Supreme Court Warns Authorities Against Arbitrary Public Tender Cancellations

Supreme Court Warns Authorities Against Arbitrary Public Tender Cancellations

The Supreme Court emphasized the importance of upholding the sanctity of contracts and cautioned public authorities against arbitrary cancellation of public tenders, noting that these processes originate from the doctrine of public trust to ensure a fair opportunity for all potential bidders.

"The sanctity of contracts is a fundamental principle that underpins the stability and predictability of legal and commercial relationships. When public authorities enter into contracts, they create legitimate expectations that the state will honor its obligations. Arbitrary or unreasonable terminations undermine these expectations and erode the trust of private players in public procurement processes and tenders," the Court observed.

"When private parties perceive that their contractual rights can be easily trampled by the state, they would be dissuaded from participating in public procurement processes, which may have a negative impact on such other public-private partnership ventures, and ultimately, it is the public who would have to bear the brunt, thereby frustrating the very object of public interest."

The Supreme Court observed that the decision of the state to cancel a public tender must be grounded in bona fide considerations and should be evident in its decision-making process rather than being influenced by extraneous factors. The Court emphasized that the failure of the public authority to provide valid reasons for canceling a tender awarded for a public purpose warrants judicial review.

"Cancellation of a contract deprives a person of his very valuable rights and is a very drastic step, often due to significant investments having already been made by the parties involved during the subsistence of the contract. Failure on the part of the courts to zealously protect the binding nature of a lawful and valid tender would erode public faith in contracts and tenders. Arbitrary terminations of contracts create uncertainty and unpredictability, thereby discouraging public participation in the tendering process. When private parties perceive that their contractual rights can be easily trampled by the state, they would be dissuaded from participating in public procurement processes, which may have a negative impact on such other public-private partnership ventures, and ultimately it is the public who would have to bear the brunt, thereby frustrating the very object of public interest."

"We caution public authorities to be circumspect in attempting to disturb or evade their contractual obligations through means beyond the contract's terms by exercising their executive powers. While we acknowledge that the state has the power to alter or cancel a contract in the public interest or due to a change in policy, such actions must be bona fide and clearly reflected in the decision-making process and the final decision. Otherwise, it could have a chilling effect, making participating in and winning a tender seem worse than losing it at the outset."

Noting a shift in the legal landscape regarding the judicial review of the state's contract-making decisions, where courts were previously reluctant to interfere, the bench led by CJI DY Chandrachud, along with Justices JB Pardiwala and Manoj Misra, emphasized that the state cannot claim immunity from judicial review if its contracting decisions, which involve public interest, exhibit arbitrariness or mala fide intentions.

“Although disputes arising purely out of contracts are not typically amenable to writ jurisdiction, the state's obligation to act fairly and not arbitrarily or capriciously makes it well-settled that contractual powers used for public purposes are certainly subject to judicial review,” stated Justice JB Pardiwala in the judgment.

The core dispute involved the appellant being granted a tender to maintain and operate two underpasses in Kolkata. The respondent-state issued a notice cancelling the tender without providing reasons as stipulated in the contract, citing an extraneous ground that higher officials wanted the cancellation.

Aggrieved by the state's decision, the appellant filed a writ petition before the Calcutta High Court, which was dismissed. The appellant then approached the Supreme Court.

The Supreme Court asserted that judicial review of an executive action is warranted if the decision is not based on valid considerations. The Court stressed the need to determine whether the decision was founded on genuine motivations.

Upon examining the cancellation notice, the court found that no valid reasons were provided for cancelling the tender. Instead, the cancellation was driven by an unrelated reason—the transfer of the operation and maintenance responsibilities for the underpasses to another authority.

Drawing from the internal file notings of the respondents, the Court acknowledged that such notings could be considered during judicial review if they played a significant role in the decision-making process to cancel the tender.

“Any internal discussions or notings that have been approved and formalized into a decision by an authority can be examined to ascertain the reasons and purposes behind such decisions for the overall judicial review of the decision-making process and to determine whether they conform to the principles enshrined in Article 14 of the Constitution,” the Court stated.

The Court also dismissed the respondent's argument that the tender cancellation was in the public interest to avoid a loss to the public exchequer. It held that such a claim did not constitute a valid reason for cancelling an existing tender.

“A blanket claim by the state citing loss of public money cannot be used to evade contractual obligations, especially when it is not based on any evidence or examination, as the larger interest of upholding contracts is also at play,” the Court noted.

The Court characterized the case as a textbook example of arbitrary exercise of power by the respondent, where the tender issued in favor of the appellant was cancelled at the behest of the concerned Minister-in-Charge.

The Court found that the respondent's notice of tender cancellation was an arbitrary exercise of power, as it was passed without recording reasons as per the contract terms but based on extraneous grounds. Therefore, exercising its power of judicial review, the Court quashed the tender cancellation notice and overturned the decision of the High Court.