K. Jayachandra Reddy, J.— By our order dated January 14, 1993 while disposing of these special leave petitions we gave our conclusions and we proposed to deliver the detailed judgment at a later stage giving all the reasons in support of those conclusions. We hereby deliver the detailed judgment.
2. In our earlier order we stated the relevant facts and the issues involved in a concised form. However, we think it appropriate and necessary to refer to some of them for a better appreciation of the reasons in their proper perspective.
3. Every year the Railway Board enters into contracts with the manufacturers for the supply of cast steel bogies which are used in turn for building the wagons. Cast steel bogies come under a specialised item procured by the railways from the established sources of proven ability. There are 12 suppliers in the field who have been regularly supplying these items. Two new firms Simplex and Beekay also entered the field. Among them admittedly M/s H.D.C, Mukand and Bhartiya are bigger manufacturers having capacity to manufacture larger quantities. On October 25, 1991 a limited tender notice for procurement of 19,000 cast steel bogies was issued to the regular suppliers as well as the above two new entrants for the year namely from April 1, 1992 to March 31, 1993. The last date for submission of offers to the Ministry of Railways was November 27, 1991 by 2.30 p.m and the tenders were to be opened on the same day at 3 p.m It was stated therein that the price was subject to the price variation clause and the base date for the purpose of escalation was September 1, 1991 and that the railways reserved the right to order additional quantity up to 30% of the ordered quantity during the currency of the contract on the same price and terms and conditions with suitable extensions in delivery period. The offers were to remain open for a period of 90 days. On that day the tenders were opened in the presence of all parties. The price quoted by the three manufacturers i.e M/s H.D.C, Mukand and Bhartiya was an identical price of Rs 77,666 per bogie while other tenderers quoted between 83,000 and 84,500 per bogie. After the tenders were opened and before the same could be finalised, the Government of India announced two major concessions namely reduction of custom duty on the import of steel scrap and dispensation of freight equalisation fund for steel. The tenders were put up and placed before the Tender Committee of the railways which considered all the aspects. The Committee concluded that three of the tenderers namely M/s H.D.C, Mukand and Bhartiya who had quoted identical rates without any cushion for escalation between July 1, 1991 and September 1, 1991, have apparently formed a cartel. The Tender Committee also noted that the rates quoted by them were the lowest. Taking into consideration the reduction of Rs 1500 as a result of the concessions in respect of the reduction of customs duty on the import of steel scrap and dispensation of the freight equalisation fund for steel, the Tender Committee concluded that the reasonable rate would be Rs 76,000 per bogie. On the question of distribution of quantities to the various manufacturers the Tender Committee decided to follow the existing procedure. The Tender Committee signed these recommendations on February 4, 1992 but on the same day the Member (Mechanical) of the Committee received letters from M/s H.D.C and Mukand. M/s H.D.C in its letter stated that in view of the concessions and also on the basis that per kg. rate of casting per bogie could be reduced from Rs 37.50 to Rs 29 the cost of casting can also be reduced and therefore they would be in a position to supply the bogies at a lesser rate, in case a negotiation meeting is called. M/s Mukand in its letter also offered to substantially reduce the prices and that they would like to cooperate with the railways and the Government and bring down the prices as low as possible and asked for negotiations. Though this was post-tender correspondence, the department felt that the offers made by M/s H.D.C and Mukand could be considered. The whole matter was examined by the Advisor (Finance) in the first instance and by an elaborate note he observed that the need for encouraging open competition to improve quality and bring down costs has been recommended by the Government and if it is intended to continue the existing policy of fixing a rate and distributing the order among all the manufacturers, then negotiations may not be useful as uniform prices offered to all manufacturers have to be sufficient even for the smaller and less economical units and that as any review of the existing policy would take time, the present tender can be decided on the basis of the existing policy. With this noting the file was immediately sent to the Member (Mechanical), the next higher authority. He, with some observations, however recommended the acceptance of the Tender Committee's recommendations. The file was then put up to Financial Commissioner. He noted that the Tender Committee was convinced that the three manufacturers who quoted identical price of Rs 77,666 had formed a cartel. He also considered the offers made by M/s H.D.C and Mukand and observed that these three manufacturers who quoted a cartel price intended to get a larger order on the basis of such negotiated price which would eventually nullify the competition from the other manufacturers and lead to their industrial sickness and subsequently to monopolistic price situation. He, however, approved the Tender Committee's recommendations that a counter-offer of Rs 76,000 may be accepted but in the case of M/s H.D.C a price lower by Rs 11,000 may be offered as per their letter dated February 4, 1992. He also recommended that the two manufacturers M/s Cimmco and Texmaco may be given orders to the extent of