government contract
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This article is written by Ankur Ved Tuli. Ankur is a practicing lawyer with specialisation in areas including litigation relating to banking, competition and commercial disputes as well as general corporate advisory.

A contract is an agreement/arrangement between two or more parties defining their obligations. Contractual obligations are attributed to the will of the parties involved. In other words, a contract contains the terms and conditions accepted to be performed by the parties to a contract in order to fulfil their promise.

While performing the obligations to a contract, parties can mutually agree to alter a contract for recording terms and conditions that are different from the existing one. The validity of such alteration is reflected in the mutual agreement of the parties. At this point, we may draw reference from Section 62 of the Indian Contract Act, 1872, cited below:

“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed”.

Therefore, the point of validity of an alteration of a contract would be weighed on a scale by the mutual consent/agreement of the parties.

Alteration of a contract awarded on the basis of a tender floated by the Government

However, in case of an alteration of a contract awarded on the basis of a tender floated by the Government, the determinative factors will be different. It is also apt to mention that the notion of freedom in a government contract is diluted owing to various factors [or practice].

The Government (or its instrumentalities), unlike private individuals, has to consider many factors, indicatively:

  • (a) fairness;
  • (b) arbitrariness;
  • (c) procedural impropriety;
  • (d) adherence to public policy;
  • (e) reasonableness; and
  • (f) guidelines on tender promulgated by the Central Vigilance Commission (“CVC”). Therefore, in the given scenario, if the Government were to alter a contract, it has to consider the foregoing factors.

Guidelines on tender promulgated by the Central Vigilance Commission

Other than being guided by public policy, Government has to consider the guidelines on tenders prescribed by CVC. These guidelines contain a record of instances where irregularities and lapses have been observed while executing a tender. It not only records the data but also contains suggestions for the Government that are to be considered in a tender process.

Thus, these guidelines primarily give an overview of measuring legality of an alteration carried out by government in case of a contract awarded by a tender process. Let us draw suggestions from the guidelines on our point of discussion, the relevant provision is cited below:

Modifications of contract terms/stipulations

 

After conclusion of the contract, any relaxation in the contract terms/specifications should be severely discouraged. However, in exceptional cases where the modifications/amendments are considered to be absolutely essential, the same should be allowed after taking into account the financial implications for the same.      

Generally, an alteration having a financial implication would imply undue benefit to the supplier. But in view of the guidelines, an alteration may be valid if it satisfies the guideline set out above. On the contrary, if the Government makes an alteration against the public policy and does not consider the factors illustrated above, an aggrieved party can always seek remedy by way of a judicial review.

Towards this, let us discuss few judicial observations on this point. In the scenario being discussed, a court can only interfere when an action taken by the Government is arbitrary, discriminatory, mala fide or actuated by bias. This was observed by the Supreme Court in Michigan Rubber (India) Ltd. versus State of Karnataka and Ors[1]. Additionally, the Supreme Court has also laid down general principles concerning determination of issues pertaining to government contract /tenders, which are illustrated below[2]:

  • The modern trend points to judicial restraint in administrative action;
  • The court does not sit as a court of appeal but merely reviews the manner in which the decision was made;
  • The court does not have the expertise to correct the administrative decision. If a review of the administrative decision is permitted it will be substituting its own decision, without the necessary expertise, which itself may be fallible;
  • The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract;
  • The Government must have freedom of contract. In other words, a fair play in the joints is a necessary concomitant for an administrative body functioning in an administrative sphere or quasi-administrative sphere. However, the decision must not only be tested by the application of Wednesbury principle of reasonableness (including its other facts pointed out above) but must be free from arbitrariness not affected by bias or actuated by mala fides; and
  • Quashing decisions may impose heavy administrative burden on the administration and lead to increased and unbudgeted expenditure.

In another case, the Supreme Court has observed that government actions are amenable in the panorama of judicial review only to the extent that the State must act validly for a discernible reason, not whimsically for any ulterior purpose. The meaning and true import and concept of arbitrariness is more easily visualized than precisely defined.

A question whether the impugned action is arbitrary or not is to be ultimately answered on the facts and circumstances of a given case[3]. Also, in Reliance Airport Developers (P.) Ltd. versus Airport Authority of India and Ors.[4], it was held that while judicial review cannot be denied in contractual matters or matters in which the Government exercises its contractual powers, such review is intended to prevent arbitrariness and must be exercised in larger public interest. Similar principles have also been laid down in Tejas Constructions and Infrastructure Pvt. Ltd. versus Municipal Council, Sendhwa and Anr[5].

In the above premises, we can very well see and reason that an alteration to a contract would always entail consideration of factors that have been summarily discussed above. Especially, for an alteration which results in modification of tender conditions, it would draw judicial attention as the bidders who were disqualified might challenge it on the grounds of arbitrariness and unfairness. Government should always refrain from action which reflects favouritism. In any event, there is no doubt as to possibility of carrying out an alteration of a contract by the Government. In view of which, it would be correct to suggest that the Government can alter a contract. However, if it results in an alteration of tender conditions, such action would be amenable to a judicial review, which will be tested on a scale by measuring the magnitude of arbitrariness/unfairness/ favouritism involved in it.

Hope the above information was useful.

For any queries, feel free to reach to out on the email address mentioned below –

[email protected]

Note: The discussion and views expressed above are based on an understanding of law and information gathered from judicial precedents and general research on the subject.

 References

[1]AIR 2012 SC 2915

[2]Tata Cellular versus Union of India [1994 6 SCC 651],

[3]Union of India versus International Trading Co. & Anr. [2003 5 SCC 437]

[4](2006) 10 SCC 1

[5] (2012) 6 SCC 464.

 

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