FOOD CORPORATION OF INDIAversusKAMDHENU CATILE FEED INDUSTRIES

A                      FOOD CORPORATION OF INDIA
                                          v.
                 KAMDHENU CATILE FEED INDUSTRIES

                               NOVEMBER 3, 1992

B                [J.S. VERMA, YOGESHWAR DAYAL AND
                          N. VENKATACHALA, JJ.]

          Constitution of India, 1950:

C         Article 14-Contractual transactions of State or its instmmentality-Es-
    sential requisites-Non-arbitrariness, fairness in action and due consideration
    of legitimate expectation-Ignoring the highest bid-Negotiations for higher
    offer and acceptance thereof--Validity of

          Administrative Law:
D                                                                                    ....
          Doctrine of legitimate expectation-Forms part of non-arbitrariness and
    Rule of Law-To be determined in the larger public interesr--Open to judicial
    review.

          The appellant-Corporation invited tenders for sale of stocks of
E damaged food-grains. The respondent's bid was the highest. Since the
    appellant was not satisfied about the adequacy of the amount offered even
    in the highest tender, it invited all the tenderers to participate in the
    negotiations, instead of accepting the highest tender. During the course of
    negotiations, the respondent refused to revise the rates in its offer. On the
    basis of the highest bid made during the negotiations, the appellant
F   disposed of the stocks of damaged foodgrains, rejecting the highest              •.
    tenders. The respondent, whose tender was the highest, challenged the
    decision of the appellants by filing a Writ Petition before the High Court.
    It was contended that the action of the appellant was arbitrary and hence
    violative of Art. 14 of the Constitution. The High Court accepted the
G   contention and allowed the Writ Petition. Being aggrieved by the High
    Court's decision the appellant-Corporation preferred the present appeal.

          It was contended on behalf of the appellant that there being no right
    in the person submitting the highest tender to claim acceptance thereof,
    and since all tenderers were given equal opportunity to participate in the
H   negotiations and to revise the bid before acceptance, the action of the
                                         322




                                                                                      I'
               F.C.l. v. KAMDHENU CATfLE FEED IND.                         323

appellant was not arbitrary.                                                      A
      The Respondent contended that since no cogent reasons were indi·
catcd for rejecting all the tenders and for deciding to dispose of the stock
by negotiating with the tenderers for procuring a higher price, such a
decision was arbitrary.
                                                                                  B
      Allowing the appeal, this Court,

      HELD: 1.1. In contractual sphere as in all other State actions, the
Stato and all its instrumentalities have to conform to Article 14 of the
Constitution of which non-arbitrariness is a significant facet. There is no
unfettered discretion in public law. A public authority possesses powers          c
only to use them for public good. This imposes the duty to act fairly and
to adopt a procedure which is 'fairplay in action'. Due observance of this
obligation as a part of good administration raises a reasonable or
legitimate expectation in every citizen to be treated fairly in his interaction
with the State and its instrumentalities, with this element forming a             D
necessary component of the decision making process in all State actions.
To satisfy this requirement of non-arbitrariness in a State action, it is
necessary to consider and give due weight to the reasonable or legitimate
expectations of the persons likely to be affected by the decision or else that
unfairness in the exercise of the power may amount to an abuse or excess
of power apart from affecting the bona fides of the decision in a given case.
                                                                                  E
The decision so made would be exposed to challenge on the ground of
arbitrariness. Rule of law does not completely eliminate discretion in the
exercise of power, as it is unrealistic, but provides for control of its
exercise by judicial review. [328-A-D]
                                                                                  F
       1.2. The mere reasonable or legitimate expectation of a citizen, in.           ~c
such a situation, may not by itself be a distinct enforceable right, but
failure to consider and give due weight to it may render the decision
arbitrary, and this is bow the requirement of due consideration of a
legitimate expectation forms part of the principle of .uon-arbitrariness, a
necessary concomitant of the. mle of law. Every legitimate expectation is a G
relevant factor requiring due consideration in a fair decision making
process. Whether the expectation of the claimant is reasonable or
legitimllte in the context is a question of fact in each case. Whenever the
question arises; it is to be determined not according to the claimant's
perception but in larger public interest wherein other more important H
    324                 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A £onsiderations may outweigh what would otherwise have been the
    legitimate expectation of the claimant. A bona fide decision of the public
    authority reached in this manner would satisfy the requirement of oon·ar·
    bitrariness and withstand judicial scrutiny. [328-E·G]

