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Case Analysis of- Kanhaiyalal Agrawal versus Union of India and ors

The main concepts involved in Kanhaiya Lal Agrawal v. UOI[1] are

  1. The liability of the state arising out of contracts
  2. Freedom of government in exercising its administrative functions relating to tenders and commercial contracts
  3. The scope of judicial review of administrative action in tenders and commercial contracts


Liability of State arising out of contracts-

The British maxim, King can do no wrong gave absolute immunity to the Crown in England. However, in India, this immunity was not extended to the East India Company. In Bank of Bengal v. United Company[2] it was held that suits arising out of contracts could be filed against East India Company and hence, it did not enjoy immunity from such actions.

Article 298 and 299 of the Constitution of India embody the concept of contractual liability of the government.

Article 298 states that[3]: The executive power of the Union and of each State shall extend to the carrying on of any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose.

Article 299[4] lays down 3 essential conditions that must be complied with by the contract made in exercise of power of Union:[5]

  1. Such contract has to be expressed to be entered into by the Governor or the President. A contract would be unenforceable against the government if the contract is not expressed to be made by the governor.[6] This is a mandatory condition but a liberal view has often been taken by the Supreme Court in this regard. A contract was held to be valid when signed by an authorized officer even though the same wasnt done on the governors behalf.[7]
  2. Execution of the contract must be done on behalf of the Governor or President: However, the SC has taken the view that a formal document in this regard is not required although this condition is mandatory.[8]
  3. Execution of the contract must be done by a person that the Governor or the President has authorized to do so. Implied authorization in this regard is also permitted under this condition.[9]

Freedom of Government in exercising administrative functions relating to tenders and commercial contracts: The government though having the power to enter into commercial contracts with private individuals, are imposed with certain restrictions. These restrictions have been placed with the intent to conform the provisions of the statute with article 14 of the Constitution as the granting of contracts and tenders falls under the realm of administrative actions of the state and such actions are required to conform to the Indian Constitution. The general rule is that if the administrative law does not conform to constitutional law, the Courts will intervene and ensure such conformity.

A strong nexus exists between the concept of contractual liability of the government and Article 14 of the Constitution which states- The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.[10]

However, in cases of contractual obligations, the government enjoys the same freedom and the rights as enjoyed by private individuals. This entitles the government to a freedom of choice i.e., it can choose to enter into a contract with anyone. This freedom implies that in cases of auctions, the government is not bound to accept the highest bid and has the freedom to reject all the bids.[11]

Judicial Review of Administrative action in commercial contracts and tenders:

In Association of Registration Plates V. Union of India and others[12]:

Article 14 of the Constitution prohibits the government from arbitrarily choosing a contractor at its will and pleasure. It has to act reasonably, fairly and in public interest in awarding contract. At the same time, no person can claim a fundamental right to carry on business with the government. All that he can claim is that in competing for the contract, he should not be unfairly treated and discriminated against, to the detriment of public interest. Undisputedly, the legal position which has been firmly established from various decisions of the Supreme Court is that government contracts are highly valuable assets and the court should be prepared to enforce standards of fairness on government in its dealings with tenderers and contractors.

Although the government and the private individuals enjoy similar rights and duties in cases of contracts, there is one fundamental distinction. While enjoying absolute freedom in contractual matters, the government must not neglect the fact that it is exercising a public power with the purpose of promoting public interest and therefore all its actions must be free from arbitrariness.

However, the courts do not interfere or intervene in matters that concern with the contractual powers of the government unless their action in that regard is unreasonable or arbitrary or malafide or against the mandatory procedure. This was held in Kanhaiya Lal Agrawal v. Union of India and Others.

Thus in conclusion, the law relating to government contracts in India can be said to be an amalgamation of the principles of Administrative Law as well as the provisions of the Constitution of India. Owing to the involvement of public interest in cases government contracts, the law has to be carefully balanced out keeping in mind the individual interest and there can be no scope for arbitrariness or foul play to be involved in the process.


Kanhaiya Lal Agrawal v. Union of India (UOI) and Ors.[13]

Hon'ble Judges/Coram:

S. Rajendra Babu and P. Venkatarama Reddi, JJ.

This case mainly deals with liability of state arising out of contracts, freedom of government to enter into such contracts and the scope of judicial review of administrative actions in such cases.
Facts- Tenders were invited by Respondent no. 1 for the execution of five items of work that included supplying, delivery and stacking of 75000 m3 machine crushed track ballast at Naurozabad Depot in Bilaspur Division as per the specifications provided from outside the land of railway and loading the same into railway wagons. Supply period for the same was 24 months. The tender was opened on 1st March 2001.

