Supreme Court Upholds Contractual Rights in Tender Cancellation Case: Subodh Kumar Singh Rathour vs. The Chief Executive Officer & Ors. (2024)

Date of the Judgment: July 9, 2024
Citation: 2024 INSC 486
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.
Can a government authority arbitrarily cancel a tender after it has been awarded? The Supreme Court of India recently addressed this crucial question in a case involving the cancellation of a tender for the maintenance of underpasses. The core issue revolved around whether the cancellation was justified or if it was an arbitrary action violating the principles of fairness and Article 14 of the Constitution. The Supreme Court, in a significant ruling, set aside the cancellation, emphasizing the sanctity of contracts and the need for public authorities to act reasonably and transparently. This judgment underscores the importance of upholding contractual rights and ensuring that government bodies are held accountable for their decisions.

Case Background

The Kolkata Metropolitan Development Authority (KMDA), the respondent, issued a tender notice on May 12, 2022, for the maintenance of two underpasses on the Eastern Metropolitan Bypass. The tender included advertisement rights over designated sites at each underpass for a period of 10 years. The scope of work involved regular maintenance of the underpasses, upkeep of garden areas, and electro-mechanical fittings.

On June 13, 2022, the appellant, Subodh Kumar Singh Rathour, submitted his bid, quoting ₹29,55,555 for the Beliaghata Underpass and ₹23,55,555 for the Swabhumi Underpass. The appellant’s quotations were the highest and were classified as ‘H1’ for both underpasses. Consequently, the respondent issued two Letters of Intent on June 27, 2022, accepting the appellant’s quotations and declaring him the successful bidder. A formal Memorandum of Tender for Work was executed and issued to the appellant.

The Work Orders were issued on October 18, 2022, and the appellant commenced his work. However, on December 1, 2022, the Urban Development and Municipal Affairs Department, Government of West Bengal, issued an order directing that the maintenance of roads and drainage of the E.M. Bypass, including the two underpasses, be handed over from KMDA to the Kolkata Municipal Corporation (KMC). Despite this order, the right to collect revenue from advertisements remained with KMDA.

On January 24, 2023, the KMDA issued a notice to the appellant to stop all work. Subsequently, on February 7, 2023, KMDA issued another notice stating that the tender was cancelled due to a “technical fault,” claiming it was “non-specific” and “not well defined,” leading to financial losses.

Timeline:

Course of Proceedings

Aggrieved by the cancellation, the appellant filed a writ petition (WPA No. 3381 of 2023) before the High Court of Calcutta. The High Court rejected the writ petition on April 24, 2023, stating that the decision to cancel the tender was due to administrative exigencies and a change in policy, and that it did not stem from any ulterior motives. The High Court also held that the matter was essentially a contractual dispute without a public law element.

The appellant then appealed to a Division Bench of the High Court (M.A.T. No. 744 of 2023), which dismissed the appeal, affirming the judgment of the Single Judge. Consequently, the appellant approached the Supreme Court of India.

Legal Framework

The judgment primarily revolves around the interpretation and application of Article 14 of the Constitution of India, which guarantees equality before the law and equal protection of the laws. The Supreme Court examined the scope of judicial review in contractual matters involving the State and its instrumentalities. The Court also considered the principles of fairness, reasonableness, and non-arbitrariness in state actions, particularly in contractual contexts.

Arguments

Appellant’s Submissions:

• The appellant argued that the cancellation was arbitrary and influenced by extraneous considerations, specifically the direction of the concerned Minister-In-Charge.
• He submitted that the reasons for cancellation (technical faults) were not found in the respondent’s internal file notings.
• The appellant contended that the respondent could not have issued stop-work orders because the respondent continued to operate and maintain the underpasses, including licensing rights for advertisements.
• He argued that the respondent did not follow the contract’s termination clauses and acted arbitrarily.
• The appellant also stated that the respondent’s claim of financial losses was erroneous, as the tender was generating more revenue.