          2.1. Even though the highest tenderer can claim no right to have his
B tender accepted, there being a power while inviting tenders to reject all the
  tenders, yet that power cannot be exercised arbitrarily and must depend
  for its validity on the existence of cogent reasoros for such action. The
  object or inviting tenders for disposal of a commodity is to procure the
  highest price while giving equal opportunity to all the Intending bidders to
c compete. Procuring the highest price for the commodity is undoubtedly in
  public interest since the amount so collected goes to the public fund.
  Accordingly, inadequacy of the price offered in the highest tender would
  be a cogent ground for negotiating with the tenderers giving them equal
  opportunity to revise their bids with a view to obtain the highest available
  price. Retaining the option to accept the highest tender, in case the
D negotiations do not yield a significantly higher offer would be fair to the
  tenderers besides protecting the public interest. A procedure wherein
   resort is had to negotiations with the tenderers for obtaining a significant·
  ly higher bid during the period when the offers in the tenders remain open
  for acceptance and rejection of the tenders only in the event of a sig·
E nificant higher bid being obtained during negotiations would ordinarily
   satisfy this requirement. This procedure involves giving due weight to the
  legitimate expectation of the highest bidder to have his tender accepted
   unless outbid by a higher offer, in which case acceptance of the highest
  offer within the time the offers remain open would be a reasonable exercise
   of power for public good. [329-E-H; 330-A]
F
           Shanti Vijay & Co. etc. v. Princess Fatima Fouzia & Ors. etc., [1980]
     1 S.C.R. 459, relied on.

           Council of Civil Se1Vice Unions and Others v. Minister for the Civil
G Se1Vice, 1985 A.C. 374 (H.L.), and Jn re Preston, 1985 A.C. 835 (H.L.),
     referred to.

           2.2. ln the instant case, the respondent's highest tender was super-
     seded only by a significantly higher bid made during the negotihtions with
     all tenderers giving them equal opportunity to compete by revising their
H    bids. The fact that it was a significantly higher bid obtained by adopting
          F.C.I. v. KAMDHENU CATTLE FEED IND. [VERMA, l.]              325

the right course is sufficient to demonstrate that the action of the appel- A
lant satisfied the requirement of non-arbitrariness, and it was taken for
the cogent reason of inadequacy or the price offered in the highest tender,
which reason was evident to all tenderers invited to participate in the
negotiations and to revise their bids. The High Court was in error in
taking the contrary view. [330-D-E]
                                                                              B
        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4731 of
1992.

        From the Judgment and Order dated 21.7.92 of the C.W.N. 7419 of
~                                                                             c
        Y .P. Rao for the Appellant.

        Ashok Sen, H.L. Aggarwal, and K.K. Gupta (NP) for the Respon-
dent.
                                                                              D
        The Judgment of the Co11rt was delivered by

        VERMA, J. Leave granted.

