Businessmen Will Be Hesitant To Enter Govt Contracts If Undertakings Are Altered On Mere Change Of Person In Power : Supreme Court

On 11.06.2008, City and Industrial Development Corporation of Maharashtra ("CIDCO") called for a tender to lease out land for development of necessary infrastructure around the Navi Mumbai Airport. On 25.07.2008, upon scrutiny of the technical qualification of the bidders by the legal team of CIDCO, the bids were opened. M/s. Metropolis Hotels (Respondent No. 1) emerged as the highest bidder and on the same day its eligibility was objected to, by another bidder i.e. M/s. Indian Hotels Company Ltd. Examining the contention, the officer of CIDCO rejected the objection and subsequently on 07.08.2008 a letter of allotment was issued in favour of Metropolis for construction of a five-star hotel near the proposed Airport. Thereafter, Metropolis applied for change of use of a portion of the allotted land to commercial-cum-residential use. CIDCO accepted the application, but for a reduced area of land. Next, a subdivision of the plots for five star hotel and the comercial-cum-residential project was sought and it was accepted by CIDCO. Metropolis further requested for assignment of their rights with respect to the comercial-cum-residental plot to M/s. Shishir Realty Private Ltd. (Respondent No. 2). CIDCO approved the assignment referring to Shishir as one of the partners in the original allotment. In order to obtain a loan for its project at the Airport, Shishir was permitted by CIDCO to mortgage the plot assigned to it.

On receiving complaints pertaining to irregularities in allotment of plots of land, change of use and deviation from the terms and conditions of the tender, the Government of Maharashtra directed the Principal Secretary, Urban Development Department to conduct a preliminary enquiry. Based on the same, the Vice-Chairman, CIDCO issued a show cause notice to the Respondents on 06.12.2010 and finally on 16.03.2011, it cancelled the lease deeds of the Respondents. Challenging the said order, the Respondents filed two writ petitions before the Bombay High Court. A PIL was also filed challenging the allotment, change of land use and subdivision of the plot. The High Court quashed the cancellation order passed by CIDCO, mainly on three counts:

1. The change of land use and sub-division of plot was duly authorised by CIDCO;
2. CIDCO failed to show any material violation;
3. CIDCO estopped to cancel allotment based on the doctrine of promissory estoppel

Contentions raised by CIDCO

Senior Advocate, Mr. Rakesh Dwivedi appearing on behalf of CIDCO argued that the High Court erred in not considering the blatant violations and irregularities committed by the respondents in the tender process. It was averred that Metropolis, which was then an unregistered partnership had placed a bid in violation of clause 4(c) and 8(b) of the tender document, which mandated registration at the time of the bid. CIDCO contended that Metropolis had gone beyond the scope of the allotment letter, by subsequent change in land use and subdivision of the plot. It was further argued that the benefit of estoppel cannot be extended to the Respondents considering that the cancellation of allotment was in public interest.

Contentions raised by State of Maharashtra

Senior Advocate, Mr. Atmaram Nadkarni appearing on behalf of the State of Maharashtra largely supporting the submissions made by CIDCO, asserted that terms of the tender cannot be changed after allotment.

Contentions raised by Petitioner in PIL

Advocate Mr. Harinder Toor, appearing on behalf of Petitioner, a social activist involved in construction services, mainly contended that the change of land use was in detriment of clause 15 of the allotment letter, which mandated the land to be used for the purpose of a five star hotel.

Contentions raised by Metropolis

Senior Advocate, Mr. Mukul Rohatgi appearing on behalf of Metropolis (R1) submitted that the construction of the hotel was contingent on the comping up of the Airport. Construction of the hotel is not commercially viable without the Airport. It was emphasised upon that amidst global recession, Metropolis decided to enter bid only on the consideration that an Airport was to be built nearby and the area would be declared a Special Economic Zone. Since the Airport is still not in place, the purpose of construction of a five-star hotel is frustrated. Contextualising the decision for change in land use, it was argued that it was in consonance with the policy of 1997.

Contentions raised by Shishir

Senior Advocate, Dr. Abhishek Manu Singhvi appearing on behalf of Shishir (R2) argued that CIDCO was aware that Metropolis had applied for registration of the partnership at the time of the allotment, but still decided to go with it, since its bid was Rs. 23 crore higher than the next in line. It was submitted that the enquiry conduct by the Principal Secretary without serving any notice to the respondents was in derogation of the principles of natural justice. It was asserted that CIDCO was bound by the doctrine of estoppel and the allegations of collusion and financial losses raised by it were unsubstantiated.

Role of Constitutional Courts in reviewing the tender process

Before delving into the issues of the matter at hand, the Supreme Court set out to examine the role of the constitutional courts in viewing the tender process in the backdrop of the constitutional permit given to the government to enter into commercial activities. Relying on Council of Civil Service Unions v. Minister for the Civil Service [1985] AC 374, a landmark decision of the House of Lords pertaining to the scope of judicial review of administrative decisions, the Supreme Court reiterated the grounds of challenge as illegality, irrationality, procedural impropriety, legitimate expectation, proportionality. The Court further elucidated that in cases of administrative decisions the manner, method and motive is open to be tested on the touchstone of equality, fairness, proportionality and natural justice. The restraint of the courts to interfere in administrative decisions is to enable the authorities to perform duties in furtherance of public interest. Placing reliance on M/s. Star Enterprises v. City and Industrial Development Corporation of Maharashtra Ltd. (1990) 3 SCC 280 and Tata Cellular v. Union of India (1994) 6 SCC 651, the Supreme Court reiterated that though the scope of the constitutional courts were expanded to consider challenges to administrative decisions, the same cannot be done in a routine manner.

