Preface:
Unlike a private individual, the State cannot act as it pleases in the matter of giving largesse and it cannot choose to deal with any person it pleases in its absolute and unfettered discretion. In the matter of: Kasturilal V/s State of J&K, AIR 1980 SC 1992, it was observed that:
(a) 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.
(b) 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.
Where there is arbitrariness in State action, Article 14 of the Constitution of India, 1950 springs in and judicial review strikes such an action down. Every action of the executive authority is subject to the rule of law and it must be informed by reason. So, whatever be the activity of the public authority, it should meet the test of Article 14 of the Constitution of India, 1950.
Moreover, in the matter of: Sachidanand Pandey & Anr V/s State of West Bengal & Ors, (1987) 2 SCC 295, it was observed that ordinary rule for disposal of State-owned or public-owned property, is by way of public auction or by inviting tenders but there could be situations where departure from the said rule may be necessitated but then the reasons for the departure must be rational and should not be suggestive of discrimination and that nothing should be done which gives an appearance of bias, jobbery or nepotism.
State which has the right to trade has also the duty to observe equality:
In the matter of: Erusian Equipment & Chemicals Ltd. V/s State of West Bengal, AIR 1975 SC 266, it was observed that:
i. The State which has the right to trade has also the duty to observe equality. The Government cannot exclude persons by discrimination.
ii. No person has a fundamental right to insist that the Government must enter into a contract with him.
That in the aforenoted matter, it was held that:
“… The State can enter into contract with any person it chooses. No person has a fundamental right to insist that the Government must enter into a contract with him. A citizen has a right to claim equal treatment to enter into a contract which may be proper, necessary and essential to his lawful calling. Where the blacklisting order involves civil consequences, it casts a slur. It creates a barrier between the persons blacklisted and the Government in the matter of transactions. The blacklists are ‘instruments of coercion’. Hence, a person must be given an opportunity of hearing before his name is put on the blacklist.”
Government contract may be granted by private negotiation, but in exceptional circumstances:
In the matter of: Nova Ads V/s Metropolitan Transport Corporation & Ors, (2015) 13 SCC 257, it was observed that:
i. Whenever a contract is to be awarded or a license is sought to be given, it is obligatory on the part of the public authority to adopt a transparent and fair method. It serves two purposes:
(a) Participation of all eligible competitors and giving fair opportunity to them; and,
(b) Generating maximum revenue.
ii. That contracts by the State, its corporations, instrumentalities and agencies must be normally granted through public auction/ public tender by inviting tenders from eligible persons and the notification of the public auction or tenders should be advertised in well known dailies having wide circulation in the locality with all relevant details such as date, time, place of auction, subject matter of auction, technical specifications, estimated cost and earnest money deposit.
iii. The award of government contracts through public auction/ public tender is to ensure transparency in the public procurement, to maximize economy and efficiency in government procurement, to promote healthy competition among the tenderers, to provide for fair and equitable treatment of all tenderers, and to eliminate irregularities, interference and corrupt practices by the authorities concerned.
iv. There can be a situation, for good reasons the contract may be granted by private negotiation, but that has to be in a very exceptional circumstance, for in the absence of transparency the public confidence is not only shaken but is rather shattered.
Similarly, in the matter of: Netai Bag & Ors V/s State of West Bengal & Ors, (2000) 8 SCC 262, it was observed that when any State land is intended to be transferred or the State largesse is decided to be conferred, resort should be had to public auction or transfer by way of inviting tenders from the people as that would be a sure method of guaranteeing compliance with mandate of Article 14 of the Constitution of India, 1950, but non-floating of tenders or not holding public auction will not in all cases be deemed to be the result of the exercise of the executive power in an arbitrary manner.
Mandatory auction can be contrary to economic logic:
In the matters of: Centre for Public Interest Litigation & Ors V/s Union of India & Ors, (2012) 3 SCC 1, and Natural Resource Allocation: In Re Special Reference No. 1 of 2012, (2012) 10 SCC 1, it was observed that:
i. The court (Supreme Court/ High Court) cannot conduct a comparative study of the various methods of distribution of natural resources and suggest the most efficacious mode, if there is one universal efficacious method in the first place. The court is bound to respect the mandate and wisdom of the executive for such matters.