      Thi> appeal by special leave under Article 136 of the Constitution is
against the judgment and order dated 21.7.92 by which the Civil Writ          E
Petition No. 7419 of 1992 has been allowed by the Punjab & Haryana High
Court directing the appellant Food Corporation of India to allot to the
respondent the necessary stocks ofdamaged rice for which the tenders had
been invited by the appellant, since the respondent was the highest bidder.
                                                                              F
      The appellant invited tenders for sale of stocks of damaged
foodgrains in accordance with the terms and conditions contained in the
tender notice (Annexure 'A'). The tenders were required to be submitted
upto 2.45 p.m. on 18.5.92; the tenders were to be opened on 18.5.92 at 3.00
p.m.; and offers·were to remain open for acceptance upto and inclusive of
17.7.92. The respondent submitted its tender for a stock of damaged rice G
within the time specified, but the respondent's tender was conditional and
the full amount of earnest money required by the terms was also not
deposited. It is, however, not necessary to mention the particulars of these
two deficiencies in respondent's tender since they appear to have been
waived by the appellant and 111'< not relied on before us to support the H
    326                 SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A   appellant's action. The respondent's bid in the tender was admittedly the
    highest as found on openin;i the tenders. It appears that the appellant was
    not satisfied about the adequ.acy of the amount offered in the highest
    tenders for purchase of the stocks of damaged foodgrains and, therefore,
    instead of accepting any of the tenders submitted, the appellant invited all
    the tenderers to participate in the negotiation on 9.6.92. The respondent
B   refused to revise the rates offered in its tender. It was Rs. 245 per quintal
    for certain lots of this stock, while the highest offer made during the
    negotiations was Rs. 275.72 per quintal. Similarly, as against the
    respondent's offer of Rs. 201 per quintal in respect of some other lots, the
    highest offer made during the negotiation was Rs. 271.55 per quintal. On
c   this basis, the appellant was to receive an additional amount of Rs. 8 lakhs
    by accepting the highest offer made during the negotiations over the total
    amount offered by the respondent for the stock of damaged rice. Overall,
    the appellant was offered an excess amount of Rs. 20 lakhs for the entire
    stock of damaged foodgrains in the highest offer made during the negotia-
D   lions, inasmuch as against the tot al amount of Rs. 90 lakhs which the
    appellant would have received by acceptance of the highest tenders, the
    appellant was to receive the amount of Rs. I crore 10 lakhs by accepting
    the higljest offers made during the negotiations in which all the tenderers,
    including the respondent, were given equal opportunity to participate.

E         The respondent filed the above Writ Petition in the High Court
    challenging the appellant's refusal lo accept lhe highest tender submined
    by it for the stock of damaged rice claiming that the appellant having
    chosen to in<iife tenders, it could not thereafter dispose of the stocks of
    damaged foodgrains by subsequent negotiations rejecting the highest
    tenders on the ground that a higher bid was obtained by negotiations. This
F
    action of the appellant, was alleged to be arbitrary and, therefore, in
    substance, violative of Article 14 of the Constitution. The High Court by
    its impugned order accepted this contention of the respondent and allowed
    the Writ Petition. Hence, this appeal.

G         It is not disputed that according to the terms and conditions on which
    the appellant had invited tenders, the appellant had reserved the right to
    reject all the tenders and, therefore, the highest tender was not bound to
    be accepted. Learned counsel for the appellant submitted that there being
    no right in the person submitting the highest tender to clain1 acceptance
H   of the tender, in a case like the present, where all the tenderers including
        F.C.l. v. KAMDHENU CATfLE FEED IND. [VERMA, l.J                 327

the respondent, were invited for negotiation and given equal opportunity A
to participate and to revise the bid before acceptance of the highest bid
offered during negotiation which resulted in obtaining an additional
amount of Rs. 8 lakhs for the stock relating to respondent's lender and an
overall gain of Rs. 20 lakhs in disposal of the entire stock of damaged
foodgrains, the action of the appellant could not be termed arbitrary. In
reply, Shri A.K. Sen, learned counsel for the respondent contended that
                                                                                B
even though the appellant had the right to reject any tender, including the
highest tender, and thereafter negotiate with all the tenderers to procure
 the highest price for the commodity, yet this right has to be exercised
 reasonably and not arbitrarily, otherwise, the credibility of the procedure
 of sale by inviting tenders would be lost. Shri Sen submitted that the       c
 decision not to accept any tender and to negotiate thereafter for obtaining
 a higher price than that quoted in the highest bid, cannot be taken on the
 whim and caprice ·of the concerned authority and can be only for cogent
 reasons indicated while taking the decision, or else, the decision would be
 arbitrary. On this basis, Shri Sen further submitted that in the present case, D
 no cogent reasons were indicated for rejecting all the tenders and deciding
 to dispose of the commodity by negotiation with the tendercrs for procur-
 ing a higher price. He also added that the mere fact that a higher price
 was obtained by negotiation would not justify the decision if it was not
  taken in the manner permissible. This was the only submission of Shri Sen
 to support the decision of the High Court.                                     E

