Government contracts: India
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Immunity for contracts entered into in the President/ Governor’s name
The Supreme Court has held that the government, when entering into a contract under the President’s name, cannot claim immunity from the legal provisions of that contract under Article 299 of the Constitution, in a recent case.
A Bench led by Chief Justice of India (CJI) DY Chandrachud said, “Having considered the purpose and object of Article 299, we are of the clear opinion that a contract entered into in the name of the President of India, cannot and will not create an immunity against the application of any statutory prescription imposing conditions on parties to an agreement, when the Government chooses to enter into a contract”.
The case dealt with an application filed by Glock Asia-Pacific Limited, a pistol manufacturing company, against the Centre regarding the appointment of an arbitrator in a tender-related dispute.
First, what is Article 299 of the Constitution?
Article 298 grants the Centre and the state governments the power to carry on trade or business, acquire, hold, and dispose of property, and make contracts for any purpose, while Article 299 delineates the manner in which these contracts will be concluded. Articles 298 and 299 came after the Constitution came into effect and the government entered into contracts even in the pre-independence era. According to the Crown Proceedings Act of 1947, the Crown could not be sued in court for a contract it entered into.
Article 299 of the Constitution provides that “all contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President or by the Governor of the State” and that all such contracts and “assurances of property made in the exercise of that power shall be executed” on behalf of the President or the Governor by persons in a manner as directed and authorised by them.
Further, the phrase ‘expressed to be made and executed’ under Article 299 (1) means that there must be a deed or contract in writing and that it should be executed by a person duly authorised by the President of the Governor on their behalf.
The objective behind Article 299(1), as per the 1954 top court ruling in ‘Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors’, is that there must be a definite procedure according to which contracts must be made by agents acting on the government’s behalf; otherwise, public funds may be depleted by unauthorized or illegitimate contracts. It implies that contracts not adhering to the manner given in Article 299(1) cannot be enforced by any contracting party.
However, Article 299 (2) says that essentially, neither the President nor the Governor can be personally held liable for such contracts.
What was the case?
The May 19 ruling delivered by the Bench, also comprising Justices PS Narasimha and JB Pardiwala, dealt with an application filed by Glock Asia-Pacific Limited against the Centre on the appointment of an arbitrator in a dispute. Glock Asia Pacific entered into a contract with the Ministry of Home Affairs for the supply of 31,756 Glock pistols. Subsequently, there was a dispute between the two parties due to the Centre invoking a performance bank guarantee. A performance bank guarantee, similar to a letter of credit, is the bank’s promise that it will meet the debtor’s liabilities, provided that he fails to meet the contractual obligations.
Glock then issue a notice invoking arbitration, nominating a retired Delhi High Court judge as the sole arbitrator. When the government was called to accept this, it said that the arbitrator’s nomination violated one of the tender conditions that said an officer in the Law Ministry, appointed by the MHA Secretary, would be the arbitrator in case of a dispute. Thus, Glock challenged this clause in the agreement, which allowed a government officer to resolve the difference between the two parties as an arbitrator, as one party here was the MHA itself.
What did the court hold?
One of the major grounds of the challenge given under Section 12(5) of the Arbitration and Conciliation Act, 1996, says that notwithstanding any prior agreement, any person whose relationship with the parties or counsel of the dispute falls under any of the categories in the Seventh Schedule will be ineligible to be appointed as an arbitrator. The Seventh Schedule includes relationships where the arbitrator is an employee, consultant, advisor, or has any other past or present business relationship with a party.
Deciding the case in Glock’s favour, the court observed that the arbitration clause allowed a “serving employee of the Union of India, a party to the contract, to nominate a serving employee of the Union of India as the Sole Arbitrator.” Holding this to be in conflict with Section 12(5), the court allowed the present application. The court also appointed former SC judge Justice Indu Malhotra “as the Sole Arbitrator to adjudicate upon the disputes” in the case.
Referring to the recommendation of the 246th Law Commission Report, which dealt with the issue of contracts with government entities, the court observed that when the party appointing an arbitrator is the State, “the duty to appoint an impartial and independent adjudicator is even more onerous.” Thus, the court rejected the Centre’s reliance on Article 299, saying, “Article 299 only lays down the formality that is necessary to bind the government with contractual liability” and not “the substantial law relating to the contractual liability of the Government”, which is to be found in the general laws of the land.
What are the requirements for government or state contracts?
In its judgement, the court referred to its 1966 ruling in ‘K.P. Chowdhry v. State of Madhya Pradesh. And Others’, which laid down essential requirements for government contracts under Article 299.
In that ruling, the top court had reiterated three conditions to be met before a binding contract against the government could arise, namely: “(1) the contract must be expressed to be made by the Governor or the Governor-General; (ii) it must be executed in writing, and (iii) the execution should be by such persons and in such manner as the Governor or the Governor-General might direct or authorise.” Prior to this, the Apex Court, in its 1962 ruling in ‘State of Bihar v. Messrs. Karam Chand Thapar’, had laid down these three conditions too.
SC restrains courts from evaluating technical bids
‘If Decision Is Taken In Public Interest, Courts Should Exercise Restraint’
In a significant order, the Supreme Court has barred courts from evaluating technical bids submitted by companies to bag contracts for public works.
While giving this verdict, a bench of Justices Ranjan Gogoi, R Banumathi and Mohan M Shantanagoudar held that door-to-door garbage collection was intrinsically linked to public health, for which municipalities should be free to choose a private firm with sound technical ability to carry out the task and not necessarily award the contract to a company which submitted the lowest financial bid.
Writing a 52-page judgment for the bench, Justice Shantanagoudar said, “It is not open to the court to independently evaluate the technical bids and financial bids of the parties as an appellate authority for coming to its conclusion” unless the challenger proved mala fide, intention to favour someone or bias, arbitrariness, irrationality or perversity on the part of the authorities. “Where a decision is taken purely in public interest, the court ordinarily should exercise judicial restraint,” he said.
The SC reversed a judgment by the Madhya Pradesh high court, which had set aside Ujjain Municipal Corporation’s decision to award door-to-door garbage collection contract to Global Waste Management Cell Private Ltd instead of BVG India Ltd, which alleged that its offer was rejected despite its financial bid being the lowest.
Discussing the nature of tender process and scope of judicial interference, the bench said, “Evaluating tenders and awarding contracts are essentially commercial transactions/contracts. If the decision relating to award of contract is in public interest, the courts will not, in exercise of the power of judicial review, interfere even if a procedural aberration or error in awarding the contract is made out.
“The power of judicial review will not be permitted to be invoked to protect private interest by ignoring public interest. Attempts by unsuccessful bidders with an artificial grievance and to get the purpose defeated by approaching the court on some technical and procedural lapses should be handled by courts with firmness. The power of judicial review should be avoided if there is no irrationality or arbitrariness.”
The SC disapproved of the HC decision to set aside the award of contract to Global Waste despite there being no allegation of bias or mala fide against the technical committee. While approving the formula applied by technical experts to evaluate the bids, the SC faulted the method employed by the HC for the same.
Attempts by unsuccessful bidders with an artificial grievance to get the purpose defeated should be handled with firmness. The power of judicial review should be avoided if there is no irrationality or arbitrariness