their capacity or quantity offered by them whichever is lower in view of the fact that they are wagon builders and the present formula regarding the distribution of quantities may be applied to all manufacturers except the three who have formed a cartel. He also recommended some recoveries from these three manufacturers who are alleged to have formed a cartel on the basis of their letters wherein they have quoted prices which were much less than the updated price as on September 1, 1991 of Rs 79,305. He also made certain other recommendations and finally concluded that the post-tender letters may be ignored and that for short-term gains the department cannot sacrifice long-term healthy competition. After these recommendations of the Financial Commissioner the file was put up to the approving authority i.e the Minister for Railways, who in general agreed with the recommendations of the Financial Advisor. He also noted that these three manufacturers have formed a cartel. He also noted that subsequent to the Financial Commissioner's note, besides M/s H.D.C and Mukand, M/s Bhartiya has also offered to reduce the price by 10% or more, vide their letter dated February 19, 1992 if called for negotiations. Taking these circumstances into consideration the Minister ordered that all these three firms may be offered a price lower by Rs 11,000 with reference to the counter-offer recommended by the Tender Committee and the quantities also be suitably adjusted so that the cartel is broken. The Minister also noted that as a result of this a saving of about Rs 11 crores would be effected. In his note, the Minister also ordered redistribution of the quantities. He also ordered that 30% option should straightaway be exercised. After the approving authority took these decisions, the file went to the Chairman, Railway Board for implementing the decisions. He noted that action will be taken as decided by the Minister but added that it results in dual-pricing namely one to the three manufacturers and the higher one to the others and therefore the Minister may consider whether they could counter-offer the lower price to all the manufacturers as that would result in saving much more. The file was then again sent to and was considered by the Financial Commissioner who noticed this endorsement made by the Chairman, Railway Board. He however noted that so far all the other firms are concerned it is Rs 3305 less than the present contract price but it would not be equitable to offer the lower price put forward by the three manufacturers as it would make the other units unviable and that incidentally the price of Rs 76,000 now proposed to be counter-offered to the other firms is also in line with the recommendations of the Tender Committee. He, however, noted that some of the units were sick units and owe a lot of money to the nationalised banks and it would therefore be in the national interest to accept dual-pricing. Therefore the file was again put up to the approving authority who agreed with the recommendations of the Financial Commissioner and the Tender Committee and directed that the same may be implemented. In view of this final decision taken by the approving authority a telegram was issued to the three manufacturers giving them a counter-offer of Rs 65,000 per bogie. The counter-offer was also made to the other nine manufacturers at the rate of Rs 76,000 per bogie namely the price worked out by the Tender Committee. Soon after the receipt of this telegram dated March 18, 1992 M/s H.D.C and Mukand filed writ petitions in the Delhi High Court challenging the so-called discriminatory counter-offer. M/s Bhartiya also filed a similar petition in Calcutta High Court but the same was withdrawn but another writ petition was filed later in the Delhi High Court. In the writ petitions filed by M/s H.D.C and Mukand, the High Court stayed the operation of the telegram dated March 18, 1992 and issued notice to the Union of India and to the Executive Director and Director of the Railways (Stores) who figured as respondents in those writ petitions. M/s H.D.C and Mukand also wrote to the Minister of Railways in reply to the telegram that they were not prepared to accept the counter-offer at the rate of Rs 65,000 and instead they offered to supply the bogies at the rate of Rs 67,000 per bogie. The railways accepted this offer and intimated M/s H.D.C and Mukand accordingly. The High Court, at an interlocutory stage pending the writ petitions, passed an order on April 2, 1992 directing the Ministry to accept the allocation of bogies recommended by the Tender Committee and to pay a price at the rate of Rs 67,000 only per bogie and that would be subject to the final decision of the writ petitions. Being aggrieved by this order, the railways filed a petition for Special Leave to Appeal No. 5512 of 1992 and this Court while refusing to interfere at that interlocutory stage made the following observations on April 28, 1992:
“However, we may observe — and so direct — that during the pendency of the writ petition if any of the suppliers in terms of the package of distribution indicated by the High Court (including the petitioners in the High Court in the writ petition) seek an ‘on-account’ payment representing the difference between the sum of Rs 67,000 indicated as price by the High Court and the sum of Rs 76,000 contemplated by the railways; the order of the High Court shall not prohibit the Government making such on-account payment to such suppliers on each wagon on the condition that the said on-account payment of Rs 9000 per bogie should be covered by a bank guarantee for its prompt repayment together with interest at 20% per annum in the event the on-account payment cannot be observed in the price structure that may ultimately come to be determined pursuant to the final decision in the writ petitions.