       In our \iew, Shri A.K. Sen is right in the first part of his submission.
However, in the present case, the respondent does not get any benefit
therefrom. The High Court's decision is based on the only ground that once
tenders have been invited and the highest bidder has come forward to F
comply with the conditions stipulated in the tender notice, it is not permis-
sible to switch over to negotiation with all the tenderers and thereby reject
the highest tender. According to the High Court, such a procedure is not
countenanced by the rule of law. This is not the same, as the submission
of Shri Sen which is limited to permissibility of such a co'1rse only on cogent
grounds indicated while deciding to switch over to the procedure of G
negotiation after receiving the tenders to satisfy the requirement of non-
arbitrariness, a necessary concomitant of the rule of law. The proposition
enunciated by the High Court which forms the sole basis of its decision is
too wide to be acceptable and has to be limited in the manner indicated
hereafter.                                                              H
    328                  SUPREME COURT REPORTS [1992] SUPP. 2 S.C.R.

A        In contractual sphere as in all other State actions, the State and all
  its instrumentalities have to conform to Article 14 of the Constitution of
  which non-arbitrariness is a significant facet. There is no unfettered discre·
  tion in public law : A public authority possesses powers only to use them
  for public good. This impose the duty to act fairly and to adopt a procedure
  whicb is 'fairplay in action'. Due observance of this obligation as a part of
B good administration raises a reasonable or le2itimate expectation in every
  citizen to be treated fairly in his interaction with the State and its in·
  strumentalities, with this element forming a necessary component of the
   decision making process in all State actions. To satisfy this requirement of
   non-arbitrariness in a State ar~ion, it is, therefore, necessary to consider
c  and give due weight to the reasonable or iegitimate expectations of the
   persons likely to be affected by the decision or else that unfairness in the
  exercise of the power may amount to an abuse or excess of power apart
   from affecting the bona fides of the decision in a given case. The decision
   so made would be exposed to challenge on the ground of arbitrariness.
D Rule of law does not completely eliminate discretion in the exercise of
   power, as it is unrealistic, but provides for control of its exercise by judicial
   revtew.

         The mere reasonable or legitimate expectation of a citizen, in such a
  situation, may not by itself be a distinct enforceable right, but failure to
E consider and give due weight to it may render the decision arbitrary, and
  this is how the requirement of due consideration of a legitimate expectation
  forms part of the principle of non-arbitrariness, a necessary concomitant
  of the rule of law. Every legitimate expectation is a relevant factor requiring
  due consideration in a fair decision making process. Whether the expecta·
F tion of the claimant is reasonable or legitimate in the context is a question
  of fact in eacb case. Whenever the question arises, it is to be determined
  not according to the claimant's perception but in larger public interest
  wherein other more important considerations may outweigh what would
  otherwise have been the legitimate expectation of the claimant. A bona fide
  decision of the public authority reached in this manner would satisfy the
G requirement of non-arbitrariness and withstand judicial scrutiny. The
  doctrine of legitimate expectation gets assimilated in the rule of law and
  operates in our legal system in this manner and to this extent.

