Scope Of Judicial Review Of State Action In A Matter Arising From A Non-Statutory Contract: Supreme Court Explains

In a judgment delivered on Wednesday (16 Nov 2022), the Supreme Court explained the scope of judicial review of action by the State in a matter arising from a non- statutory contract.

The mere fact that relief is sought under a contract which is not statutory, will not entitle the State in a case by itself to ward-off scrutiny of its action or inaction under the contract, if the complaining party is able to establish that the action/ inaction is, per se, arbitrary, the bench of Justices KM Joseph and Hrishikesh Roy observed.

The bench observed thus while dismissing an appeal filed against the Madhya Pradesh High Court judgment which quashed the order passed by the MP Power Management Company Limited (a wholly owned company of the Government of Madhya Pradesh) , terminating the Power Purchase Agreement  (PPA), which was entered into by it with Sky Power Southeast Solar India Private Limited. 

In appeal, the Apex Court found that the contract in question, i.e., the PPA, is not a statutory contract. It added that even if it is a non-statutory contract, there is no absolute bar in dealing with a cause of action based on acts or omission by the State or its instrumentalities even during the course of the working of a contract. 

While upholding the High Court judgment, the Apex Court bench, referring to various earlier judgments, summarized the principles regarding the scope of judicial review in contractual matters:

1. It is, undoubtedly, true that the writ jurisdiction is a public law remedy. A matter,  which lies entirely within a private realm of affairs of public body, may not lend itself for being dealt with under the writ jurisdiction of the Court.
2. The principle laid down in Bareilly Development Authority (supra) that in the case of a non - statutory contract the rights are governed only by the terms of the contract and the decisions, which are purported to be followed, including Radhakrishna Agarwal (supra), may not continue to hold good, in the light of what has been laid down in ABL (supra) and as followed in the recent judgment in Sudhir Kumar Singh (supra). 
3. The mere fact that relief is sought under a contract which is not statutory, will not entitle the respondent-State in a case by itself to ward-off scrutiny of its action or inaction under the contract, if the complaining party is able to establish that the action/ inaction is, per se, arbitrary.
4. An action will lie, undoubtedly, when the State purports to award any largesse and, undoubtedly,  this relates to the stage prior to the contract being entered into [See R.D. Shetty (supra)]. This scrutiny, no doubt, would be undertaken within the nature of the judicial review, which has been declared in the decision in Tata Cellular vs. Union of India. 
5. After the contract is entered into, there can be a variety of circumstances, which may provide a cause of action to a party to the contract with the State, to seek relief by filing a Writ Petition. 
6. Without intending to be exhaustive, it may include the relief of seeking payment of amounts due to the aggrieved party from the State. The State can, indeed, be called upon to honour its obligations of making payment, unless it be that there is a serious and genuine dispute raised relating to the liability of the State to make the payment. Such dispute, ordinarily, would include the contention that the aggrieved party has not fulfilled its obligations and the Court finds that such a contention by the State is not a mere ruse or a pretence. 
7. The existence of an alternate remedy, is, undoubtedly, a matter to be borne in mind in declining relief in a Writ Petition in a contractual matter. Again, the question as to whether the Writ Petitioner must be told off the gates, would depend upon the nature of the claim and relief sought by the petitioner, the questions, which would have to be decided, and, most importantly, whether there are disputed questions of fact, resolution of which is necessary, as an indispensable prelude to the grant of the relief sought. Undoubtedly, while there is no prohibition, in the Writ Court even deciding disputed questions of fact, particularly when the dispute surrounds demystifying of documents only, the Court may relegate the party to the remedy by way of a civil suit. 
8. The existence of a provision for arbitration,  which is a forum intended to quicken the pace of dispute resolution, is viewed as a near bar to the entertainment of a Writ Petition (See in this regard, the view of this Court even in ABL (supra) explaining how it distinguished the decision of this Court in State of U.P. and others v. Bridge & Roof Co., by its observations in paragraph-14 in ABL (supra)].
9. The need to deal with disputed questions of fact, cannot be made a smokescreen to guillotine a genuine claim raised in a Writ Petition, when actually the resolution of a disputed question of fact is unnecessary to grant relief to a writ applicant.
10. The reach of Article 14 enables a Writ Court to deal with arbitrary State action even after a contract is entered into by the State. A wide variety of circumstances can generate causes of action for invoking Article 14. The Court's approach in dealing with the same, would be guided by, undoubtedly, the overwhelming need to obviate arbitrary State action, in cases where the Writ remedy provides an effective and fair means of preventing miscarriage of justice arising from palpably unreasonable action by the State. 
11. Termination of contract can again arise in a wide variety of situations. If for instance, a contract is terminated, by a person, who is demonstrated, without any need for any argument, to be the person, who is completely unauthorised to cancel the contract, there may not be any necessity to drive the party to the unnecessary ordeal of a prolix and avoidable round of litigation. The intervention by the High Court, in such a case, where there is no dispute to be resolved, would also be conducive in public interest, apart from ensuring the Fundamental Right of the petitioner under Article 14 of the Constitution of India. When it comes to a challenge to the termination of a contract by the State, which is a non-statutory body, which  is acting in purported exercise of the powers/rights under such a contract, it would be over simplifying a complex issue to lay down any inflexible Rule in favour of the Court turning away the petitioner to alternate Fora. Ordinarily, the cases of termination of contract by the State, acting within its contractual domain, may not lend itself for appropriate redress by the Writ Court. This is, undoubtedly, so if the Court is duty-bound to arrive at findings, which involve untying knots, which are presented by disputed questions of facts. Undoubtedly, in view of ABL Limited (supra), if resolving the dispute, in a case of repudiation of a contract, involves only appreciating the true scope of documentary material in the light of pleadings, the Court may still grant relief to an applicant. We must enter a caveat. The Courts are today reeling under the weight of a docket explosion, which is truly alarming. If a case involves a large body of documents and the Court is called upon to enter upon findings of  facts and involves merely the construction of the document, it may not be an unsound discretion to relegate the party to the alternate remedy. This is not to deprive the Court of its constitutional power as laid down in ABL (supra). It all depends upon the facts of each case as to whether, having regard to the scope of the dispute to be resolved, whether the Court will still entertain the petition.
12. In a case the State is a party to the contract and a breach of a contract is alleged against the State, a civil action in the appropriate Forum is, undoubtedly, maintainable. But this is not the end of the matter. Having regard to the position of the State and its duty to act fairly and to eschew arbitrariness in all its actions, resort to the constitutional remedy on the cause of action, that the action is arbitrary, is permissible (See in this regard Kumari Shrilekha Vidyarthi and others v. State of U.P. and ). However, it must be made clear that every case involving breach of contract by the State, cannot be dressed up and disguised as a case of arbitrary State action. While the concept of an arbitrary action or inaction cannot be cribbed or confined to any immutable mantra, and must be laid bare, with reference to the facts of each case, it cannot be a mere allegation of breach of contract that would suffice. What must be involved in the case must be action/inaction, which must be palpably unreasonable or absolutely irrational and bereft of any principle. An action, which is completely malafide, can hardly be described as a fair action and may, depending on the facts, amount to arbitrary action. The question must be posed and answered by the Court and all we intend to lay down is that there is a discretion available to the Court to grant relief in appropriate cases.
13. A lodestar, which may illumine the path of the Court, would be the dimension of public interest subserved by the Court interfering in the matter, rather than relegating the matter to the alternate Forum.
14. Another relevant criteria is, if the Court has entertained the matter, then, while it is not tabooed that the Court should not relegate the party at a later stage, ordinarily, it would be a germane consideration, which may persuade the Court to complete what it had started, provided it is otherwise a sound exercise of jurisdiction to decide the matter on merits in the Writ Petition itself. 
15. Violation of natural justice has been recognised as a ground signifying the presence of a public law element and can found a cause of action premised on breach of Article 14. [See Sudhir Kumar Singh and Others (supra)]
    

