Introduction:
State Liability in cases of contractual wrongs refers to the legal responsibility of the state or its entities when they are in breach of their contractual obligations. With every passing day, the economic activities of the government are expanding, which involves entering into a huge number of contracts, granting licenses, rights etc. Therefore, there is a possibility that the state may exercise its power in an arbitrary manner, adversely affecting the interests of the private party. This can arise either through non-performance of the terms and conditions under the contract entered, or inadequate performance thereof, inviting legal action. The division bench of the Bombay High Court in the matter of Systra MVA Consulting (India) Pvt. Ltd. Vs. Mumbai Metropolitan Region Development Authority 1 has reiterated that State in its executive capacity, even in contractual matters, is under an obligation to act fairly and cannot practice any discrimination which might lead to a violation of Article 14 of the Constitution of India. Further, it was observed that judicial remedy by way of writ is maintainable where there is executive action unsupported by law, or if there is denial of equality before law or equal protection of law or if it was done without a notice of hearing and in violation of principles of natural justice.
Brief Facts:
Systra MVA Consulting (India) Pvt. Ltd. ("Petitioner") was a company incorporated in India having a 70 % Stake in the Systra-SMCIPL Consortium. The Petitioner entered into a contract with Mumbai Metropolitan Region Development Authority ("MMRDA" or "Respondent") is a statutory body engaged in implementation of strategic projects and financing infrastructure development in Mumbai. A tender notice was issued by the Petitioner in 2020 for appointment of General Consultant for assistance in the procurement, construction, management supervision for Mumbai Metro Lines. The Petitioner submitted its bid in the month of June 2020, which was accepted by the Respondent and an agreement was entered between the parties on 28.12.2021 ("Contract") for a period of 42 months i.e. up to 30.11.2024. Further, the Petitioner also requested for an extension of the term of the contract on 18.07.2024, which was granted on 04.10.2024 and the contract was extended up to 31.12.2026.
However, the Respondent issued notice on 03.01.2025 ("Impugned Notice"), unilaterally terminating the contract w.e.f 46th day of issuance of the impugned notice. Accordingly, the Petitioner filed the present Writ Petition under Article 226 of the Constitution of India seeking judicial review and quashing the impugned notice.
Arguments on behalf of the Parties:
The counsel for the Petitioner made the following arguments:
- That the impugned notice had been issued de-hors the terms of the Contract and did not set out any reasons for discontinuation of the services of the Petitioner.
- That the Respondent failed to provide any reasons while issuing the impugned notice and therefore, failed to act reasonably and fairly and had violated the mandate of non-arbitrariness.
- That the presence of an arbitration clause in the contract was no bar in exercise of jurisdiction under Article 226 of the Constitution of India2.
- The termination of the Petitioner was arbitrary and unreasonable and therefore the same could be interdicted by this Court. That arbitration was a private law remedy available to the parties and while adjudicating the disputes in the realm of private law, the arbitral tribunal would only look at the terms of the contract between the parties and could not deal with the questions of public law which arose for consideration in the present writ petition3.Accordingly, the arbitral tribunal could not determine the actions of the State to be violative of Article 14 of the Constitution of India.
- That the State was duty bound to act fairly, even in the contractual field, in consonance with principles of fairness and non-reasonableness, which were the cornerstone of Article 14 of the Constitution of India4.
- That in terms of Clause 2.8.1 of the Contract, the Respondent was obligated to assign reasons and any contrary interpretation of the same would make the Clause unreasonable, oppressive and violative of basic principles of public law.
- That the Court was empowered to exercise writ jurisdiction in contractual matters as well.5
Per contra, the counsel for the Respondent led the following arguments:
- That the notice of discontinuance had been issued in terms of Clause 2.8.1(f) of the General Conditions of Contract, which enabled the MMRDA to rescind the contract without providing any reasons.
- That the expression "in its sole discretion and for any reason whatsoever" were the words of wide amplitude and the contract was determinable in nature and therefore incapable of being enforced specifically6.
- That the Petitioner wilfully accepted the terms and conditions of the contract and could not be permitted to eschew its contractual commitments by seeking to invoke public law principles of reasonableness or fairness within the domain of private law contracts.
- That there was a distinction between the administrative law and contractual law and where contracts were freely entered with the State, the doctrine of fairness and reasonableness could not be used or relied upon for the purposes of altering the terms and conditions of the contract merely because one of the parties happened to be a State. Therefore, in such a case, the question of invocation of public law based on Article 14 of the Constitution of India did not arise, as the matter was in the realm of private law rights7.
- That the writ petition ought not to be entertained, as the agreement executed between the parties contains an arbitration clause.
- That the present contract related to an infrastructure project, viz. Metro, and therefore under the provisions of the Specific Relief Act, 1963, no injunction ought to be granted, as it would impede or delay completion of such a large-scale project.
Issues:
- Whether State or its entities are immune from satisfying public duty, when acting in its commercial capacity?
- Whether a writ can be issued to correct contractual wrongs committed by the State?
Analysis by the Hon'ble Court:
The Hon'ble Court first examined the terms of reference of the General Consultant and then examined Clause 2.8.1 of the General Conditions of Contract, which provided for Termination and Clayuse 8 which provided for the arbitration clause.