The special leave petitions are disposed of accordingly.”
Thereafter the High Court took up the writ petitions for final hearing and by the impugned judgment allowed the writ petitions filed by M/s H.D.C and Mukand and directed that all the suppliers should make the supplies at the rate of Rs 67,000 per bogie and also set aside the quantity allocation and directed that the same should be considered afresh on a reasonable basis and pending such fresh consideration future supplies should be made on the basis of the recommendations of the Tender Committee. In the course of the judgment, the High Court also made certain observations to the effect that the decision of the approving authority is arbitrary and that the Government has no justification to offer a higher price than the market price to any supplier to rehabilitate it. It was further observed that the stand of the railways that those three manufacturers formed a cartel is based on extraneous considerations. The learned Judges of the High Court also observed that they failed to understand as to why the railway authorities could not initiate negotiations with those manufacturers who had offered to reduce their offer which could result in saving crores of rupees to the railways. Aggrieved by this judgment of the High Court the Union of India filed SLP (Civil) Nos. 11897-98 of 1992. Before the High Court in the two writ petitions filed by M/s H.D.C and Mukand the other manufacturers figured as respondents 4 to 12 and M/s Bhartiya otherwise known as Besco figured as respondent 13. The other SLPs are filed by those nine manufacturers. M/s Bhartiya, respondent 13, has not questioned the judgment of the High Court. As mentioned above M/s Bhartiya filed a separate Writ Petition No. 1753 of 1992 in the Delhi High Court after withdrawing an earlier writ petition filed in the Calcutta High Court. The same also was disposed of in terms of the judgment in the other two Writ Petition Nos. 1152 and 1157 of 1992. But they have not questioned the same. Consequently M/s Bhartiya figures as a respondent before us in the SLP filed by the Union of India.
4. In our earlier order we have already referred to the various submissions made by the learned counsel on behalf of Union of India and on behalf of the respondents particularly M/s H.D.C, Mukand and Bhartiya and other smaller manufacturers. After considering the various submissions and issues involved we have given our conclusions in our earlier order which briefly stated are as follows:
(1) There is not enough material to conclude that M/s H.D.C, Mukand and Bhartiya formed a cartel. However, there was scope for entertaining suspicion by the Tender Committee that they formed a cartel since all the three of them quoted identical price and the opinion entertained by the concerned authorities including the Minister that these three big manufacturers formed a cartel, was not per se malicious or was actuated by any extraneous considerations and the authorities acted in a bona fide manner in taking the stand that the three big manufacturers formed a cartel.
(2) The direction of the High Court that the supply of bogie should be at Rs 67,000 by every manufacturer cannot be sustained and that a fresh consideration of a reasonable price is called for. The Tender Committee shall reconsider the question of fixation of reasonable price. While doing so it shall consider the offer of Rs 67,000 made by M/s H.D.C and Mukand along with the data that would be given by them in support of their offer and the percentage of profits available to all the manufacturers and other relevant aspects and then fix a reasonable price at which the manufacturers would be able to supply.