Relevant conditions in the tender document-[14]

  • Clause 2- The tenderer was required to state his rate in both, figures and words against each item.
  • Clause 3- Alteration or omission of the tender document made the tender liable to be rejected. However, permissible corrections in the tender document were required to be countersigned by the tenderers and attached.
  • Clause 6 read with Clause 16- The offer in the tender should be held open for a minimum of 90 days from the date the tender was opened and contravention of the same would result in the forfeiture of security deposit.
  • Clause 13- Non-compliance of any condition mentioned in the tender form makes it liable to be rejected.


Five tenders were received. Kanhaiya Lal, the appellant, made his tender on 27th February 2001 and in a covering letter attached with the tender, stated that if his tender is accepted within 45 days, 60 days and 75 days, he would provide rebates of 5%, 3% and 2% respectively on the rates tendered by him and to make use of the machinery at the quickest possible time.[15]

Respondent no. 5, that is, Hukumchand Constructions, made a similar offer on 5th March 2001 and 26th March 2001 that if his tender were to be accepted within 30 days and 45 days, he would extend a rebate of 1.25% and 1% respectively on the rate provided by him.[16]

The tender of the Appellant was accepted and Hukumchand filed a writ petition in Madhya Pradesh High Court claiming that his tender should have been accepted since he offered the lowest rates. The matter went to a Single judge bench of MP High Court.

Decision of Single Judge Bench-
The judge directed that fresh offers were to be taken from Kanhaiya Lal and Hukumchand since the tender notice of Kanhaiya Lal did not mention in itself the offer of rebate and the offer made by Hukumchand was after the opening of the tender and hence, was of no consequence. The same shall be taken into consideration, appreciated by the competent authority and the tender shall be given to the person having the lower offer.
Letters Patent Appeals were filed by Kanhaiya Lal, Hukumchand and Union of India challenging the above decision which was then decided by a division bench of the MP High Court.

Decision of Division Bench-
The Division Bench, after adverting to several decisions on the question of award of contracts, stated that the tender notice did not contemplate any attachment of conditions by giving rebate which would amount to alteration of the tender document which is impermissible; that the tender should be unconditional and relaxation, if any, should have been notified to all the tenders to enable them to change their rates; that all the tenderers should have been treated equally and fairly, and on that basis, took the view that the tender of Respondent No. 5 is at a lower rate and hence, acceptable and set aside the order of the learned Single Judge directing fresh negotiations with the parties. The Division Bench directed the supply of material by the appellant to be stopped and balance material to be taken from Respondent No. 5 at the rate furnished by him.
Appeals were filed against the order of the High Court.

Questions before the Supreme Court-

  1. Whether the tender offered by the appellant with the rebates could have been accepted by the railway administration and if such an acceptance would affect the interest of any other party?
  2. Whether in accepting the tender of the appellant, the decision of the Railway administration is discriminatory, arbitrary, mala fide or in disregard to mandatory procedure?
  3. Whether courts exercise the power of judicial review in cases relating to Government contracts and contractual liability of the State?


Judgement of SC-

This Court is normally reluctant to intervene in matters of entering into contracts by the Government, but if the same is found to be unreasonable, arbitrary, mala fide or is in disregard of mandatory procedures it will not hesitate to nullify or rectify such actions.

The SC relied on G.J. Fernandez v. State of Karnataka[17] and held that when an essential condition of tender is not complied with, it is open to the person inviting tender to reject the same. Whether a condition is essential or collateral could be ascertained by reference to consequence of noncompliance thereto. If non-fulfilment of the requirement results in rejection of the tender, then it would be essential part of the tender otherwise it is only a collateral term.

In the present case, the question for consideration was whether the tender offered by Kanhaiyalal with the rebate mentioned in the covering letter could have been accepted and whether such acceptance would affect the interests of any other party.

In this regard, the SC held-
Bureaucratic delay is a notorious fact and delay in finalising tenders will cause hardship to the tenderer. In such circumstances, if a hardened businessman makes an attractive offer of concessional rates if tender is finalized within a shorter period, it cannot be said that the rates offered are subject to conditions. The rates offered are clear and the time within which they are to be accepted is also clear. As long as such offer does not militate against the terms and conditions of inviting tender it cannot be said that such offer is not within its scope.

