When Writ Courts should interfere in Contractual or Commercial matters?

The Apex Court in the matter of the Silppi Constructions Contractors vs. Union of India and Anr. explained the principles through a catena of judgments with regard to judicial review in contractual matters.

The Apex Court being the guardian of fundamental rights is duty bound to interfere when there is arbitrariness, irrationality, mala fides and bias. However, this Court is normally loathe to   interfere   in   contractual   matters   unless   a   clear­cut   case   of arbitrariness or mala fides or bias or irrationality is made out. One must remember that today many public sector undertakings compete with the private industry. The contracts entered into between private parties are not subject to scrutiny under writ jurisdiction. No doubt, the bodies which are State within the meaning of Article 12 of the Constitution are bound to act fairly and are amenable to the writ jurisdiction of superior courts but this discretionary power must be exercised with a great deal of restraint and caution.

In Jagdish Mandal vs. State of Orissa it was held that 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.

In Caretel Infotech Limited vs. Hindustan Petroleum Corporation Limited and Others observed that a writ petition under Article 226 of the Constitution of India was maintainable only in view of government and public sector enterprises venturing into economic activities. This Court observed that there are various checks and balances to ensure fairness in procedure.  It was observed that the window has been opened too wide as every small or big tender is challenged as a matter of routine which results in government and public sectors suffering when unnecessary, close scrutiny of minute details is done.

In Raunaq International Ltd. vs. I.V.R. Construction Ltd., this Court held that superior courts should not interfere in matters of tenders unless substantial public interest was involved or the transaction was mala fide.

In Air India Limited vs. Cochin International Airport Ltd., this Court once again stressed the need for overwhelming public interest to justify judicial intervention in contracts involving the State and its instrumentalities. It was held that Courts must proceed with great caution while exercising their discretionary powers and should exercise these powers only in furtherance of public interest and not merely on making out a legal point.

In Michigan Rubber (India) Ltd. vs. State of Karnataka & Ors. it was held that if State or its instrumentalities acted reasonably, fairly and in public interest in awarding contract, interference by Court would be very restrictive since no person could claim fundamental   right to carry on business with the Government. Therefore, the Courts would not normally interfere in policy decisions and in matters challenging award of contract by State or public authorities.

In Master Marine Services (P) Ltd. vs. Metcalfe & Hodgkinson (P) Ltd. it was held that while exercising power of judicial review in respect of contracts, the Court should concern itself primarily with the question, whether there has been any infirmity in the   decision­making   process. By way of judicial review, Court cannot examine details of terms of contract which have been entered into by public bodies or State.

(Link : https://sci.gov.in/supremecourt/2019/21059/21059_2019_4_22_14619_Judgement_21-Jun-2019.pdf)