Supreme Court Upholds Natural Justice in Tender Cancellation Case: State of U.P. vs. Sudhir Kumar Singh (2020)

Introduction

Date of the Judgment: 16th October 2020

Citation: Not Available in Source

Judges: R.F. Nariman, J., Navin Sinha, J., K.M. Joseph, J.

Can a government body cancel a contract, especially after it has been running for over a year, without giving the contractor a chance to be heard? The Supreme Court of India recently addressed this critical question in a case involving the Uttar Pradesh State Warehousing Corporation. The core issue revolved around the cancellation of a tender awarded to a contractor, Mr. Sudhir Kumar Singh, for handling and transporting food grains, without providing him with a prior hearing. The court examined whether this action violated the principles of natural justice, which require that no one should be condemned unheard. This judgment emphasizes the importance of fair procedure in government contracts. The bench was composed of Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, with the opinion authored by Justice R.F. Nariman.

Case Background

The case originated from a series of tender notices issued by the U.P. State Warehousing Corporation for handling and transporting food grains. Initially, an e-tender was issued on January 6, 2018, but it was cancelled ten days later due to “administrative reasons.” A new e-tender was published on April 1, 2018, for the same work in the Vindhyachal (Mirzapur) region. After technical and price bids were opened, this tender was also cancelled on May 4, 2018, by the then Managing Director of the Corporation, citing it as “impractical”. Subsequently, on June 1, 2018, a third e-tender was issued for the same work. Mr. Sudhir Kumar Singh was declared the successful bidder for the Bhawanipur-I center. An agreement was entered into on July 13, 2018, and the contract was executed for over a year. However, following complaints of financial irregularities, the contract was cancelled on July 26, 2019, without prior notice to Mr. Singh.

Timeline:

Course of Proceedings

Mr. Sudhir Kumar Singh filed a writ petition before the High Court of Judicature at Allahabad, challenging the cancellation of his contract. The High Court framed four key questions: whether the enquiry reports were procedurally defective, whether the Managing Director was justified in cancelling the agreement without notice, whether the Corporation could be directed by the Special Secretary, and whether the Managing Director was biased. The High Court ruled in favor of Mr. Singh, stating that the entire proceedings were conducted without his knowledge and that the cancellation of the contract was a breach of natural justice. The court emphasized that the tender notice had not been challenged, and the ex parte appraisal of complaints was done in a hurry. The High Court quashed the cancellation order, the Managing Director’s report, and the Special Secretary’s order.

Legal Framework

The core legal principle at play in this case is the concept of natural justice, specifically the audi alteram partem rule, which means “hear the other side.” This principle dictates that no person should be judged without a fair hearing in which they have the opportunity to present their case. In the context of government contracts, this means that before a contract is cancelled, the affected party must be given a chance to explain their position. The Supreme Court has repeatedly upheld this principle, stating that it is a cornerstone of fair administrative action. The court also considered Article 14 of the Constitution of India, which guarantees equality before the law, and how arbitrary actions violate this principle.

Arguments

Arguments by the Corporation:

• The Corporation, represented by Dr. Abhishek Manu Singhvi, argued that the High Court exceeded its jurisdiction by quashing not only the cancellation order but also the enquiry report and the Special Secretary’s order, which were not specifically challenged in the writ petition.
• The Corporation contended that the rates in the second tender were significantly higher than those in the cancelled first tender, justifying the cancellation to prevent financial loss.
• Dr. Singhvi argued that the principles of natural justice are not inflexible and should not be applied when no prejudice is caused. He cited several judgments to support the argument that if a breach of natural justice does not result in prejudice, it is futile to set aside the order.
• The Corporation argued that the writ court should not have interfered in contractual matters and should have directed the respondent to a civil court.

Arguments by the State of U.P.:

• Shri Tushar Mehta, the learned Solicitor General, confined his arguments to the setting aside of the letter dated 16.07.2019 of the Special Secretary, arguing that the High Court could not have set aside this letter as it was not challenged by the writ petitioner.

Arguments by Mr. Sudhir Kumar Singh:

• Mr. Rakesh Dwivedi, representing Mr. Sudhir Kumar Singh, argued that the High Court judgment should not be interfered with because his client had invested significant money and successfully worked the contract for over a year without any complaints.
• He emphasized that the cancellation was done without any notice or hearing, causing serious prejudice to his client, who was unable to complete the two-year contract.
• Mr. Dwivedi argued that if a hearing had been given, his client could have demonstrated that the rates were reasonable and comparable to other nearby divisions.
• He also pointed out that the current lower rates at Mirzapur are not comparable due to the difference in the volume of work.
• He argued that the termination was not done with an independent application of mind by the Corporation but purely on the instructions of the Special Secretary.
• Mr. Dwivedi stated that his client would not claim damages for the period post-cancellation, but the earnest money and security deposit should be returned.