(3) Dual pricing under certain circumstances may be reasonable and the stand of the railways to adopt dual pricing under the circumstances is bona fide and not mala fide. M/s H.D.C, Mukand and Bhartiya must be deemed to be in a position to supply at the rate of Rs 67,000 per bogie and thus they form a distinct category. The smaller manufacturers belong to a different category and if a different price is fixed for them it is not discriminatory.
(4) If the price that is to be fixed by the Tender Committee as directed by us happens to be more than Rs 67,000 then that would be applicable to the smaller manufacturers only and not to M/s H.D.C, Mukand and Bhartiya who on their own commitment have to supply at the rate of Rs 67,000.
(5) The price thus fixed by the Tender Committee which applies only to the smaller manufacturers shall be deemed to be final and the respective contracts shall be deemed to be concluded so far the price is concerned.
(6) Coming to the allotment of quota of bogies the Tender Committee made recommendations on the basis of the existing practice. The Minister of Railways in his ultimate decision has made some variations taking into consideration the recommendations of the Financial Commissioner and other authorities. In making these variations, the Minister accepting the suggestion that a cartel was formed by the three big manufacturers reduced the allotment of quota to them by way of reprisal. Since we are of the view that formation of a cartel is not established, such a reduction of quota cannot be justified. The Minister of Railways as the final authority may be justified in taking a particular decision in the matter of allotment of quota but such decision must be taken on objective basis. In allotting these quotas the Government is expected to be just and fair to one and all.
(7) The three big manufacturers M/s H.D.C, Mukand and Bhartiya should be allotted the quantities as per the recommendations of the Tender Committee. However, the quantities finally allotted by the competent authority to the smaller manufacturers need not be disturbed and the railway authorities may make necessary adjustments next year in the matter of allocation of quantities to them taking into consideration the allotments given to them this year.
(8) It will be open to the railways to exercise 30% option, if not already exercised.
(9) Taking all the circumstances and the time factor into consideration the time to complete the supply is extended up to March 31, 1993.
5. Before we proceed to consider each of these issues and give our reasons, we shall deal with few general submissions regarding the tender system and the economic policy of the Government in the matter of stopping monopolistic tendencies.
6. Shri K.K Venugopal, learned counsel appearing for M/s H.D.C at the outset submitted that in a case of this nature the Government must either by way of public auction or by way of inviting tenders work out the lowest price and award the contract accordingly, as that would safeguard the interests of the public exchequer. The further submission in this regard is that the railways having invited tenders and having further entertained post-tender correspondence offering the lower price, should have accepted the price quoted by the three big manufacturers. Shri Sibal, learned counsel appearing for the Union of India, however, contended that it is a matter of policy decision by the Government and that where the Government realises that the lowest price offered is not reasonable and realistic, it may for a variety of good and sufficient reasons reject the same.
