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Scope of Judicial Review in Government Contracts

“When the judiciary is the midwife of tyranny, the law becomes the most lethal weapon of a
fascist state”

A Government contract is a contract in which one of the parties is the Government. The Government of India both at the Centre as well as at the State level make several contracts because Government also runs public companies and carries out various function. The State, as well as the Central Government,
maybe the party in a Government contract. All the Government contracts are made in the name of President of India in case of Central Government and in the name of Governor in case of State Government. While an ordinary contract is governed by the Indian Contract Act, 1872, in case of a Government Contract some additional provisions have been provided under the Indian Constitution, thus the formation of Government contract is done in a different manner as compared to an ordinary contract. Chapter XII Part III of the Constitution deals with the Government Contracts, its liabilities, properties, obligations etc. The provisions relevant to government contracts are Article 298 and Article 299 of Indian Constitution. Under Article 298 of the Indian Constitution, the power of the Union and the State government to carry on any trade or business has been provided. For the formation of a Government contract the requirements under Article 299 have to be fulfilled and if they have fulfilled a contract can be enforced against the Government.

The liability of the Government will be the same as is the case in a normal contract under the Indian Contract Act, 1872 but the President and Governor through whose name the contract is entered into are immune from any personal liability under Article 299 (2). Thus, a person can sue the Government “When the judiciary is the midwife of tyranny, the law becomes the most lethal weapon of a fascist state” for the breach of contract and may be awarded damages by the court. If a person has derived any benefit from the Government under such contracts, the Government also has the right to sue that person under Section 70. In the case the Government has made a void contract then it has the right to recover the benefits given by it from the other party under section 65 of the Indian Contract Act.

Apart from the specific performance and other remedies availing through the Contract act for breach of contract one can also approach the judiciary for judicial review in matter of dispute in a government contract. The Government is not bound to enter into a contract with any person but when it does enters into one, it has to do so in a fair manner without any prejudice and such a contract is subject to judicial review power of the Judiciary. Judicial Review is the power of the courts or judiciary of a country to examine the actions of the legislative, executive and administrative branches of the government and to determine whether such actions are consistent with the constitution. The Constitution of India expressly confers the power of judicial review on Supreme Court and the High Courts under Articles 32 and 226 respectively.

There are some limitations on the judiciary on exercising its power of judicial review. In fact, when the judiciary crosses its threshold and interferes in the executive’s mandate, it can be called judicial activism, which when furthered can lead to judicial overreach. The ambit of judicial review and the power of the court to set aside any decision of the Government on its merits are very important factors in Government contracts. The power of judicial review in Government contracts is exercised to keep the unfair practices which may be exercised by the Government or the officers who act on their behalf, in check and therefore it plays an important role in ensuring that the interest of the contracting party is protected. And it does have its own limitations. Judicial Review generally, limits the functioning of the government. It is only permissible to the extent of finding if the procedure in reaching the decision has been correctly followed but not the decision itself. On this sense, the control by the judiciary is concerned with the decision making process itself and not with the merits of the decision. By judicial review, the court cannot review the details of the terms of the contract which has been entered into by the public authorities on behalf of the Government. If the Government has entered into a contract without any arbitrariness and all the procedures have been duly followed in the contract which is essential to be followed without any prejudice, the court cannot exercise its power of judicial review. But if the procedure which has been taken by the authority is against the provisions of Article 14 or there is noncompliance of the proper procedure and the interest of the public, the court cannot ignore such actions and it has to exercise its power of judicial review.