The arguments presented by each side were meticulously considered by the Supreme Court, which emphasized the importance of adhering to the principles of natural justice, especially in cases involving government contracts. The court’s analysis focused on whether the cancellation of the tender without a hearing was justified and whether any prejudice had been caused to the respondent.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was whether the cancellation of the tender awarded to Mr. Sudhir Kumar Singh, without providing him with a prior hearing, violated the principles of natural justice, specifically the audi alteram partem rule. The sub-issues that the court dealt with were:

• Whether the High Court exceeded its jurisdiction in quashing the Managing Director’s report and the Special Secretary’s order.
• Whether the breach of natural justice caused prejudice to the respondent.
• Whether the writ court should have interfered in contractual matters.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered various authorities to arrive at its decision. These authorities are categorized below by the legal point they address:

Maintainability of Writ Petition in Contractual Matters:

• ABL International Ltd. and Anr. v. Export Credit Guarantee Corporation of India Ltd. and Ors. [(2004) 3 SCC 553] (Supreme Court of India): This case established that a writ petition under Article 226 is maintainable to enforce a contractual obligation of the State when the State acts arbitrarily.
• K.N. Guruswamy v. State of Mysore [(1955) 1 SCR 305] (Supreme Court of India): This case held that if a state acts arbitrarily in a contract matter, an aggrieved party can approach the court via a writ under Article 226.
• D.F.O. v. Ram Sanehi Singh [(1971) 3 SCC 864] (Supreme Court of India): This case held that a writ petition is maintainable even if the right to relief arises from a breach of contract, if the action challenged is of a public authority with statutory power.
• Gujarat State Financial Corpn. v. Lotus Hotels (P) Ltd. [(1983) 3 SCC 379] (Supreme Court of India): This case stated that a state instrumentality cannot commit a breach of a solemn undertaking and the aggrieved party can compel specific performance through Article 226.
• LIC of India v. Escorts Ltd. [(1986) 1 SCC 264] (Supreme Court of India): This case held that the court may not examine actions related to contractual obligations unless the action has a public law character.
• State of U.P. v. Bridge & Roof Co. (India) Ltd. [(1996) 6 SCC 22] (Supreme Court of India): This case stated that if a contract contains an arbitration clause, parties should follow that remedy instead of invoking Article 226.
• Noble Resources v. State of Orissa and Anr. [(2006) 10 SCC 236] (Supreme Court of India): This case upheld the principle that a writ petition is maintainable in contractual matters with a public law element.
• Food Corp. of India and Anr. v. SEIL Ltd. and Ors. [(2008) 3 SCC 440] (Supreme Court of India): This case reiterated that a writ petition can be used to enforce contractual obligations of the State.
• Central Bank of India v. Devi Ispat Ltd. and Ors. [(2010) 11 SCC 186] (Supreme Court of India): This case reaffirmed the maintainability of writ petitions in contractual matters.
• Surya Constructions v. State of U.P. and Ors. [(2019) 16 SCC 794] (Supreme Court of India): This case upheld the principle that a writ petition is maintainable in contractual matters with a public law element.
• Radhakrishna Agarwal and Ors. v. State of Bihar and Ors. [(1977) 3 SCC 457] (Supreme Court of India): This case held that contractual questions should be settled by civil courts, but this was dissented from in later judgments.
• Verigamto Naveen v. Govt. of A.P. and Ors. [(2001) 8 SCC 344] (Supreme Court of India): This case stated that in cases of breach of statutory obligations, the matter falls within the sphere of public law, and Article 226 can be invoked.
• Rishi Kiran Logistics v. Board of Trustees of Kandla Port and Ors. [(2015) 13 SCC 233] (Supreme Court of India): This case held that a “public law element” must be present to invoke Article 226.
• Joshi Technologies International Inc. v. Union of India and Ors. [(2015) 7 SCC 728] (Supreme Court of India): This case summarized the legal position regarding contracts entered into by the State, stating that a writ petition is maintainable when the action has a public law character.

Principles of Natural Justice and Prejudice:

