Supreme Court Upholds Tender Award, Emphasizes Limited Judicial Review in Contractual Matters: Uflex Ltd. vs. Government of Tamil Nadu (2021)

Date of the Judgment: September 17, 2021
Citation: (2021) INSC 625
Judges: Sanjay Kishan Kaul, J., Hrishikesh Roy, J.
Can unsuccessful bidders challenge tender processes merely on the basis of perceived irregularities? The Supreme Court of India recently addressed this question, emphasizing that judicial review in tender matters is limited to preventing arbitrariness and mala fides, not to re-evaluating commercial decisions. This judgment clarifies the extent to which courts can interfere in contractual matters, especially those involving government tenders. The bench, comprising Justices Sanjay Kishan Kaul and Hrishikesh Roy, delivered a unanimous opinion.

Case Background

The Government of Tamil Nadu issued a tender on 01.10.2020 for the supply of polyester-based hologram excise labels. The tender was for stickers to be pasted on liquor bottles sold by the Tamil Nadu State Marketing Corporation (TASMAC). The tender process involved a Technical Specification Committee (TSC) and a Tender Scrutiny and Finalisation Committee (TSFC). The TSC aimed for generic technical specifications to ensure wider participation. However, certain conditions were introduced, such as the requirement of 8 years of experience in the field of manufacturing security holograms and a supply of at least Rs. 20 crores to any state excise department in the last three financial years. These conditions, along with a technical requirement for a “Hidden Text on Colour Change Background”, became contentious.

Timeline:

Course of Proceedings

M/s. Kumbhat Holographics and M/s. Alpha Lasertek India LLP filed writ petitions challenging the tender, alleging that the conditions were designed to favor Uflex Limited and Montage Enterprises Private Limited. A single judge of the High Court dismissed the petitions, noting that three bidders had met the technical specifications. However, the Division Bench of the High Court allowed the writ appeals, directing the State to float a fresh tender. The Division Bench was of the view that the technical specifications were not generic, and that there was a nexus between Uflex and Montage that impaired the integrity of the tender process. This decision was then appealed to the Supreme Court by Uflex.

Legal Framework

The Supreme Court referred to the following legal principles:

• Article 226 of the Constitution of India: This article grants High Courts the power to issue writs for the enforcement of fundamental rights and for other purposes.
• The principle that judicial review of administrative actions is intended to prevent arbitrariness, irrationality, unreasonableness, bias, and mala fides.
• The principle that courts should not interfere with the decision-making process unless it is arbitrary or irrational to an extent that no reasonable authority could have reached such a decision.
• The principle that the author of a tender document is the best person to understand and appreciate its requirements.
• The principle of business efficacy, which allows for the implication of terms in a contract only if necessary to give business efficacy to the contract to avoid failure of the contract.
• Section 10(2) of the Tamil Nadu Transparency in Tenders Act, 1998, which mandates acceptance of the lowest tender based on objective and quantifiable factors, with a proviso for domestic enterprises.
• Rule 15 of the Tamil Nadu Transparency in Tender (Public-Private Partnership Procurement) Rules, 2012, which pertains to conflict of interest in tender proceedings.

Arguments

Submissions on behalf of Uflex:

• Uflex argued that the High Court should not have interfered with the tender process as there was no evidence of mala fides or arbitrariness.
• They contended that the terms of the NIT were not open to judicial scrutiny and that the Court can only review the decision-making process.
• Uflex submitted that the High Court erred in lifting the corporate veil to scrutinize the business relations between Uflex and Montage.
• They also argued that the technical specifications were not patented and that they did not have a monopoly over the same.

Submissions on behalf of Montage:

• Montage supported Uflex’s plea and argued that the High Court’s findings that Uflex and Montage were related entities could have an adverse impact on Montage in other contractual and tender matters.
• They contended that they are separate legal entities and that Uflex’s investment in Montage did not give Uflex any controlling interest.
• Montage also argued that the allegation of a common source of patent technology was baseless.