7. It is true, as it is today, that the Government in a welfare State has wide powers in regulating and dispensing of special services like leases, licences, and contracts etc. The magnitude and range of such Governmental function is great. The Government while entering into contracts or issuing quotas is expected not to act like a private individual but should act in conformity with certain healthy standards and norms. Such actions should not be arbitrary, irrational or irrelevant. In the matter of awarding contracts inviting tenders is considered to be one of the fair ways. If there are any reservations or restrictions then they should not be arbitrary and must be justifiable on the basis of some policy or valid principles which by themselves are reasonable and not discriminatory. In the instant case the railways every year used to enter into contracts with the established manufacturers for the supply of cast steel bogies and there are 12 such suppliers. On October 25, 1991 a limited tender notice for the procurement of steel bogies was issued to these suppliers. Under Clause 5 of the tender notice the railways reserved the right to order additional quantity of 30% of the ordered quantity during the currency of the contract on the same price and terms with suitable extension in delivery period. Clause 7 is to the effect that the tender will be governed by the IRS conditions of the contract. In the instructions appended to the tender notice it is again reiterated that the contracts made under the tender would be governed by the IRS conditions of contract and also the instructions in the invitation of tender. Clause 9.3 of the instructions lays down that the price is subject to price variation clause and the base date for the purpose of escalation is September 1, 1991. Under Clause 23 it is made clear that the department does not pledge itself to accept the lowest or any tender and reserves to itself the right of acceptance of the whole or any part of the tender. Pursuant to this notice and subject to the conditions mentioned therein, 12 manufacturers in the field as well as two new manufacturers M/s Simplex and Beekay submitted their offers and they are as follows:
“Name of the firm Price quoted for 20.3 T axle load 1. Himmat 84,510 2. Texmaco 83,950 3. Titagarh 84,100 4. BECO Ltd. 83,350 5. Anup 84,980 6. Sri Ranga 84,600 7. Orient 84,750 8. Burn Standard 83,000 9. CIMMCO 84,800 10. Mukand 77,666 11. Bhartiya 77,666 12. HDC 77,666 13. Simplex 78,100 14. BEEKAY 75,000”
8. These offers were got technically evaluated by the Research, Development and Standard Organisation (‘RDSO’ for short). Thereafter a three-men Tender Committee comprising the officers of the rank of Joint Secretary designated as Executive Directors in the Railway Board considered the offers. Since the three big suppliers namely M/s H.D.C, Mukand and Bhartiya quoted an identical price of Rs 77,666 which was lower than the updated price of the previous contract, the base date of which was September 1, 1991, the Tender Committee formed an opinion that they have formed a cartel. The offers made by the two new firms, however, were not accepted. The Tender Committee made their own recommendations and fixed Rs 76,000 as a reasonable price at which counter-offer could be made. Then as already mentioned there was post-tender correspondence and ultimately a dual price was fixed. In this regard the submission is that having entertained post-tender correspondence, the Government either should have accepted the same or rejected the same and in any event the lowest offer should have been accepted. From a perusal of the proceedings of the Tender Committee as well as the opinion expressed by the Financial Commissioner and the other members of the Board, it is clear that Rs 76,000 per bogie can be the reasonable price and Rs 67,000 was not a reasonable price. It is also clear that the post-tender offer at a lower price was made with the hope that they would get the entire or larger quantity allotted. The stand taken by the railways is that the three big manufacturers originally formed a cartel and the post-tender offers at least by two of them confirmed the same and if these big manufacturers are allotted entire or larger quantity that would result in monopoly extinguishing the smaller manufacturers. The question is whether such a stand taken by the Government as a policy, is unfair and arbitrary as to warrant interference by the courts.
9. It must be mentioned at this stage that the validity of the conditions in the tender as such are not questioned. Consequently the Government had the right to either accept or reject the lowest offer but that of course, if done on a policy, should be on some rational and reasonable grounds. In Erusian Equipment and Chemicals Ltd. v. State of W.B (1975) 1 SCC 70, (1975) 2 SCR 674 this Court observed as under:
“When the Government is trading with the public, ‘the democratic form of Government demands equality and absence of arbitrariness and discrimination in such transactions’. The activities of the Government have a public element and, therefore, there should be fairness and equality. The State need not enter into any contract with anyone, but if it does so, it must do so fairly without discrimination and without unfair procedure.”
Approving these principles, a Bench of this Court in Ramana Dayaram Shetty v. International Airport Authority of India (1979) 3 SCC 489, (1979) 3 SCR 1014 held thus:
“… This proposition would hold good in all cases of dealing by the Government with the public, where the interest sought to be protected is a privilege. It must, therefore, be taken to be the law that where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licences or granting other forms of largess, the Government cannot act arbitrarily at its sweet will and, like a private individual, deal with any person it pleases, but its action must be in conformity with standard or norms which is not arbitrary, irrational or irrelevant. The power or discretion of the Government in the matter of grant of largess including award of jobs, contracts, quotas, licences etc. must be confined and structured by rational, relevant and non-discriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory.”
