'Public Interest' Cannot Be Used As A Pretext By Public Authorities To Arbitrarily Terminate Contracts: Supreme Court

The Supreme Court has emphasized that public interest cannot be used as a pretext to arbitrarily terminate contracts.

In that context, the Bench of Chief Justice DY Chandrachud, Justice JB Pardiwala and Justice Manoj Misra observed that, "any decision to terminate a contract must be grounded in a real and palpable public interest, duly supported by cogent materials and circumstances in order to ensure that State actions are fair, transparent, and accountable. Public interest cannot be used as a pretext to arbitrarily terminate contracts and there must be a clear and demonstrable ramification or detriment on the public interest to justify any such action."

The appeal arose from the judgment by the High Court of Calcutta, which upheld the respondent's decision to cancel a tender awarded to the appellant for the maintenance of two underpasses on a Public-Private Partnership basis.

The High Court dismissed the appellant's writ appeal. The respondent had issued a tender notice on May 12, 2022, inviting bids for the maintenance of two underpasses on the Eastern Metropolitan Bypass. The maintenance included the upkeep of the underpasses, garden areas, and electro-mechanical fittings, with a license fee for advertisement rights over a 10-year period. The appellant submitted a bid on June 13, 2022, quoting Rs. 29,55,555 for the Beliaghata Underpass and Rs. 23,55,555 for the Swabhumi Underpass. The appellant's quotations were the highest and classified as 'H1' for both underpasses.

On June 27, 2022, the respondent issued two Letters of Intent to the appellant, accepting the quotations and declaring the appellant as the successful bidder. A formal Memorandum of Tender for Work was executed. The Memorandum of Tender for Work detailed the scope of work, including sweeping floors, cleaning walls, stairwells, escalators, railings, and glass fixtures, emptying dustbins, maintaining gardens and plants, and maintaining light fittings, escalators, water pumps, and other electro-mechanical fixtures. The contract could be terminated for any failure, breach, or non-compliance of the terms. On October 18, 2022, Work Orders were issued by the Executive Engineer, and the appellant commenced work under the contract.

On December 1, 2022, the Urban Development and Municipal Affairs Department of West Bengal ordered the maintenance of the roads and drainage of the E.M. Bypass, including the two underpasses, to be handed over from the Kolkata Metropolitan Development Authority (KMDA) to the Kolkata Municipal Corporation (KMC), while the right to collect advertisement revenue remained with KMDA. Following this order, the Executive Engineer, KMDA, sent a notice to the appellant on January 24, 2023, instructing him to stop all maintenance work on the underpasses immediately. The appellant responded on January 25, 2023, pointing out that the rights and custody of the underpasses remained with the respondent and requested the recall of the stop-work notice.

On February 7, 2023, the respondent issued another notice, cancelling the tender due to technical faults, stating it was non-specific and not well defined, causing financial losses to the respondent. The appellant filed a writ petition (WPA No. 3381 of 2023) before the High Court of Calcutta, challenging the cancellation notice. The Single Judge dismissed the petition, holding that the cancellation was due to administrative exigencies and a change in policy, not arbitrariness or ulterior motives. The appellant then appealed to the Division Bench of the High Court (M.A.T. No. 744 of 2023), which also dismissed the appeal, affirming the Single Judge's decision. The appellant has now brought the present appeal before this Court.

The Court concluded that the case exemplified an arbitrary exercise of power by the respondent in canceling the tender issued in favor of the appellant, influenced by the concerned Minister-In-Charge, rendering the Notice of Cancellation dated February 7, 2023, illegal. The Court emphasized, "We are of the considered opinion that the litigation at hand is nothing but a classic textbook case of an arbitrary exercise of powers by the respondent in canceling the tender that was issued in favor of the appellant and that too at the behest of none other than the concerned Minister-In-Charge and thereby rendering the Notice of Cancellation dated 07.02.2023 illegal."

Furthermore, the Court noted the appellant's significant investments in erecting multiple structures for advertisements under the tender terms. As a result, the vested rights accrued to the appellant were not to be affected by the issuance of a fresh tender to any third party or the transfer of maintenance operations of the E.M. Bypass to the KMC. 

The Court allowed the appeal, quashed the cancellation notice, and set aside the High Court's impugned judgment, "Thus, for all the foregoing reasons, the appeal succeeds and is hereby allowed. The notice of cancellation dated 07.02.2023 is quashed and the impugned judgment and order passed by the High Court is hereby set aside."

Cause Title: Subodh Kumar Singh Rathour vs The Chief Executive Officer & Ors.

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