The Court then went on to examine the well settled principles regarding judicial review pertaining to contractual disputes. It examined various judgements such as Mahabir Auto Stores v. IOC8 and LIC v. Consumer Education and Research Center9to conclude that the manner, the method and motive of a decision to execute or not execute a contract, were subject to judicial review. The court was within powers to interfere if the State action was on the touchstone of (i) relevance and reasonableness, (ii) fair play, (iii) natural justice, (iv) equality and (v) non-discrimination; in the type and nature of the transaction. Thereafter, it examined the judgement of the Hon'ble Supreme Court in Joshi Technologies International Inc v. UOI10 and M.P. Power Management Co. Ltd., Jabalpur v. Sky Power Southeast Solar India Pvt. Ltd.11 regarding the scope of judicial review in the matters pertaining to contractual disputes, where it was held that if a grievance was made against an arbitrary action or inaction of the State, even if they arose from a non-statutory contract, the grant of relief under the writ jurisdiction could be considered.
Further, the Court also examined the judgement of Subodh Kumar Singh Rathour v. Chief Executive Officer12, where it was held by a three-Judge Bench of the Supreme Court that the cancellation of a contract is a serious and significant action, which deprives a person of his very valuable rights.. It was further held that such a decision can also discourage the private parties from participating in public procurement processes, which in turn could have a negative impact on such other public-private partnerships, ultimately undermining the broader objectives of such initiatives. It was also held that although the disputes arising purely out of contracts are not amenable to writ jurisdiction, yet keeping in mind that the State is obligated to act fairly and not arbitrarily or capriciously, it is now well settled that when the government uses contractual power for public purpose, it's actions are undoubtedly amenable to the court's power of judicial review. It was further held that in appropriate cases, the Court can issue a writ to correct contractual wrongs committed by the State to ensure that the instrumentalities of the State act in accordance with the provisions of the Constitution, such as Article 14.
Decision of the Hon'ble High Court:
After examining the judicial precedents in this regard, the Hon'ble Court concluded that the State or its instrumentality must act fairly or cannot act arbitrarily or unreasonably, even in contractual matters. In the instant case, the nature of controversy involves an element of public law, the Court in exercise of power of judicial review could very well examine whether the action of the State or its agencies were fair, just and equitable.
It further held that the Respondent did not assign reasons for discontinuation of services of the Petitioner and that Clause 2.8 of the Contract could not be read to mean that the Respondent was free to to act unfairly, arbitrarily or unreasonably in the contractual field without providing reasons. Any power given under the aforesaid clause had to be exercised in accordance with the principles of fairness, reasonableness and non-arbitrariness. Therefore, the act of the Respondent in discontinuing the terms of the Contract was arbitrary, unfair, and unreasonable.
The Court further refused to grant the relief of specific performance of agreement in the writ petition and further held that merely on the ground of availability of alternate remedy, the Court was not precluded from exercising the power of judicial review, in case this Court determined that the action of termination of contract was arbitrary and unreasonable.
Accordingly, the Court quashed the impugned notice and directed the Respondent to make a fresh decision on whether to discontinue the contract or otherwise award the contract to the Petitioner afresh, after giving them a chance to be heard, and issuing a speaking order.
Conclusion:
It can be concluded that the State acting in its executive capacity is not immune from following the fundamental rules of equality before law and rule of law. The State cannot invoke its sovereign capacity to default in its contractual obligations. Therefore, private parties have full rights to seek remedies against the State or its entities in the event of breach or in case of not following the basic tenets of the rule of law such a fairness, non-arbitrariness and equality. Ultimately, ensuring state accountability in contractual matters not only protects private interest but also enforces the confidence of the people in the legal and commercial systems that state or its entities are held to the same standard of good faith and contractual integrity as private parties.
Footnotes
1. 2025 SCC OnLine Bom 342
2. Reliance placed on the judgements of Harbanslal Sahnia v. Indian Oil Corporation Ltd (2003) 2 SCC 107; Union of India v. Tantia Construction Private Limited (2011) 5 SCC 697; Unitech Limited v. Telangana State Industrial Infrastructure Corporation (2021) 16 SCC 35 ; Uttar Pradesh Power Transmission Corporation Limited v. CG Power and Industrial Solutions Limited (2021) 6 SCC 15, among others.
3. Board of Control for Cricket in India v. Deccan Chronicle Holdings Ltd. 2021 SCC OnLine Bom 834
4. Reliance placed on the judgements of Food Corporation of India v. Kamdhenu Cattle Feed Industries (1993) 1 SCC 71; Union of India v. Dinesh Engineering Corporation (2001) 8 SCC 491 and Mihan India Ltd. v. GMR Airports Ltd 2022 SCC OnLine SC 574
5. Reliance placed on the judgements of Tata Cellular v. Union of India (1994) 6 SCC 651; ABL International Ltd. v. Export Credit Guarantee Corporation of India Ltd (2004) 3 SCC 553.; Noble Resources Ltd. v. State of Orissa (2006) 10 SCC 236; Rajasthan State Industrial Development and Investment Corporation v. Diamond an Gem Development Corporation Ltd. (2013) 5 SCC 470 ; Joshi Technologies International Inc. v. Union of India (2015) 7 SCC 728 ; among others.
6. Reliance placed on the judgement of Egis India Consulting Engineers Private Limited v. Pawan Hans Ltd. 2022 SCC OnLine Del 233 and Sundar Kumar Yadav v. Union of India 2024 SCC OnLine Jhar 1328
7. ONGC v. Streamline Shipping Col Pvt. Ltd (2002) 3 Mah LJ 530
8. (1990) 3 SCC 752
9. (1995) 5 SCC 482
10. (2015) 7 SCC 728
11. (2023) 2 SCC 703
12. 2024 SCC OnLine SC 1682
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