Rejection of Highest Bid in Tender Matters : The Law

Justice G.S. Singhvi
Supreme Court of India

The Supreme Court in Himachal Pradesh Housing And Urban Development Authority Vs. Universal Estate, has examined the question whether a body can reject the highest bid received by it pursuant to a tender process. The Supreme Court while answering the question in the affirmative, has held as under;

16. We shall now consider whether the action of the Chief Executive Officer to reject the bid of respondent No.1 was arbitrary, unfair, unreasonable and amounted to violation of Article 14 of the Constitution, but before doing that we deem it proper to observe that the scope of judicial review in such matters is very limited and the Court will exercise its discretion only when it is satisfied that the action of the public authority is detrimental to public interest. In Air India Ltd. v. Cochin International Airport Ltd. (2000) 2 SCC 617, the Court while dealing with a matter involving award of contract, made it clear that the public authority is free not to accept the highest or the lowest offer and the scope of judicial review is confined to the scrutiny of decision making process, which can be annulled if the same is found to be vitiated by malafides, arbitrariness or total unreasonableness. Some of the observations made in the judgment are extracted below: 

"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. The State, its corporations, instrumentalities and agencies have the public duty to be fair to all concerned. Even when some defect is found in the decision-making process the court must exercise its discretionary power under Article 226 with great caution and should exercise it only in furtherance of public interest and not merely on the making out of a legal point. The court should always keep the larger public interest in mind in order to decide whether its intervention is called for or not. Only when it comes to a conclusion that overwhelming public interest requires interference, the court should intervene." (emphasis supplied) 

In Jagdish Mandal v. State of Orissa (2007) 14 SCC 517, a two- Judge Bench, after taking note of the propositions laid down in Sterling Computers Ltd. v. M & N Publications Ltd. (1993) 1 SCC 445, Tata Cellular v. Union of India (1994) 6 SCC 651, Air India Ltd. v. Cochin International Airport Ltd. (supra) and B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. (2006) 11 SCC 548 observed: 

"Judicial review of administrative action is intended to prevent arbitrariness, irrationality, unreasonableness, bias and mala fides. Its purpose is to check whether choice or decision is made "lawfully" and not to check whether choice or decision is "sound". When the power of judicial review is invoked in matters relating to tenders or award of contracts, certain special features should be borne in mind. A contract is a commercial transaction.  

Evaluating tenders and awarding contracts are essentially commercial functions. Principles of equity and natural justice stay at a distance. If the decision relating to award of contract is bona fide and is in public interest, courts will not, in exercise of power of judicial review, interfere even if a procedural aberration or error in assessment or prejudice to a tenderer, is made out. The power of judicial review will not be permitted to be invoked to protect private interest at the cost of public interest, or to decide contractual disputes. The tenderer or contractor with a grievance can always seek damages in a civil court. 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. Such interferences, either interim or final, may hold up public works for years, or delay relief and succour to thousands and millions and may increase the project cost manifold. Therefore, a court before interfering in tender or contractual matters in exercise of power of judicial review, should pose to itself the following questions: 

(i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone; OR Whether the process adopted or decision made is so arbitrary and irrational that the court can say: "the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached"; 

(ii) Whether public interest is affected. 

If the answers are in the negative, there should be no interference under Article 226. Cases involving blacklisting or imposition of penal consequences on a tenderer/contractor or distribution of State largesse (allotment of sites/shops, grant of licences, dealerships and franchises) stand on a different footing as they may require a higher degree of fairness in action." 

Meerut Development Authority v. Association of Management Studies (2009) 6 SCC 171 is a case arising out of the demand of the respondent for allotment of land. Initially, the respondent had given tender for allotment of plot measuring 37,000 square meters at the rate of Rs.500 per square meter. The appellant offered the plot at the rate of Rs.690 per square meter because other parties were prepared to take the land at that price. Later on, the Authority decided to issue open tender-cum-auction notice. Officer's Class Housing Society of the Canal Colony offered to pay Rs.775 per square meter. At that stage, the respondent indicated its willingness to purchase the land at Rs.690 per square meter. The appellant did not accept the respondent's prayer for transfer of land at that rate. Thereupon, the respondent filed writ petition for issue of a direction to the appellant to allot land at the rate of Rs.690 per square meter. By an interim order dated 7.5.2002, the High Court allowed the appellant to allot the land pursuant to advertisement dated 15.4.2002 but made it subject to the decision of the writ petition. Shri Pawan Kumar Agarwal gave an offer of Rs.1365 per square meter. This was accepted by the appellant. But, after some time, the allotment made in favour of Pawan Kumar Agarwal was cancelled. The High Court allowed the writ petition filed by the respondent and dismissed the one filed by Pawan Kumar Agarwal. This Court allowed the appeal and reversed the order of the High Court insofar as it related to the respondent and observed that the decision taken by the appellant was neither arbitrary nor vitiated due to mala fides and the respondent did not have any right to be allotted land. The Bench relied on the principles laid down in several decisions and reiterated the following observations in Kasturi Lal Lakshmi Reddy v. State of J&K (1980) 4 SCC 1: 

"... It must follow as a necessary corollary from this proposition that the Government cannot act in a manner which would benefit a private party at the cost of the State; such an action would be both unreasonable and contrary to public interest. The Government, therefore, cannot, for example, give a contract or sell or lease out its property for a consideration less than the highest that can be obtained for it, unless of course there are other considerations which render it reasonable and in public interest to do so."