Supreme Court Cautions Authories Against Arbitrary Cancellation Of Public Tenders; Says It Can Impact Private-Public Partnerships

In a notable judgment, the Supreme Court cautioned the public authorities against cancelling public tenders arbitrarily and stressed the importance of upholding the sanctity of contracts.

The Court explained that public tenders emanate from the Doctrine of Public Trust and are designed to provide a level playing field for all potential bidders

"The sanctity of contracts is a fundamental principle that underpins the stability and predictability of legal and commercial relationships. When public authorities enter into contracts, they create legitimate expectations that the State will honour its obligations. Arbitrary or unreasonable terminations undermine these expectations and erode the trust of private players from the public procurement processes and tenders," the Court observed.

"When private parties perceive that their contractual rights can be easily trampled by the State, they would be dissuaded from participating in public procurement processes which may have a negative impact on such other public-private partnership ventures and ultimately it is the public who would have to bear the brunt thereby frustrating the very object of public interest."

Observing that the decision of the State to cancel the public tender must be based on bona fide consideration being reflected in its decision-making process, and not on extraneous grounds, the Supreme Court said that the failure of the Public Authority to record valid reasons for the cancellation of the Tender awarded for the public purpose warrants judicial review.

"Cancellation of a contract deprives a person of his very valuable rights and is a very drastic step, often due to significant investments having already been made by the parties involved during the subsistence of the contract. Failure on the part of the courts to zealously protect the binding nature of a lawful and valid tender, would erode public faith in contracts and tenders. Arbitrary terminations of contract create uncertainty and unpredictability, thereby discouraging public participation in the tendering process. When private parties perceive that their contractual rights can be easily trampled by the State, they would be dissuaded from participating in public procurement processes which may have a negative impact on such other public-private partnership ventures and ultimately it is the public who would have to bear the brunt thereby frustrating the very object of public interest."

Court cautions authorities to be careful in cancelling public tenders

"We caution the public authorities to be circumspect in disturbing or wriggling out of its contractual obligations through means beyond the terms of the contract in exercise of their executive powers. We do not say for a moment that the State has no power to alter or cancel a contract that it has entered into. However, if the State deems it necessary to alter or cancel a contract on the ground of public interest or change in policy then such considerations must be bona-fide and should be earnestly reflected in the decision-making process and also in the final decision itself. We say so because otherwise, it would have a very chilling effect as participating and winning a tender would tend to be viewed as a situation worse than losing one at the threshold."

Noting that there is a shift in the position of law concerning the power of the Courts to exercise judicial review of the State's contract-making decision, wherein earlier the Courts were reluctant to interfere with the contract-making decisions of the State, the bench led by CJI DY Chandrachud and also comprising Justices JB Pardiwala and Manoj Misra observed that the State cannot claim immunity from the Court's power to review its contracting decisions (having public interest) if it has an element of arbitrariness or mala fide.

“Therefore, what can be culled out from the above is that although disputes arising purely out of contracts are not amenable to writ jurisdiction yet keeping in mind the obligation of the State to act fairly and not arbitrarily or capriciously, it is now well settled that when contractual power is being used for public purpose, it is certainly amenable to judicial review.”, the Judgment authored by Justice JB Pardiwala said.

The gist of the dispute was that the Appellant was granted a Tender to undertake the maintenance and operations works of two Underpasses in the City of Kolkata. The Respondent-State had issued notice canceling the tender awarded to the Appellant without providing any reasons in terms of the contract. The tender was canceled on an extraneous ground that the Higher Officials wanted to cancel the tender.

Aggrieved by the decision of the State, the Appellant preferred a Writ Petition before the Calcutta High Court which was subsequently dismissed. Following this, the Appellant approached the Supreme Court.

According to the Court, the judicial review of an executive action can be taken if the decision is not based on valid considerations. The Court said that the question needs to be answered as to whether the decision was based on valid considerations to ensure that the reasons assigned were the true motivations behind the action.

After perusing the notice of cancellation of the tender awarded to the Appellant, the Court found that there were no reasons assigned for canceling the order, rather the orders to stop the work had been issued for an altogether different reason – i.e., handing over of the operation & maintenance of the concerned underpasses to another authority.

Internal File Noting's Having Role In Decision-Making Process Be Considered For Judicial Review

Taking a clue from the internal file notings of the respondents, the Court said that the same could be taken into consideration while exercising the power of a judicial review, if such internal file noting played a significant role in a decision-making process to cancel the tender.

“any internal discussions or notings that have been approved and formalized into a decision by an authority can be examined to ascertain the reasons and purposes behind such decisions for the overall judicial review of such decision-making process and whether it conforms to the principles enshrined in Article 14 of the Constitution.”, the court said.

Unsupported Claims Of Loss To Public Exchequer Not Valid Ground To Cancel Tender

Further, the Court rejected the respondent's contention that the decision to cancel the tender was taken in the public interest to avoid loss to the public exchequer. The Court said that by no stretch it could be said to be a cogent reason for cancelling an already existing tender.

“A blanket claim by the State claiming loss of public money cannot be used to forgo contractual obligations, especially when it is not based on any evidence or examination as the larger interest of upholding contracts is also in the play.”, the Court said.

Conclusion

The Court later found the present case as a classic textbook case of an arbitrary exercise of powers by the respondent in canceling the tender that was issued in favor of the appellant and that too at the behest of none other than the concerned Minister-In-Charge.

The Court came to the findings that the Respondent's notice of cancelation of the tender is an arbitrary exercise of the power, wherein the decision to cancel the already existing tender was passed without recording reasons as per the terms of the contract but on extraneous grounds. Therefore, in the exercise of the power of judicial review, the Court quashed the notice of cancelation of the tender and set aside the decision of the High Court.

Counsels For Petitioner(s) Mr. Shyam Divan, Sr. Adv. Mr. Ateev Mathur, Adv. Mr. Ajay Monga, Adv. Mr. Sanjay Gupta, Adv. Ms. Varsha Kriplani, Adv. Mr. Anmol Sharma, Adv. Mr. Ananta Prasad Mishra, AOR

Counsels For Respondent(s) Mr. Rakesh Dwivedi, Sr. Adv. Mr. Zoheb Hossain, AOR

Case Details: SUBODH KUMAR SINGH RATHOUR VERSUS THE CHIEF EXECUTIVE OFFICER & ORS., CIVIL APPEAL NO. 6741 OF 2024

Citation : 2024 LiveLaw (SC) 455

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