Submissions on behalf of Kumbhat:

• Kumbhat argued that the technical specifications were not generic and that the tender conditions were tailor-made to favor Uflex and Montage.
• They contended that Hololive was disqualified on certain conditions of the NIT, resulting in only two eligible bidders.
• Kumbhat also argued that Uflex and Montage were closely related to each other.
• They claimed a right to participate in tenders in Tamil Nadu as a domestic enterprise under the MSMED Act.

Submissions on behalf of Alpha:

• Alpha supported Kumbhat’s submissions and argued that the tender had non-generic specifications.
• They contended that they were disqualified due to the technical specifications and their past experience, which eliminated all bidders except two.
• Alpha emphasized the aspect of public interest as a ground for judicial intervention.

Submissions on behalf of the Government of Tamil Nadu:

• The State emphasized that the tender conditions were designed to prevent spurious liquor from being sold.
• They stated that the TSC comprised of eminent scientists and that the NIT was formulated after their deliberations.
• The State argued that the technical specifications were the latest and most secure features to reduce counterfeiting.
• They submitted that similar conditions were part of the 2015 tender and that the corrigendum addressed the issues raised by the petitioners.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the court were:

1. Whether the High Court was justified in interfering with the tender process.
2. Whether the tender conditions were tailor-made to favor Uflex and Montage.
3. Whether the technical specifications were generic, as mandated by the G.O.
4. Whether there was a conflict of interest between Uflex and Montage.
5. Whether the High Court was right in lifting the corporate veil to examine the financial linkages between Uflex and Montage.
6. Whether the petitioners had the locus standi to challenge the tender process.
7. Whether the tender process was in violation of the Tamil Nadu Transparency in Tenders Act, 1998.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the following authorities:

Judgment

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

How each authority was viewed by the Court?

• Jagdish Mandal v. State of Orissa [CITATION]: The Court applied this case to emphasize that principles of equity and natural justice should not interfere with commercial prudence in tender evaluations.
• Michigan Rubber v. State of Karnataka [CITATION]: The Court used this case to reiterate the limited scope of judicial review in tender matters, focusing on fairness and non-arbitrariness.
• Caretel Infotech Ltd. v. Hindustan Petroleum Corporation Limited & Ors. [CITATION]: The Court relied on this case to emphasize that courts should not interfere with the decision-making process unless it is arbitrary or irrational.
• Afcons Infrastructure Limited v. Nagpur Metro Rail Corporation Limited & Anr. [CITATION]: The Court used this case to support the view that interference is permissible only if the decision-making process is arbitrary or irrational.
• Nabha Power Limited (NPL) v. Punjab State Power Corporation Limited (PSPCL) & Anr. [CITATION]: The Court relied on this case to discuss the legal principles for interpretation of commercial contracts.
• Tata Cellular v. Union of India [CITATION]: The Court used this case to emphasize judicial restraint in administrative action and the limited scope of judicial review in tender matters.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to prevent unnecessary judicial interference in commercial matters, particularly in government tenders. The Court emphasized that the tender process should be governed by principles of commercial prudence and that judicial review should be limited to preventing arbitrariness and mala fides, not to re-evaluating commercial decisions. The Court also noted that the tendering authority is the best judge of its requirements and that the Court should not substitute its own view for that of the administrative authority.

The Court was also influenced by the fact that the petitioners had repeatedly challenged similar tender conditions in the past and had failed. The Court found that the petitioners were trying to create impediments in the way of the successful party merely because they had not succeeded themselves. The Court also noted that the State Government had taken steps to address the concerns raised by the petitioners, such as issuing a corrigendum to the tender conditions.

Fact:Law Ratio

Logical Reasoning:

The Court emphasized that it is not the role of the Court to vet the terms of the NIT, as it is the decision-making process which can be reviewed in judicial scrutiny. The Court also stated that it is not the function of the Court to ensure that every party gets a share of the tender but to ensure that the tender process is fair and transparent. The Court found that the State Government had taken steps to ensure that the tender process was fair and transparent and that there was no evidence of mala fides or arbitrariness.

