Contract Terminated By An Awardee Following Due Process Cannot Be Subsequently Novated By Awardee Itself: Rajasthan High Court

The Rajasthan High Court has ruled that a contract terminated by an awardee following due process cannot be novated by the awardee itself.

The Court also held that an administrative order cannot set at nought a duly considered decision or adjudicated order which had bearing on the civil or business rights of contracting parties.

A bench of Justice Dinesh Mehta held that "the grant and termination of the contract by the State or instrumentalities of the State have to conform to principles of transparency and fairness, which is the corner stone of good governance. The State cannot act arbitrarily, whimsically or capriciously – It cannot resurrect a terminated contract in the manner done in the case in hands.”

Rajasthan State Mines & Minerals Ltd. (“RSMML”) had opened a tender which was awarded to United Coal Carrier (“UCC”). Being unsatisfied with the work quality, the contract with UCC was terminated on December 24, 2023.

Subsequently, a letter of acceptance was given to another entity named PMP Infratech Pvt Ltd. (“PMP”) to carry on the work. However, pursuant to a call received from the Chairman of RSMML by the Managing Director (“MD”), on December 26, 2023, the order terminating the contract with UCC and the letter of acceptance to PMP were kept in abeyance.

A petition was filed by PMP which contended that the awarding of a contract by a public sector enterprise needs to take place in a transparent manner, adhering to the principles of fairness and transparency.

It was contended that novation of a terminated contract while terminating an earlier contract instituted after following due process, could not take place based on a telephonic conversation by passing an unreasoned administrative order.

On the other hand, it was argued on behalf of RSMML that the Chairman of the board and head of the company were empowered to issue all sorts of directions to protect the interest and image of the company.

Two questions were answered by the Court- 1) Whether a contract once cancelled by the awardee be subsequently revived? 2) Whether the chairman or any authority not being the appellate authority or the court can order the revival of an already terminated contract?

A preliminary objection was raised regarding the Court's writ jurisdiction to deal with the matter which was based on a contract. However, the objection was rejected by the Court referring to a recent Supreme Court decision in Subodh Kumar Singh Rathour vs. The Chief Executive Officers & Ors. in which certain principles regarding scope of judicial review in matters pertaining to contract disputes were enumerated.

The Court held that since the telephonic direction given by the Chairman neither carried any legal sanction nor recorded any reason, it was a fit case for the Court to exercise its jurisdiction under Article 226. 

Contract once cancelled by the awardee cannot be revived

The Court opined that once a contract was terminated by the awardee after following due process, it could not be normally revived by the awardee itself. It said:

“In the opinion of this Court, the termination of contract after following due procedure amounts to a civil death of a business deal. The same can normally not be revived even by the court, Appellate Authority or Arbitrator, let alone by the Managing Director itself of by the Chairman of the awardee company.”

Furthermore, the Court referred to the case of Indian Oil Corporation Ltd. vs. Amritsar Gas Service & Ors., in which the Supreme Court had said that arbitrator, appellate authority or any civil court could not novate the contract. If the contract was terminated illegally or unlawfully, at best, the party could be awarded damages or compensation.

It was affirmed that no termination order could be kept in abeyance by the awardee itself by way of an administrative order.

Chairman is not the appellate authority, cannot order the revival of an already terminated contract

The Court held that granting of contract was in the domain of the MD and the chairman could not direct the competent authority to change the decision. The Court highlighted that the Chairman took upon the role of an appellate authority to put on hold the letter of acceptance issued in favour of PMP which was done without any authority and in an arbitrary manner.

It was opined that an administrative order could not set at nought a duly considered decision or adjudicated order which had bearing on the civil or business rights of contracting parties.

“This Court has no hesitation in holding that the verbal direction of the Chairman on the one hand is without authority of law and arbitrary on the other, as no reasons have been recorded. The order impugned issued by the Managing Director dated 26.12.2023 is illegal also because it suffers from the vice of dictatorship.”

Accordingly, the petition filed by PMP was allowed. The order dated December 26, 2023, that had kept the termination order as well as the letter of acceptance in abeyance was set aside. RSMML was directed to initiate a fresh tender process.

Title: PMP Infratech Private Limited & Ors. v Rajasthan State Mines and Minerals Limited

Citation: 2024 LiveLaw (Raj) 166

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