Respondent’s Submissions:

• The respondent argued that the matter was a purely contractual dispute and not amenable to writ jurisdiction.
• It submitted that the cancellation was bona fide due to technical faults in the tender, particularly ambiguity regarding advertisement placements.
• The respondent claimed that the decision was taken in public interest to enable separate tenders for maintenance and advertisement rights.
• The respondent also contended that the decision was based on a change in policy and was not arbitrary.
• The respondent stated that the internal file notings were merely internal deliberations and could not be relied upon.
• Finally, the respondent submitted that the matter had become infructuous as the operation, maintenance, and licensing rights had been taken over by a third party.

The innovativeness of the argument from the appellant’s side was in highlighting the discrepancies between the stated reasons for cancellation and the actual reasons revealed in the internal file notings, thereby establishing arbitrariness and extraneous influence.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. What is the scope of judicial review of the actions of the State in matters relating to contract/tender disputes under writ jurisdiction?
2. Whether the action on the part of the respondent herein in cancelling the tender vide its notice dated 07.02.2023 was amenable to the writ jurisdiction of the High Court? If so, whether the said action could be termed as arbitrary or unfair and in consequence of violation of Article 14 of the Constitution of India?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several landmark cases and legal provisions to arrive at its decision:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court distinguished and overruled the earlier position of law as laid down in Radhakrishna Agarwal & Ors. v. State of Bihar & Ors. [(1977) 3 SCC 457], which held that contractual disputes cannot be adjudicated under writ jurisdiction.
• The Court relied on Mahabir Auto Stores & Ors. v. Indian Oil Corporation [(1990) 3 SCC 752], LIC v. Consumer Education & Research Centre [(1995) 5 SCC 482] and Shrilekha Vidyarthi (Kumari) v. State of U.P. [(1991) 1 SCC 212] to emphasize that State actions, even in contractual matters, are subject to judicial review on grounds of fairness and reasonableness.
• The Court followed ABL International Ltd. v. Export Credit Guarantee Corporation of India Ltd. [(2004) 3 SCC 553], holding that a writ petition against the State is maintainable in contractual obligations.
• The Court used Joshi Technologies International Inc. v. Union of India & Ors. [(2015) 7 SCC 728] and M.P. Power Management Co. Ltd., Jabalpur v. Sky Power Southeast Solar India Pvt. Ltd. & Ors. [(2023) 2 SCC 703] to summarize the legal principles on contracts with the State, including the need for fairness and non-arbitrariness.
• The Court also relied on Ramana Dauaram Shetty v. The International Airport Authority of India & Ors. [AIR 1979 SC 1628], Tata Cellular v. UOI [(1994) 6 SCC 651], to highlight that state actions must conform to rational and non-discriminatory standards and that judicial review is exercised to prevent unbridled executive functioning.
• The Court clarified that internal file notings are not final orders, citing Bachhittar Singh v. State of Punjab & Anr. [AIR 1963 SC 395], Shanti Sports Club v. Union of India [(2009) 15 SCC 705] and Pimpri Chinchwad New Township Development Authority v. Vishnudev Coop. Housing Society [(2018) 8 SCC 215], but also held that they can be examined for judicial review, citing State of Bihar v. Kripalu Shankar [(1987) 3 SCC 34].
• The Court emphasized that mere possibility of more money is not ‘public interest’, citing Vice Chariman & Managing Director, City & Industrial Development Corporation of Maharashtra Ltd. & Anr. v. Shishir Realty Pvt. Ltd. & Ors. [(2021) SCC OnLine SC 1141] and also that State must show how public interest is jeopardized, citing Vasantkumar Radhakisan Vora (Dead) by His LRs. v. Board of Trustees of the Port of Bombay [(1991) 1 SCC 761].
• The Court also cited Har Shankar & Ors. v. Dy. Excise and Taxation Commr. & Ors. [(1975) 1 SCC 737] to emphasize that contractual obligations must be accepted.
• The Court used Nagar Nigam v. Al. Farheem Meat Exporters Pvt. Ltd. [(2006) 13 SCC 382] and Sivanandan C.T. v. High Court of Kerala [(2024) 3 SCC 799] to highlight that public tenders ensure transparency and that a promise made by a public authority will give rise to a legitimate expectation that it will adhere to its assurances.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to ensure fairness, non-arbitrariness, and the sanctity of contracts, particularly in the context of public procurement. The Court was deeply concerned about the arbitrary manner in which the tender was cancelled, driven by the Minister’s personal directions rather than genuine reasons. The Court emphasized that public authorities must act transparently and reasonably, and cannot use technical faults or policy changes as a guise to cancel contracts. The Court also highlighted the importance of maintaining public trust in the tendering process and upholding the legitimate expectations of private parties who enter into contracts with the State.

