Right of First Refusal Requires Participation in Tender: Supreme Court Rules in National Highways Authority of India vs. Gwalior Jhansi Expressway Limited (2018)

Introduction

Date of the Judgment: 13 July 2018

Citation: Not Available

Judges: Dipak Misra, CJI, A.M. Khanwilkar, J., Dr. D.Y. Chandrachud, J.

Can a party claim a Right of First Refusal (ROFR) in a tender process without actually participating in the bidding? The Supreme Court of India addressed this crucial question in a dispute between the National Highways Authority of India (NHAI) and Gwalior Jhansi Expressway Limited. The core issue revolved around whether Gwalior Jhansi Expressway Limited could exercise its ROFR without submitting a bid in the tender process initiated by NHAI for the completion of a highway project. The Supreme Court, in this case, clarified the position that to exercise the right of first refusal, participation in the tender process is a must.

The bench comprised of Chief Justice Dipak Misra, Justice A.M. Khanwilkar, and Justice Dr. D.Y. Chandrachud. The majority opinion was authored by Justice A.M. Khanwilkar.

Case Background

The National Highways Authority of India (NHAI) and Gwalior Jhansi Expressway Limited entered into a Concession Agreement on December 17, 2006, for the widening of a section of National Highway 75. Gwalior Jhansi Expressway Limited, a consortium, was responsible for the project. However, the project faced significant delays, with the company allegedly deploying inadequate resources and achieving only 62% progress before abandoning the site in March 2012.

NHAI issued a Cure Period Notice on October 19, 2013, asking the company to rectify the breaches within 30 days. The company contested this notice, leading NHAI to express its intention to terminate the agreement through letters dated February 27, 2014, and March 7, 2014. The company then filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996, seeking a stay on the Cure Period Notice and the termination notice. The High Court of Delhi granted an interim stay on March 12, 2014. The matter was eventually referred to an Arbitral Tribunal, with the interim stay continuing.

Timeline:

Course of Proceedings

Initially, Gwalior Jhansi Expressway Limited filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996, in the High Court of Delhi, seeking a stay on the Cure Period Notice and the termination notice issued by NHAI. The High Court granted an interim stay on March 12, 2014. The matter was then referred to an Arbitral Tribunal, with the interim order continuing during the arbitration proceedings.

NHAI moved an application under Section 17 of the Arbitration and Conciliation Act, 1996, before the Arbitral Tribunal, seeking permission to complete the remaining project work. The company also filed a similar application seeking payment of Rs. 400 crores or to be granted the Right of First Refusal. The Arbitral Tribunal, on July 23, 2016, allowed the company’s application, granting it the right to match the lowest bid in the tender process. NHAI’s application to withdraw its offer to allow the company to complete the project was rejected.

Subsequently, NHAI issued a tender for the remaining work. The company, however, did not participate in the tender process. When NHAI was about to award the tender to a third party, the company filed another application under Section 17 of the Arbitration and Conciliation Act, 1996, seeking enforcement of its ROFR. The Arbitral Tribunal allowed this application on May 24, 2017, which was upheld by the High Court of Delhi on August 21, 2017. NHAI then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of Section 17 of the Arbitration and Conciliation Act, 1996, which deals with interim measures ordered by the Arbitral Tribunal. The core issue is whether the Arbitral Tribunal’s order dated July 23, 2016, which granted the Right of First Refusal (ROFR) to Gwalior Jhansi Expressway Limited, could be interpreted to mean that the company could exercise this right without participating in the tender process.

The concept of Right of First Refusal, as it applies in the context of tender processes, is also a key legal consideration. Generally, ROFR gives a party the right to match the best offer received by the tendering authority, but the question here is whether this right can be exercised without the party first participating in the tender process.

The Supreme Court also considered the principles governing tender processes, particularly the need for transparency, fair competition, and equal opportunity for all participants.

Arguments

Arguments by NHAI (Appellant):

• 
  NHAI argued that the order of the Arbitral Tribunal dated July 23, 2016, did not exempt Gwalior Jhansi Expressway Limited from participating in the tender process. The tender documents clearly stipulated that the company had to participate in the bidding process to be eligible to exercise its ROFR.
• 
  NHAI contended that the tender process is a commercial function, and courts should refrain from interfering, especially when the decision is bona fide and in the public interest.
• 
  NHAI asserted that the company, having failed to participate in the tender process, could not claim any right to match the lowest bid or exercise ROFR. The purpose of the tender process is to ensure fair competition and get the best value for money.
• 
  NHAI argued that the Arbitral Tribunal exceeded its jurisdiction under Section 17 of the Arbitration and Conciliation Act, 1996, by passing an interim order concerning a separate contract for the completion of the unfinished works.
• 
  NHAI stated that the company was bound by the terms and conditions of the tender documents, and the fact that it was deemed technically qualified in 2006 did not exempt it from participating in the 2016 tender process.

Arguments by Gwalior Jhansi Expressway Limited (Respondent):

• 
  The company contended that the order of the Arbitral Tribunal dated July 23, 2016, granted it an unconditional right to exercise ROFR, and there was no requirement to participate in the tender process.
• 
  The company argued that the order dated July 23, 2016, was based on the consent of the parties and had attained finality, thus NHAI was bound to comply with it.
• 
  The company stated that it had completed a substantial portion of the project (78%) and invested a significant amount (Rs. 715 crores), which demonstrated its seriousness and capability to complete the remaining work.
• 
  The company argued that NHAI could not incorporate conditions in the tender documents requiring the company to participate in the bidding process, as this was in violation of the Arbitral Tribunal’s order.
• 
  The company contended that the purpose of the tender process was only to evoke responsive offers, and since the company was already deemed eligible and qualified, there was no need for it to participate in the bidding process.
• 
  The company argued that the tender documents were not furnished to it, and it was not aware of the conditions requiring participation in the bidding process.
• 
  The company stated that NHAI had failed to show what prejudice would be caused by allowing it to exercise ROFR without participating in the tender process.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue that the court addressed was:

1. Whether the respondent (Gwalior Jhansi Expressway Limited) could exercise the Right of First Refusal (ROFR) without participating in the tender process initiated by the appellant (NHAI).

Treatment of the Issue by the Court

Authorities

The Supreme Court referred to the following authorities:

Cases:

• VHCPL -ADCC Pingalai Infrastructure Pvt. Ltd. & Anr. Vs. Union of India & Ors., 2010 SCC Online Del 2687, Delhi High Court: The Court considered whether the petitioner had a preferential right to match the lowest bid without pre-qualifying or participating in the bidding process. The court held that if the concessionaire chose not to submit its proposal, it did not have the right to match the preferred offer.
• M/s. Raj West Power Limited & Anr. Vs. Rajasthan Electricity Regulatory Commission & Ors., 2013 SCC Online APTEL 46, Appellate Tribunal for Electricity: The Supreme Court noted that this case did not lay down any principle that had any bearing on the present case.

Legal Provisions:

• Section 17 of the Arbitration and Conciliation Act, 1996: This section deals with interim measures ordered by the Arbitral Tribunal. The Supreme Court considered whether the Arbitral Tribunal’s order granting ROFR fell within the scope of this section.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fundamental principles of tender processes and the need for fair competition. The court emphasized that the Right of First Refusal (ROFR) could not be exercised in isolation but was contingent upon participation in the tender process. The court also noted that the respondent was aware of the tender process but chose not to participate, thus losing its opportunity to exercise ROFR.

The court also emphasized that the Arbitral Tribunal’s order granting ROFR was not an unconditional exemption from the tender process. The court also stated that the High Court had failed to examine the core issue in conformity with the fundamental policy of Indian law.

Logical Reasoning

Key Takeaways

✓ The Right of First Refusal (ROFR) in a tender process cannot be exercised without participating in the bidding process.

✓ Tender conditions are binding on all parties, and any exemption from these conditions must be expressly stated.

✓ The purpose of a tender process is to ensure fair competition and get the best value for money, and this cannot be compromised by granting ROFR to a non-participating party.

✓ Interim orders of the Arbitral Tribunal cannot be interpreted to grant exemptions from the tender process unless explicitly stated.

✓ Parties must be vigilant and follow up on tender notices and documents to protect their rights.

Directions

The Supreme Court quashed and set aside the order passed by the Arbitral Tribunal dated May 24, 2017, and the order passed by the High Court dated August 21, 2017. The application preferred by the respondent under Section 17 of the Arbitration and Conciliation Act, 1996, was dismissed.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the Right of First Refusal (ROFR) cannot be exercised without participating in the tender process. This judgment clarifies that even if a party has been granted ROFR, they must still participate in the tender process to avail of this right. The judgment reinforces the importance of adhering to the terms and conditions of tender documents and upholds the principles of fair competition and transparency in tender processes. There is no change in the previous positions of law, but it clarifies the application of ROFR in the context of tender processes.

Conclusion

In the case of National Highways Authority of India vs. Gwalior Jhansi Expressway Limited, the Supreme Court held that the Right of First Refusal (ROFR) cannot be exercised without participating in the tender process. The court emphasized that tender conditions are binding, and any exemption must be expressly stated. This judgment reinforces the principles of fair competition and transparency in tender processes and clarifies the application of ROFR in such contexts. The Supreme Court set aside the orders of the Arbitral Tribunal and the High Court, dismissing the respondent’s application.