In Kasturi Lal Lakshmi Reddy v. State Of J&K (1980) 4 SCC 1, (1980) 3 SCR 1338 an order awarding contract by the Government to a party was questioned on the ground that it was arbitrary, mala fide and not in public interest and the same created monopoly in favour of that party and that the contract was awarded without affording an opportunity to others to compete and the same is not based on any rational or relevant principle and therefore was violative of Article 14 of the Constitution and also the rule of administrative law which inhibits the arbitrary action by the State. A Bench of this Court while approving the principles laid down in the above cases further observed thus:
“… Though ordinarily a private individual would be guided by economic considerations of self-gain in any action taken by him, it is always open to him under the law to act contrary to his self-interest or to oblige another in entering into a contract or dealing with his property. But the Government is not free to act as it likes in granting largess such as awarding a contract or selling or leasing out its property. Whatever be its activity, the Government is still the Government and is, subject to restraints inherent in its position in a democratic society. The constitutional power conferred on the Government cannot be exercised by it arbitrarily or capriciously or in an unprincipled manner; it has to be exercised for the public good. Every activity of the Government has a public element in it and it must therefore, be informed with reason and guided by public interest. Every action taken by the Government must be in public interest; the Government cannot act arbitrarily and without reason and if it does, its action would be liable to be invalidated. If the Government awards a contract or leases out or otherwise deals with its property or grants any other largess, it would be liable to be tested for its validity on the touchstone of reasonableness and public interest and if it fails to satisfy either test, it would be unconstitutional and invalid.”
Now coming to the test of reasonableness which pervades the constitutional scheme, this Court in several cases particularly with reference to Articles 14, 19 and 21 has considered this concept of reasonableness and has held that the same finds its positive manifestation and expression in the lofty ideal of social and economic justice which inspires and animates the Directive Principles and that Article 14 strikes at arbitrariness in State action. (Vide Maneka Gandhi v. Union of India (1978) 1 SCC 248, (1978) 2 SCR 621 and E.P Royappa v. State of T.N (1974) 4 SCC 3, (1974) 2 SCR 348) After referring to these decisions it was further held in Kasturi Lal Lakshmi Reddy case (1980) 4 SCC 1, (1980) 3 SCR 1338 as under:
“… Any action taken by the Government with a view to giving effect to anyone or more of the directive principles would ordinarily, subject to any constitutional or legal inhibitions or other overriding considerations, qualify for being regarded as reasonable, while an action which is inconsistent with or runs counter to a directive principle would prima facie incur the reproach of being unreasonable.
So also the concept of public interest must as far as possible receive its orientation from the directive principles. What according to the founding fathers constitutes the plainest requirement of public interest is set out in the directive principles and they embody par excellence the constitutional concept of public interest. If, therefore, any governmental action is calculated to implement or give effect to a directive principle, it would ordinarily, subject to any other overriding considerations, be informed with public interest.
Where any governmental action fails to satisfy the test of reasonableness and public interest discussed above and is found to be wanting in the quality of reasonableness or lacking in the element of public interest, it would be liable to be struck down as invalid. It must follow as a necessary corollary from this proposition that the Government cannot act in a manner which would benefit a private party at the cost of the State; such an action would be both unreasonable and contrary to public interest. The Government, therefore, cannot, for example give a contract or sell or lease out its property for a consideration less than the highest that can be obtained for it, unless of course there are other considerations which render it reasonable and in public interest to do so. Such considerations may be that some directive principle is sought to be advanced or implemented or that the contract or the property is given not with a view to earning revenue but for the purpose of carrying out a welfare scheme for the benefit of a particular group or section of people deserving it or that the person who has offered a higher consideration is not otherwise fit to be given the contract or the property. We have referred to these considerations only illustratively, for there may be an infinite variety of considerations which may have to be taken into account by the Government in formulating its policies and it is on a total evaluation of various considerations which have weighed with the Government in taking a particular action, that the court would have to decide whether the action of the Government is reasonable and in public interest.”