The Court quoted the following from the judgment:

• “The judicial review of such contractual matters has its own limitations. It is in this context of judicial review of administrative actions that this Court has opined that it is intended to prevent arbitrariness, irrationality, unreasonableness, bias and mala fide. The purpose is to check whether the choice of decision is made lawfully and not to check whether the choice of decision is sound.”
• “We cannot lose sight of the fact that a tenderer or contractor with a grievance can always seek damages in a civil court and thus, “attempts by unsuccessful tenderers with imaginary grievances, wounded pride and business rivalry, to make mountains out of molehills of some technical/procedural violation or some prejudice to self, and persuade courts to interfere by exercising power of judicial review, should be resisted.””
• “The object cannot be that in every contract, where some parties would lose out, they should get the opportunity to somehow pick holes, to disqualify the successful parties, on grounds on which even the party floating the tender finds no merit.”

Key Takeaways

• Judicial review in tender matters is limited to preventing arbitrariness and mala fides, not to re-evaluating commercial decisions.
• Tendering authorities are the best judges of their requirements, and courts should not substitute their own views.
• Unsuccessful bidders should not use the judicial process to create impediments for successful bidders.
• Courts should not lift the corporate veil in tender matters unless it is necessary to address issues of inter-corporate battles or minority shareholder rights.
• Tender processes should be transparent and fair, but they should also be efficient and not unduly burdened by litigation.
• Courts should be hesitant to interfere in commercial matters where there is no evidence of mala fides or arbitrariness.
• Costs should follow the cause in commercial litigation to deter frivolous and vexatious litigation.

Directions

The Supreme Court directed Kumbhat and Alpha to pay costs of Rs. 23,25,750/- to Uflex and Rs. 7,58,000/- to the State Government within four weeks.

Development of Law

The ratio decidendi of the case is that judicial review in tender matters is limited to preventing arbitrariness and mala fides, and not to re-evaluating commercial decisions. Thejudgment reinforces the principle that the tendering authority is the best judge of its requirements and that courts should not interfere unless there is clear evidence of arbitrariness or mala fides. The judgment clarifies the scope of judicial review in contractual matters and provides guidance for future cases involving government tenders. The judgment also emphasizes the need for realistic costs in commercial litigation to deter frivolous and vexatious litigation. This case adds to the existing body of case law that seeks to balance the need for transparency and fairness in tender processes with the need for efficiency and commercial prudence.

Impact of the Judgment on Tender Processes:

• Limited Judicial Review: The judgment reinforces the principle of limited judicial review in tender matters, which means that courts are less likely to interfere in tender processes unless there is clear evidence of arbitrariness or mala fides.
• Commercial Prudence: The judgment emphasizes the importance of commercial prudence in tender processes, which means that tendering authorities are given more leeway in making decisions based on their commercial judgment.
• Discouraging Frivolous Litigation: The judgment discourages frivolous litigation by unsuccessful bidders by imposing costs on those who challenge tender processes without sufficient grounds.
• Transparency and Fairness: The judgment emphasizes the importance of transparency and fairness in tender processes, but it also recognizes the need for efficiency and commercial prudence.
• Expertise of Tendering Authorities: The judgment recognizes the expertise of tendering authorities in evaluating their own requirements, which means that courts are less likely to substitute their own views for those of the tendering authority.

Future Implications:

• Reduced Interference: The judgment is likely to reduce judicial interference in tender processes, which could lead to more efficient and timely procurement.
• Increased Commercial Prudence: The judgment is likely to encourage tendering authorities to make decisions based on commercial prudence, which could lead to better value for money.
• Reduced Litigation: The judgment is likely to reduce frivolous litigation by unsuccessful bidders, which could save time and resources for both the government and the courts.
• Clearer Guidelines: The judgment provides clearer guidelines for judicial review in tender matters, which could lead to more consistent and predictable outcomes.
• Balanced Approach: The judgment strikes a balance between the need for transparency and fairness in tender processes and the need for efficiency and commercial prudence.

Impact on Stakeholders: