or any other tender is always available to the Government. But the principle laid down in article 14 of the Constitution have to be kept in view while accepting a refusing a tender. There can no question of infringement of Article 14 if Government tries to get the best person a best quotation. The right to choose cannot be considered to be an arbitrary power. Of course, if said power is exercised for any collateral purpose the exercise of that power will be struck down”.
Subsequent to the above, the Hon’ble Supreme Court in Asia foundation and Construction Ltd.Vs. Trafalgas House Construction (I) Ltd. (1997 (1) SCC 738) held that “Though the principle of Judicial review cannot be denied as far as exercise of contractual powers of Government bodies are concerned but it is intended to prevent arbitrariness or favoritism and is exercised in the larger public interest and is brought to the notice of the court if the power has been exercised for any collateral purpose.”
In Raunaq International Ltd. Vs. I.V.R co ltd . (1999 (1) SCC 492) the Supreme Court further laid down propositions that are to be considered while evolving the case on hand. The Supreme Court further held that the court is entitled to examine whether these requirements have been considered. The court held that “if any relaxation is granted for bona fide reasons, the tender conditions permits such relaxation and the decision arrived at for legitimate after fair consideration of all offers, the Court should hesitate to intervene.”
In B.S.N. Joshi & Soni Ltd. Vs. Nair Coal Services Ltd. (2006 (11) SCC 548) the Hon’ble Supreme Court after reviewing the judgment on the subject laid down the legal principles are applicable to the award of Government contract/tenders.
Further the Hon’ble Supreme Court in Jagdish Mandal Vs. State of Orissa (2007 (14), SCC 517) further held that “If the decision relating to award of contract is bonafide and is in public interest, the courts will not, in exercise of power of judicial review, interfere even if a procedural aberration or error in assessment or prejudice to a tender, is made out.”
In view of the same it can be stated that the aggrieved person can invoke the jurisdiction of the High Court under Article 226 of Constitution of India in the matter of contractual transactions between the state and persons who are dealing with the State or its instrumentalities.
By Alladi Ravinder Advocate, High Court of A.P.
Senior Associate Kochhar & Co., Hyderabad
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