In the case of Tata Cellular v. Union of India., the Supreme Court observes that, “It cannot be denied that the principles of judicial review would apply to the exercise of contractual powers by Government bodies in order to prevent arbitrariness or favoritism. However, it must be clearly stated that there are inherent limitations in exercise of that power of judicial review. Government is the guardian of the finances of the State. It is expected to protect the financial interest of the State. The right to refuse the lowest or any other tender is always available to the Government. But, the principles laid down in Article 14 of the Constitution have to be kept in view while accepting or refusing a tender. There can be no question of infringement of Article 14 if the Government tries to get the best person or the best quotation. The right to choose cannot be considered to be an arbitrary power. Of course, if the said power is exercised for any collateral purpose the exercise of that power will be struck down. Judicial review is concerned with reviewing not the merits of the decision in support of which the application for judicial review is made, but the decision-making process itself. The duty of the court is to confine itself to the question of legality. Its concern should be:

  • Whether a decision-making authority exceeded its powers?
  • committed an error of law,
  • committed a breach of the rules of natural justice, (1994) 6 SCC 651
  • Reached a decision which no reasonable tribunal would have reached or,
  • Abused its powers.

Therefore, it is not for the court to determine whether a particular policy or particular decision taken in the fulfilment of that policy is fair. It is only concerned with the manner in which those decisions have been taken. The extent of the duty to act fairly will vary from case to case. Shortly put, the
grounds upon which an administrative action is subject to control by judicial review can be classified as under:
(i) Illegality: This means the decision-maker must understand correctly the law that regulates his decision making power and must give effect to it.
(ii) Irrationality, namely, Wednesbury unreasonableness.
(iii) Procedural impropriety.
In all these cases the test to be adopted is that the court should, “consider whether something has gone wrong of a nature and degree which requires its intervention”.

In M/S Visual Technologies India Pvt Ltd. Vs Executive Engineer (E) PLEWD, CPWD & anr., the Division Bench comprising of Justice Satish Chandra Sharma and Justice Subramonium Prasad of Delhi High Court has observed that “It is clear as day that the scope of interference by way of judicial review in tender matters is extremely limited, and can only be justified if done to rectify patent arbitrariness, unreasonableness, mala fides, or bias, in the administrative decision. In the absence of the same, the Court must tie its hands and should not interfere, even if a procedural aberration or error in assessment
or prejudice to a tenderer is made out.” In Michigan Rubber v. State of Karnataka,3 the judgement put forward certain principles regarding the same matter, such as:
2 2022/DHC/002973 ;

WP (C) 10582/2022

3 3 (2012) 8 SCC 216

  • The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. These actions are amenable to the judicial review only to the extent that the State must act validly for a discernible reason and not whimsically for any ulterior purpose. If the State acts within the bounds of reasonableness, it would be legitimate to take into consideration the national priorities;
  • fixation of a value of the tender is entirely within the purview of the executive and courts hardly have any role to play in this process except for striking down such action of the executive as is proved to be arbitrary or unreasonable. If the Government acts in conformity with certain healthy standards and norms such as awarding of contracts by inviting tenders, in those circumstances, the interference by Courts is very limited;
  • If the State or its instrumentalities act reasonably, fairly and in public interest in awarding contract, here again, interference by Court is very restrictive since no person can claim fundamental right to carry on business with the Government.” From the above judgements it is understood that the scope of judicial review in Government contracts is limited and not flexible. It can only be justified if done to rectify arbitrariness, unreasonableness, mala fides or bias in administrative decision making process. Thus the judiciary is only concerned with the manner in which a decision is taken and not with the fairness of the decision. The grounds on which an administrative action can be put to judicial review are as follows:
  • Irrationality
  • Procedural Impropriety
  • Illegality

These grounds are not exhaustive and further grounds can be added for judicial review. If government contracts are in the bounds of reasonableness, and non-arbitrary and complies with provision of Article 299 it not only becomes valid and enforceable, but also limits the scope of judicial review to the extent of prejudicial compromise exists in between parties. Thus judicial review is a powerful tool in checking arbitrary Government contracts but this power cannot be used at any time because it would amount to infringing on the rights of the Executive to enter into contracts. So, whenever the contract is arbitrary or is against the proper procedure, the power of judicial review can be used.

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