Case details

MP Power Management Company Limited vs Sky Power Southeast Solar India Private Limited | 2022 LiveLaw (SC) 966 | SLP(C) 4609-4610 OF 2021 | 16 Nov 2022 | Justices KM Joseph and Hrishikesh Roy

For Appellant(s) Mr. K. M. Natraj, ASG (Not Present) Mr. Anish Kumar Gupta, AOR Mrs. Archana Preeti Gupra, Adv. Ms. Rita Gupta, Adv. Mr. N. Choudhary, Adv. Mr. Guneet Sheoran, Adv. Mr. Rohit Singh, Adv. Mr. Venugopal Abhay, Adv. Mr. Viabhav Verma, Adv. Mr. Vinayak Sharma, Adv.

For Respondent(s) Mr. Ramanuj Kumar, Adv. Mr. Manpreet Lamba, Adv. Ms. Priyal Modi, Adv. M/S. Cyril Amarchand Mangaldas, AOR Mr. Rajesh Kumar, AOR Mr. Aashish Vernand, Adv. Mr. Raj Kumar Prasad, Adv. Mr. Pramhans Sahini, Adv.

Headnotes

Constitution of India, 1950 ; Article 226 - Judicial Review in Contractual matters - Even if it is a non-statutory contract, there is no absolute bar in dealing with a cause of action based on acts or omission by the State or its instrumentalities even during the course of the working of a contract - A monetary claim arising from a contract may be successfully urged by a writ applicant but the premise would not be a mere breach of contract. Being part of public law the case must proceed on the basis of there being arbitrariness vitiating the decision. The matter should not fall within a genuinely disputed question of facts scenario. The dispute which must be capable of being resolved on a proper understanding of documents which are not in dispute may furnish a cause of action in a writ court. - Principles summarized (Para 78, 54)

Constitution of India, 1950 ; Articles 298, 162 - For the purpose of Article 298, the broader concept of State, as defined in Article 12 of the Constitution, which, no doubt, would include a fully owned Government Company, is inapposite and inapplicable - A Company, would not be entitled to exercise the executive power contemplated in Article 162 of the Constitution, which is the power with the Union or the State Governments. (Para 17)

Constitution of India, 1950 ; Article 14, 226 - Arbitrariness - When an act is to be treated as arbitrary ? The court must carefully attend to the facts and the circumstances of the case. It should find out whether the impugned decision is based on any principle. If not, it may unerringly point to arbitrariness. If the act betrays caprice or the mere exhibition of the whim of the authority it would sufficiently bear the insignia of arbitrariness. In this regard supporting an order with a rationale which in the circumstances is found to be reasonable will go a long way to repel a challenge to state action. No doubt the reasons need not in every case be part of the order as such. If there is absence of good faith and the action is actuated with an oblique motive, it could be characterised as being arbitrary. A total non-application of mind without due regard to the rights of the parties and public interest may be a clear indicator of arbitrary action. A wholly unreasonable decision which is little different from a perverse decision under the Wednesbury doctrine would qualify as an arbitrary decision under Article 14. Ordinarily visiting a party with the consequences of its breach under a contract may not be an arbitrary decision. (Para 48)

Statutory Contract - A contract containing prescribed terms and conditions being mandatory under the Statute, results in the contract becoming a Statutory Contract - Referred to India Thermal Power Ltd. v. State of M.P (Para 19,26)

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