Findings of the Supreme Court

Principles of Natural Justice not followed by the Principal Secretary

The Court noted that the enquiry was initiated suo-motu and neither notices were served nor the respondents were heard. Post-decision a perfunctory hearing was provided which vitiates the order of cancellation passed by the Vice Chairman, CIDCO. The Court opined that natural justice was an important aspect while reviewing administrative orders. Providing an opportunity of effective hearing to the affected party upholds the rule of law. Choosing to circumvent the same is impermissible.

Metropolis was not disqualified from participating in the bidding process

The Court observed that at the time of applying for the bid Metropolis had disclosed that it had applied for registration before the Registrar of firms. The legal team of CIDCO also conducted due diligence in this regard and raised no objection before the allotment. The Court further stated that after accepting requisite charges to the tune of Rs. 321 crore CIDCO was not in a position to question eligibility, especially when almost 13 years ago they chose not to delve into such technicalities. Commenting on the allegation of collusion in the bidding process, the Court found that CIDCO could not satisfy it as to what provision of law or contract was violated when Metropolis's partner had purportedly submitted a separate bid.

Change of land use was permitted

Appreciating the ratio of CIDCO Maharashtra Ltd. v. M/s. Shree Ambica Developers C.A. No. 7581 of 2012, wherein the court was satisfied that a post-auction change in land use reviewed by the authority at different levels was permissible and in accordance with General Development Control Regulations, squarely applied to the case at hand, the Court refused to accept the submission of CIDCO on the issue of change of land use. Moreso, when CIDCO had already accepted the 'change of user' fee from the respondents. It was further observed that though there are contradictory contractual clauses, a harmonised reading would demonstrate that there exists clauses in the tender document and allotment letter that permits modification. It was the opinion of the Court that the initial permission to change land use given by CIDCO was indeed based on material considerations like delay in construction of airport, economic slump and loss making endeavour to set up a hotel. The Court further observed that even the policy of CIDCO was to not impose limitations on the use of allotted land.

Sub-division of plots and subsequent transfer of rights permissible

On a perusal of the general terms and conditions and the allotment agreement, the Court noted that it permitted transfer of rights with prior consent of CIDCO after making all necessary payments. Permission could be granted only after the agreed lease premium was paid and after the execution of the agreement to lease. The hyper technical argument made in favour of CIDCO that the agreement was executed on the same day as the decision taken to allow transfer of rights was rejected by the Court, which held -

"The CIDCO, being a public body, had a duty to act fairly. Having acquiescence of the facts and allowing such transfer, they ought not to have taken such a hyper­technical view on contractual interpretation."

No illegality or unfairness in the sub-division and transfer of right

The contention that substantive loss was caused to the State largesses without any proof of the same did not impress the Court. It held -

"When a contract is being evaluated, the mere possibility of more money in the public coffers, does not in itself serve public interest. 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. The larger public interest of upholding contracts and the fairness of public authorities is also in play. Courts need to have a broader understanding of public interest, while reviewing such contracts."

Referring to Jagdish Mandal v. State of Orissa (2007) 14 SCC 517 and Andhra Pradesh Dairy Development Corporation Federation v. B. Narasimha Reddy (2011) 9 SCC 286, the Court opined that the decision of cancelling the appointment taken by newly appointed executive head in CIDCO cannot supersede the undertaking taken by the earlier regime. Calling it 'regime revenge' the Court observed that such a phenomenon is clearly detrimental to the constitutional values and rule of law.

CIDCO bound by doctrine of promissory estoppel

The Court cited Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh (1979) 2 SCC 409, Union of India v. Godfrey Philips India Ltd. (1985) 4 SCC 369 and Vasantkumar Radhakisan Vora (Dead) by His LRs. v. Board of Trustees of the Port of Bombay (1991) 1 SCC 761 to emphasise that the defence of public interest in cases of promissory estoppel cannot be a mere statement and needs to be substantiated with adequate material. The Court held:

"Equity demands that when the State failed to produce an iota of evidence of either financial loss or any other public interest that has been affected, it should be compelled to fulfill its promises. In fact, it is respondents­ lessees who shall be gravely prejudiced if the order of cancellation is upheld by this Court after investing a significant amount and facing prolonged litigation."

The Court further observed that -

"At this juncture, it is pertinent to remember that, by merely using grounds of public interest or loss to the treasury, the successor public authority cannot undo the work undertaken by the previous authority. Such a claim must be proven using material facts, evidence and figures. If it were otherwise, then there will remain no sanctity in the words and undertaking of the Government. Businessmen will be hesitant to enter Government contract or make any investment in furtherance of the same. Such a practice is counter­productive to the economy and the business environment in general."

Case Title : The Vice Chairman and Managing Director, City and Industrial Development Corporation Maharashtra and another vs Shishir Realty Private Ltd and others

Citation : LL 2021 SC 692

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