The court also took into account the fact that the appellant had already made significant investments pursuant to the tender, and the cancellation was therefore detrimental to his interests.

Sentiment Analysis Table

Fact:Law Ratio

The fact:law ratio of 60:40 indicates that the court placed more emphasis on the factual aspects of the case, such as the sequence of events, the internal file notings, and the actions of the involved parties, while also applying relevant legal principles.

Logical Reasoning

The Supreme Court’s reasoning followed a step-by-step approach for each issue. For the first issue, it traced the evolution of the law regarding judicial review in contractual matters, concluding that the earlier position was no longer valid. For the second issue, the court meticulously analyzed the facts, including the internal file notings, to determine that the cancellation was arbitrary and influenced by extraneous factors.

The Court considered alternative interpretations, such as the respondent’s claims of technical faults and policy changes, but rejected them after a thorough review of the evidence. The Court found that the reasons cited by the respondent were not genuine and that the cancellation was driven by the Minister’s personal directions.

The Court’s decision was based on the following reasons:

• The cancellation was influenced by the concerned Minister-In-Charge and not based on any genuine technical fault or policy change.
• The internal file notings revealed that the respondent was reluctant to cancel the tender and only did so under the Minister’s instructions.
• The respondent did not adhere to the termination clauses in the contract and acted arbitrarily.
• The respondent’s claims of financial losses were not supported by the evidence, and the tender was actually generating more revenue.
• The cancellation undermined the principles of fairness, transparency, and the sanctity of contracts.
• The appellant had already made significant investments based on the tender, and the cancellation was detrimental to his interests.

The Court did not have any minority opinions. All judges on the bench concurred with the decision.

The Supreme Court’s decision has significant implications for future cases involving contractual disputes with the State. It reinforces the principle that State actions, even in contractual matters, must be fair, reasonable, and non-arbitrary. The judgment also emphasizes the importance of maintaining public trust in the tendering process and upholding the legitimate expectations of private parties who enter into contracts with the State.

No new doctrines or legal principles were introduced, but the Court reaffirmed the existing principles of judicial review, fairness, and non-arbitrariness in State actions, particularly in contractual contexts.

The Court rejected arguments that internal file notings are not relevant for judicial review, emphasizing that they are part of the decision-making process and can be examined to ensure fairness and transparency.

The Supreme Court quoted the following from the judgment:

• “This rule also flows directly from the doctrine of equality embodied in Article 14. It is now well settled as a result of the decisions of this Court in E.P. Royappa v. State of Tamil Nadu, A.I.R. 1974 S.C. 555 and Maneka Gandhi v. Union of India, A.I.R. 1978 S.C. 597 that Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment.”
• “It is a well -settled rule of administrative law that an executive authority must be rigorously held to the standards by which it professes its actions to be judged and it must scrupulously observe those standards on pain of invalidation of an act in violation of them.”
• “Those who contract with open eyes must accept the burdens of the contract along with its benefits. The powers of the Government to enter into contracts have to be judged by the same standards as apply to private persons. The Government may not be able to claim immunity from the operation of the statute, but it is bound by the contract. The Government cannot be permitted to take advantage of its own wrong.”

The Supreme Court allowed the appeal, set aside the judgments of the High Court, and directed the respondent to restore the appellant’s contract. The Court also directed the respondent to pay costs of ₹25,000 to the appellant.