All that is required is that offer made is to be kept open for a minimum period of 90 days. Offer in compliance of that term has been made by Kanhaiyalal. The rebate given is an additional inducement to accept the offer expeditiously to have a proper return on the investment made by the tenderer in the equipment and not keeping the labour idle for long periods which is part of commercial prudence. The commercial aspect of each one of the offers made by the parties will have to be ascertained and, thereafter a decision taken to accept or reject a tender.

Kanhaiyalal made his offer of concessional rates along with the tender while Hukumchand made such offer after opening of the tenders. It is difficult to conceive that Hukumchand, who is a prudent businessman, would not be aware of the commercial practice of giving rebate in the event of quick finalization of a transaction. What Kanhaiyalal offered was part of the tender itself while Hukumchand made such offer separately and much later. There was nothing illegal or arbitrary on the part of Railway Administration in accepting the offer of Kanhaiyalal, which was made at the time of submitting the tender itself.

As a result, the appeals were allowed and the orders passed by the Division Bench and the Single Judge of Madhya Pradesh High Court were set aside and the writ petition was dismissed.

Position of Law Prior To This Kanhaiyalal

Commercial contracts and tenders are included within the administrative functions of the state. The state enjoys the freedom to enter into a contract with anyone and is not bound to accept the lowest bid. Moreover, it is well established that unless administrative actions are malafide or arbitrary, courts will not usually intervene. Principles with respect to commercial contracts and tenders and how they must be in conformity with Article 14 of the Constitution of India has been laid down by various cases prior to this judgement. They lay down that the government has commercial freedom, but in exercising such power, Article 14 must not be violated. Important cases in this regard have been discussed below-

  1. Union of India v. Hindustan Development Corporation(1993)[18]
    In this case, tenders were invited by Railways Authority for supplying bogies. Tender offers were made by both small and big manufacturers. However, the big manufacturers quoted lower prices so as to eliminate small manufacturers from competition. Hence, as a counter to this, a dual pricing scheme was adopted and allotment of quantity of bogies from small and big manufacturers was adjusted by the Railways authority so that a healthy competitive environment could be promoted.

    This was challenged to be arbitrary since the tender offers made by the big manufacturers quoted the lowest prices and they should have been accepted.

    The Supreme Court held that the government is permitted to act according to healthy standards while entering into contracts with private individuals and hence, the decision made by the Railways Authority was not arbitrary but bonafide and reasonable.
     
  2. In Air India Ltd. v. Cochin International Airport Ltd.(2000)[19] the Supreme Court held- The award of a contract, whether it is by a private party or by a public body or the State, is essentially a commercial transaction. In arriving at a commercial decision considerations which are paramount, are commercial considerations. The State can choose its own method to arrive at a decision. It can fix its own terms of invitation to tender and that is not open to judicial scrutiny.

    It can enter into negotiations before finally deciding to accept one of the offers made to it. Price need not always be the sole criterion for awarding a contract. It is free to grant any relaxation, for bona fide reasons, if the tender conditions permit such a relaxation. It may not accept the offer even though it happens to be the highest or the lowest. But the State, its corporations, instrumentalities and agencies are bound to adhere to the norms, standards and procedures laid down by them and cannot depart from them arbitrarily. Though that decision is not amenable to judicial review, the court can examine the decision-making process and interfere if it is found vitiated by mala fides, unreasonableness and arbitrariness.

    Most cases prior to Kanhaiyalal Agrawal v UOI, reiterated these principles and the court rightly followed them in this case. It is logically sound and reasonable that the government should enjoy utmost freedom in commercial matters keeping in mind that their actions do not discriminate against or cause some prejudice to the other parties arbitrarily. However, when such a situation arises, the Courts also have the power of judicial review of their actions.

    Many cases arose after this judgement and they are in conformity with the same. Hence, it can be said that the law relating to Contractual liability of the State and the scope of judicial review of such matters is a settled law in India which has been followed consistently.


Position of Law After The Judgement-

  1. The Supreme Court of India in Michigan Rubber (India) Limited Vs. State of Karnataka and others[20] held that-
    Unless the tendering authority performs actions that are mala fide or there is gross misuse of statutory powers, the Courts shall not interfere in the matters of tenders and awarding of contracts. The courts cannot exercise the power of judicial review where the actions of the state are reasonable, fair and in public interest and the scope of judicial review in such matters is very limited.