           In Council of Civil Se1Vice Unions and Others v. Minister for the Civil
H    Se1Vice, 1985 A.C. 374 (H.L.) the House of Lords indicated the extent to
              F.C.l. v. KAMDHENU CATILE FEED IND. [VERMA, J.]                329

      which· the legitimate expectation interfaces with exercise of discretionary A
      power. The impugned action was upheld as reasonable, made on due
      consideration of all relevant factors including the legitimate expectation of
      the applicant, wherein the considerations of national security were found
      to outweigh that which otherwise would have been the reasonable expec-
      tation of the applicant. Lord Scarman pointed out that 'the controlling
      factor in determining whether the exercise of prerogative power is subject
                                                                                    B
      to judicial review is not its source but its subject-matter'. Agai~ in In re
      Preston, 1985 A.C. 835 (H.L.) it was stated by Lord Scarman that 'the
      principle of fairness has an important place in the law of judicial review'
      and 'unfairness in the purported ex.!'rcise of a power can be such that it is
      an abuse of excess of power'. These decisions of the House of Lords give     c
      a similar indication of the significance of the doctrine of legitimate expec·
      tation. Shri A.K. Sen referred to Shanti Vijay & Co. etc. \'.Princess Fatima
      Fouzia & Ors. etc., [1980] I S.C.R. 459, which holds that court should
      interfere where discretionary power is not exercised reasonably and in

...   good faith.
                                                                                   D
             From the above, it is clear that even though the highest tenderer can
      claim no right to have his tender accepted, there being a power while
      inviting tenders to reject all the tenders, yet the power to reject all the
      tenders cannot be exercised arbitrarily and must depend for its validity on
      the existence of cogent reasons for such action. The object of inviting E
      tenders for disposal of a commodity is to procure the highest price while
      giving equal opportunity to all the intending bidders to compete. Procuring
      the highest price for the commodity is undoubtedly in public interest since
      the amount so collected goes to the public fund. Accordingly, inadequacy
      of the price offered in the highest tender would be a cogent ground for F


.-
      negotiating with the tenderers giving them equal opportunity to revise their
      bidi with a view to obtain the highest available price. The inadequacy may
      be for several reasons known in the commercial field. Inadequacy of the
      prince quoted in the highest tender would be a question of fact in each
      case. Retaining the option to accept the highest tender, in case the negotia-
      tioni do not yield a significandy higher offer would be fair to the tenderers G
      besides protecting the public interest. A procedure wherein rosort is had
      to negotiations with the tenderers for obtaining a significantly higher bid
      during the period when the offers in the tenders remain open for accep-
      tance and rejection of the tenders only in the event of a significant higher
      bid being obtained during negotiations wou.ld ordinarily satisfy this require- H
    330                 SUPREME COURT REPORTS IJ992] SUPP. 2 S.C.R.

A ment. This procedure involves giving due weight to the legitimate expecta-
    tion of the highest bidder to have his tender accepted unless outbid by a
    higher offer, in which case acceptance of the highest offer within the time
    the offers remain open would be a reasonable exercise of power for public
    good.

B          In the present case, the last date. upto which the offer made in the
    tender was to remain open for acceptance was 17.7.92. After opening the
    tenders on 18.5.92, the appellant decided to negotiate with all the tenderers
    on 9 .6.92 when significantly higher amount, as indicated earlier, was offered
    above the amount quoted in the highest tender. In such a situation, if the
C   negotiations did not yield the desirable result of obtaining a significantly
    higher price, the appellant had the option to accept the highest tender
    before the last date, viz., 17.7.92 upto which the offer made therein was to
    remain open for acceptance. In this manner, the respondent's higher tender
    was superseded only by a significantly higher bid made during the negotia-

D
    tions with all tenderers giving them equal opportunity to compete by
    revising their bids. The fact that it was a significantly higher bid obtained
    by adopting this course is sufficient in the facts of the present case to
    demonstrate that the action of the appellant satisfied the requirement of
                                                                                     -
    non-arbitrariness, and it was taken for the cogent reason of inadequacy of
    the price offered in the highest tender, which reason was evident to all
E   tenderers invited to participate in the negotiations and to revise their bids.
    The High Court was in error in taking the contrary view.

            Consequently, this appeal is allowed. The impugned judgment of the
     High Court is set aside, resulting in dismissal of the respondent's writ
     petition, No costs.

     G.N.                                                        Appeal allowed.

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