ii. The methodology pertaining to disposal of natural resources is an economic policy. It entails intricate economic choices and the court lacks the necessary expertise to make them. It is not the endeavor of the court to evaluate the efficacy of auction vis-à-vis other methods of disposal of natural resources. The court cannot mandate one method to be followed in all facts and circumstances.
iii. Auction being an economic choice of disposal of natural resources, is not a constitutional mandate. However, the court can test the legality and constitutionality of the methods adopted by the executive for disposal of natural resources.
iv. When the methods adopted by the executive to carry out the disposal of natural resources are challenged before the court, then the court is entitled to analyze the legal validity of different means of distribution and give a constitutional answer as to which methods are ultra vires and intra vires the provisions of the Constitution of India, 1950. However, the court will not enter into the arena of comparison to determine which policy of the executive is fairer than the other, but will only determine whether or not a policy of law is blatantly unfair to the extent that it falls foul of the fairness requirement of Article 14 of the Constitution of India, 1950. If the executive policy as regards distribution of natural resources is in teeth of Article 14 of the Constitution of India, 1950, then the court will not hesitate in striking it down.
v. Market price in economics is an index of the value that a market prescribes to a good. However, this valuation is a function of several dynamic variables; it is a science and not a law. Auction is just one of the several price discovery mechanisms.
vi. Auction despite being a more preferable method of alienation/ allotment of natural resources, cannot be held to be a constitutional requirement or limitation for alienation of all the natural resources and therefore, every method other than auction cannot be struck down as ultra vires the constitutional mandate.
vii. Auction as a mode of distribution of natural resources cannot be conferred the status of a constitutional principle. Alienation of natural resources is a policy decision, and the means adopted for the same are executive prerogatives. However, when such a policy decision is not backed by a social or welfare purpose, and precious and scarce natural resources are alienated for commercial pursuits of profit maximizing private entrepreneurs, adoption of means other than those that are competitive and maximize revenue may be arbitrary and face the wrath of Article 14 of the Constitution of India, 1950.
viii. An executive action albeit the distribution of natural resources is subject to judicial review if it can be shown to the court that such distribution of natural resources by the executive is not only arbitrary, unfair, unreasonable and capricious being hit by Article 14 of the Constitution of India, 1950, but is also motivated to confer undue benefit to some private players/ entrepreneurs.
Distribution of public largesse by State through “private negotiation”:
That in the matter of: Flemingo Travel Retail Ltd. V/s Kannur International Airport Ltd. & Ors, W.A. No. 73/ 2020, High Court of Kerala (Date of Decision: 28.04.2020), it was observed that:
i. So far as distribution of public largesse by State is concerned, there is no constitutional mandate in favour of “auction” regard being had to Article 14 of the Constitution of India, 1950.
ii. Auction is just one of the several price discovery mechanisms. Since, multiple variables are involved in valuation of natural resources, auction or any other form of competitive bidding, cannot constitute even an economic mandate, much less a constitutional mandate. Negotiation can never be stated to be a legally impermissible method of finalization of a contract.
iii. It is essential to remember the ratio in the matter of: Sivakumar V/s State of Kerala, ILR 1999 (1) Kerala 438, where the Corporation of Kochi, granted the right to collect tax on advertisement by private negotiation, by increasing the previous year’s rate by 10 percent. On facts, the court found that the contract was detrimental to the financial interests of the Corporation of Kochi and that there was no explanation offered by the Corporation of Kochi for resorting to private negotiation instead of public auction. The court held that the allegations of mala fides and favoritism stood established as there was ex- facie unequal treatment.
iv. If tender process despite repeated attempts does not yield adequate/ appropriate results, then the State or instrumentality of State, as the case may be, is at liberty to dispose of public largesse by entering into private negotiation.
It is important to note that in Villianur Iyarkkai Padukappu Maiyam V/s Union of India & Ors, (2009) 7 SCC 561, the matter before the Hon’ble Supreme Court related to the selection of contractor for development of the Port of Pondicherry without floating a tender or holding public auction. The Hon’ble Supreme Court observed that where the State is allocating resources such as water, power, raw materials, etc., for the purpose of encouraging development of the Port, the State is not bound to advertise and tell the people that it wanted development of the Port in a particular manner and invite those interested to come up with proposals for the purpose.