    Engaging in any business with the state or its agencies is not a fundamental right of any person. The Government can exercise its own free will for deciding eligibility, invitations and conditions of tender and the scope for judicial review would arise only if the same is done on a discriminatory, arbitrary or mala fide basis.

    Tender process cannot be intervened by courts merely because the terms and conditions could have been more fair or wise. Where the purpose of judicial review is to prevent arbitrariness, it cannot be denied in contractual matters.
     
  2. Maa Binda Express Carrier & Anr. v. North East Frontier Railway & Ors[21]: The SC in this case, held that-
    The state is not bound to accept the bids or tender offers made by individuals since they are merely offers. It cannot be claimed that a particular bid or a tender should have been accepted since it was the highest or the lowest.

    The State must act in a fair and reasonable manner so as to ensure that the tenderers are treated in a manner that is non- arbitrary, non- discriminatory and fair and the Courts have the power to exercise judicial review if the same is not done.


Conclusion
After an analysis of principles of administrative law and cases on the same, we come to the conclusion that the Government is free to enter into contract with any individual but if the same is done on a discriminatory, arbitrary or mala fide basis, the Courts can exercise the power of Judicial review. The government would have an upper hand over other parties to the contract and in such matters, it cannot be equated to a private individual. Hence, the government cannot act arbitrarily so as to exclude another individual.

An individual can enforce his right by approaching the court if an action has been by the government arbitrarily and has aggrieved the said individual. This principle of administrative law was reiterated by the Supreme Court in Kanhaiyalal Agrawal v. UOI. The Court was approached alleging that the government acted in an arbitrary and discriminatory manner by giving the tender to Kanhaiyalal and rejecting Hukumchands tender offer. The Supreme Court took cognizance of the matter when the decision of the MP High Court was appealed against and held that the decision of the government was neither discriminatory nor arbitrary.

Hence, as a result of the principles of administrative law and Kanhaiyalal case[22], the government is free to enter into commercial contracts with private individuals. However, the same must not be done arbitrarily or in a discriminatory or malafide manner or against mandatory procedures.

This position was further expanded in Michigan Rubber Case,[23] where it was held that engaging in any business with the state or its agencies is not a fundamental right of any person. The Government can exercise its own will for deciding eligibility, invitations and conditions of tender and the scope for judicial review would arise only if the same is done on a discriminatory, arbitrary or mala fide basis. Tender process cannot be intervened by courts merely because the terms and conditions could have been more fair or wise.

This position of law regarding the contractual liability of the State in India has pretty much been the same since its very inception.

End-Notes

  1. Kanhaiya Lal Agrawal v. Union of India, AIR 2002 SC 2766.
  2. Bank of Bengal v. United Company, (1931) 1 Bignalls reports 87-181.
  3. INDIA CONST. art. 298.
  4. Id at art. 299.
  5. VISALAKHI, ARUN BHUPATI, GOVERNMENT CONTRACTS 188 (EBC 2014).
  6. Karamshi v. State of Bombay, AIR (1964) SC 1714.
  7. Davecos Garment Factory v. State of Rajasthan, AIR (1971) SC 141.
  8. Union of India v. A. L. Rallia Ram, AIR (1963) SC 1685.
  9. State of Bihar v. Karamchand Thaper and Brothers Ltd, AIR (1962) SC 110.
  10. Supra note 3 at art. 14.
  11. State of Orissa v. Hari Narayan Jaiswal, AIR (1972) SC 816.
  12. In Association of Registration Plates v. UOI and ors, (2005) 1 SCC 679.
  13. Supra note 1.
  14. Supra note 1 at paragraph 2.
  15. Supra note 1 at paragraph 3.
  16. Id.
  17. G.J. Fernandez v. State of Karnataka, 1990 SCR (1) 229.
  18. Union of India v. Hindustan Development Corp., (1993) 3 SCC 500.
  19. Air India Ltd. v. Cochin International Airport Ltd, (2000) 2 SCC 617.
  20. Michigan Rubber Ltd. v. State of Karnataka & Ors, (2012) 8 SCC 216.
  21. Maa Binda Express Carrier & Anr v. North East Frontier Railway & Ors, AIR (2014) SC 390.
  22. Supra note 1.
  23. Supra note 20.

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