• Nawabkhan Abbaskhan v. State of Gujarat [(1974) 2 SCC 121] (Supreme Court of India): This case held that a plea of breach of natural justice against the State sounds in constitutional law as arbitrary State action.
• S.L. Kapoor v. Jagmohan and Ors. [(1980) 4 SCC 379] (Supreme Court of India): This case stated that non-observance of natural justice is prejudice in itself, except where only one conclusion is possible on admitted facts.
• P.D. Agrawal v. State Bank of India and Ors. [(2006) 8 SCC 776] (Supreme Court of India): This case observed that the law on natural justice has changed, and some real prejudice must be caused.
• K.L. Tripathi v. State Bank of India and Ors. [(1984) 1 SCC 43] (Supreme Court of India): This case held that where there is no dispute about facts, absence of cross-examination does not invalidate a decision.
• State of U.P. v. Neeraj Awasthi and Ors. [(2006) 1 SCC 667] (Supreme Court of India): This case held that natural justice is attracted when services are terminated punitively or with stigma.
• Managing Director, ECIL and Ors. v. B. Karnakumar and Ors. [(1993) 4 SCC 727] (Supreme Court of India): This five-judge bench decision held that prejudice must be shown due to the non-supply of the enquiry officer’s report.
• Haryana Financial Corporation and Anr. v. Kailash Chandra Ahuja [(2008) 9 SCC 31] (Supreme Court of India): This case reiterated that failure to supply the inquiry officer’s report does not automatically result in nullifying proceedings, and prejudice must be proven.
• Dharampal Satyapal Ltd. v. Dy. Comm. Of Central Excise, Gauhati and Ors. [(2015) 8 SCC 519] (Supreme Court of India): This case held that while natural justice is flexible, it cannot be dispensed with by the authority presuming no prejudice will be caused.
• State Bank of Patiala and Ors. v. S.K. Sharma [(1996) 3 SCC 364] (Supreme Court of India): This case distinguished between “adequate opportunity” and “no opportunity,” stating that prejudice is more relevant in the latter case.
• M.C. Mehta v. Union of India and Ors. [(1999) 6 SCC 237] (Supreme Court of India): This case discussed the dilemma between breach of natural justice and the court’s discretion to refuse relief if no real prejudice is caused.
• Aligarh Muslim University and Ors. v. Mansoor Ali Khan [(2000) 7 SCC 529] (Supreme Court of India): This case stated that there is no absolute rule, and prejudice must be shown depending on the facts of each case.
• Union of India and Ors. v. Alok Kumar [(2010) 5 SCC 349] (Supreme Court of India): This case held that prejudice should not be a mere apprehension but a definite inference of likelihood of prejudice.

Cases on Admitted Facts:

• Punjab and Sind Bank and Ors. v. Sakattar Singh [(2001) 1 SCC 214] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Karnataka SRTC and Anr. v. S.G. Kotturappa and Anr. [(2005) 3 SCC 409] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Viveka Nand Sethi v. Chairman, J&K Bank Ltd. and Ors. [(2005) 5 SCC 337] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Mohd. Sartaj and Anr. v. State of U.P. and Ors. [(2006) 2 SCC 315] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Punjab National Bank and Ors. v. Manjeet Singh and Anr. [(2006) 8 SCC 647] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Ashok Kumar Sonkar v. Union of India and Ors. [(2007) 4 SCC 54] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• State of Manipur and Ors. v. Y. Token Singh and Ors. [(2007) 5 SCC 65] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Secretary, A.P. Social Welfare Residential Educational Institutions v. Pindiga Sridhar and Ors. [(2007) 13 SCC 352] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Peethani Suryanarayana and Anr. v. Repaka Venkata Ramana Kishore and Ors. [(2009) 11 SCC 308] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Municipal Committee, Hoshiapur v. Punjab State Electricity Board and Ors. [(2010) 13 SCC 216] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.
• Union of India and Anr. v. Raghuwar Pal Singh [(2018) 15 SCC 463] (Supreme Court of India): This case is an illustration of no prejudice being caused due to admitted facts.

Decision

The Supreme Court partially allowed the appeals by the State of U.P. and the Corporation. The court held that the High Court was correct in holding that the cancellation of the contract without a hearing was a breach of natural justice. However, the Supreme Court also held that the High Court exceeded its jurisdiction in quashing the Managing Director’s report and the Special Secretary’s order, as these were not specifically challenged in the writ petition. The Supreme Court upheld the High Court’s decision to quash the order cancelling the contract. The court directed that the earnest money and security deposit of Mr. Sudhir Kumar Singh be returned. However, the court clarified that Mr. Singh would not be entitled to claim any damages for the period after his contract was cancelled.

Flowchart of Events and Decisions

Ratio of the Judgment

The ratio of the judgment can be summarized as follows:

Sentiment of the Judgment

The sentiment of the judgment can be described as follows:

Key Takeaways

This case underscores the critical importance of natural justice in government contracts. The Supreme Court’s ruling emphasizes that:

• Government agencies must adhere to the principles of natural justice, including the right to a hearing, before cancelling any contract.
• Writ petitions are maintainable in contractual matters when the State acts arbitrarily or violates fundamental rights.
• Prejudice is inherent when a contract is cancelled without a hearing, depriving the contractor of their rights.
• High Courts must exercise caution and not exceed their jurisdiction by quashing orders not specifically challenged.
• Government bodies must act transparently and fairly in all contractual matters, ensuring accountability and due process.