That in the matter of Villianur Iyarkkai Padukappu Maiyam (Supra), while observing that economic policies are ordinarily not amenable to judicial review, it was held that:
“… Wisdom and advisability of economic policy are ordinarily not amenable to judicial review. In matters relating to economic issues the Government has, while taking a decision, right to “trial and error” as long as both trial and error are bona fide and within the limits of the authority. For testing the correctness of a policy, the appropriate forum is Parliament and not the courts. Normally, there is always a presumption that the Governmental action is reasonable and in public interest and it is for the party challenging its validity to show that it is wanting in reasonableness or is not informed with public interest. This burden is a heavy one and it has to be discharged to the satisfaction of the court by proper and adequate material. The court cannot lightly assume that the action taken by the Government is unreasonable or against public interest because there are large number of considerations, which necessarily weigh with the Government in taking an action. In a case like this where the State is allocating resources such as water, power, raw materials, etc. for the purpose of encouraging development of the port, this Court does not think that the State is bound to advertise and tell the people that it wants development of the Port in a particular manner and invite those interested to come up with proposals for the purpose. The State may choose to do so if it thinks fit and in a given situation it may turn out to be advantageous for the State to do so, but if any private party comes before the State and offers to develop the port, the State would not be committing breach of any constitutional obligation if it negotiates with such a party and agrees to provide resources and other facilities for the purpose of development of the port. … It is true that one of the methods of securing the public interest, when it is considered necessary to dispose of a property, is to sell the property by public auction or by inviting tenders. But as noted earlier, this is not a case of sale of property by the State. Though public auction or inviting of tenders is the ordinary rule in case where the State Government proposes to dispose of a property, it is not an invariable rule. There may be situations where there are compelling reasons necessitating departure from the rule, the reasons indicated in this case for the departure are shown to be rational and are not suggestive of discrimination.” (emphasis supplied)
Excursus:
(a) That public property owned by the State or by an instrumentality of State should be generally sold by public auction or by inviting tenders. It is important to note that, this rule is insisted upon not only to get the highest price for the property but also to ensure fairness in the activities of the State and public authorities and to obviate the factors like bias, favoritism or nepotism. That departure from the rule of auction can be made but then it must be justified. (Haji T.M. Hassan Rawther V/s Kerala Financial Corporation, (1988) 1 SCC 166)
(b) That distribution of public largesse by inviting open tenders or by public auction is desirable but it cannot be held that in no case distribution of such largesse by negotiation is permissible. (M.P. Oil Extraction & Anr V/s State of M.P. & Ors, (1997) 7 SCC 592)
(c) Natural resources are public goods and hence, doctrine of equality applies so far as distribution and disposal of natural resources are concerned. That in the matter of Centre for Public Interest Litigation & Ors (Supra), it was observed that:
“… As natural resources are public goods, the doctrine of equality, which emerges from the concepts of justice and fairness, must guide the State in determining the actual mechanism for distribution of natural resources. In this regard, the doctrine of equality has two aspects: first, it regulates the rights and obligations of the State vis-à- vis its people and demands that the people be granted equitable access to natural resources and/or its products and that they are adequately compensated for the transfer of the resource to the private domain; and second, it regulates the rights and obligations of the State vis-à-vis private parties seeking to acquire/use the resource and demands that the procedure adopted for distribution is just, non- arbitrary and transparent and that it does not discriminate between similarly placed private parties.”
(d) Natural resources being public property, should be used in the best of interest of the society. That in the matter of: Secretary, Ministry of Information and Broadcasting, Government of India & Ors V/s Cricket Association of Bengal & Ors, 1995 (2) SCC 161, the Hon’ble Supreme Court observed that:
“… there is no doubt since air waive frequencies are public property and are also limited, they have to be used in the best interest of the society and this can be done either by the Central Authority by establishing its own broadcasting network or regulating the grant of licenses to other agencies, including the private agencies.”
(e) State is the legal owner of the natural resources but only as a trustee of the people of the country. That in the matter of: Reliance Natural Resources Limited V/s Reliance Industries Limited, (2010) 7 SCC 1, the Hon’ble Supreme Court observed that:
(1) The constitutional mandate is that the natural resources belong to the people of the country.
(2) The natural resources are vested with the Government as a matter of trust of the people of the country and it is the solemn duty of the State to protect the national interest, and further, the natural resources must always be used in the best interest of the country and not in private interest.
(3) The State is the legal owner of the natural resources but only as a trustee of the people of the country, and even though the State is empowered to distribute the same, the process of distribution must be guided by constitutional provisions, including the doctrine of equality and larger public good.