(emphasis supplied)
On the question of courts' interference in an action taken by the Government, it was further observed as under:
“But one basic principle which must guide the court in arriving at its determination on this question is that there is always a presumption that the governmental action is reasonable and in public interest and it is for the party challenging its validity to show that it is wanting in reasonableness or is not informed with public interest. This burden is a heavy one and it has to be discharged to the satisfaction of the court by proper and adequate material. The court cannot lightly assume that the action taken by the Government is unreasonable or without public interest because, as we said above, there are a large number of policy considerations which must necessarily weigh with the Government in taking action and therefore the court would not strike down governmental action as invalid on this ground, unless it is clearly satisfied that the action is unreasonable or not in public interest. But where it is so satisfied, it would be the plainest duty of the court under the Constitution to invalidate the governmental action. This is one of the most important functions of the court and also one of the most essential for preservation of the rule of law.”
(emphasis supplied)
On the question of the power of the Government in granting largess, it was also observed that:
“The second limitation on the discretion of the Government in grant of largess is in regard to the persons to whom such largess may be granted. It is now well settled as a result of the decision of this Court in Ramana D. Shetty v. International Airport Authority of India (1979) 3 SCC 489, (1979) 3 SCR 1014 that the Government is not free like an ordinary individual, in selecting the recipients for its largess and it cannot choose to deal with any person it pleases in its absolute and unfettered discretion. The law is now well established that the Government need not deal with anyone, but if it does so, it must do so fairly without discrimination and without unfair procedure. Where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or granting other forms of largess, the Government cannot act arbitrarily at its sweet will and, like a private individual, deal with any person it pleases, but its action must be in conformity with some standard or norm which is not arbitrary, irrational or irrelevant. The governmental action must not be arbitrary or capricious, but must be based on some principle which meets the test of reason and relevance. This rule was enunciated by the court as a rule of administrative law and it was also validated by the court as an emanation flowing directly from the doctrine of equality embodied in Article 14.”
(emphasis supplied)
In State of U.P v. Vijay Bahadur Singh (1982) 2 SCC 365 this Court considered the circumstances under which the Government is not always bound to accept the highest bid offered in a public auction under which a contract was to be awarded to fell trees and exploit forest produce and held as under:
“It appears to us that the High Court had clearly misdirected itself. The conditions of auction made it perfectly clear that the Government was under no obligation to accept the highest bid and that no rights accrued to the bidder merely because his bid happened to be the highest. Under Condition 10 it was expressly provided that the acceptance of bid at the time of auction was entirely provisional and was subject to ratification by the competent authority, namely, the State Government. Therefore, the Government had the right, for good and sufficient reason, we may say, not to accept the highest bid but even to prefer a tenderer other than the highest bidder. The High Court was clearly in error in holding that the Government could not refuse to accept the highest bid except on the ground of inadequacy of the bid. Condition 10 does not so restrict the power of the Government not to accept the bid. There is no reason why the power vested in the Government to refuse to accept the highest bid should be confined to inadequacy of bid only. There may be a variety of good and sufficient reasons, apart from inadequacy of bids, which may impel the Government not to accept the highest bid. In fact, to give an antithetic illustration, the very enormity of a bid may make it suspect. It may lead the Government to realise that no bona fide bidder could possibly offer such a bid if he meant to do honest business. Again the Government may change or refuse its policy from time to time and we see no reason why change of policy by the Government, subsequent to the auction but before its confirmation, may not be a sufficient justification for the refusal to accept the highest bid. It cannot be disputed that the Government has the right to change its policy from time to time, according to the demands of the time and situation and in the public interest. If the Government has the power to accept or not to accept the highest bid and if the Government has also the power to change its policy from time to time, it must follow that a change or revision of policy subsequent to the provisional acceptance of the bid but before its final acceptance is a sound enough reason for the Government's refusal to accept the highest bid at an auction. That is precisely what has happened here.”
(emphasis supplied)
In State of Orissa v. Harinarayan Jaiswal (1972) 2 SCC 36, (1972) 3 SCR 784 it was observed as under:
“… It is for the Government to decide whether the price offered in an auction sale is adequate. While accepting or rejecting a bid, it is merely performed an executive function. The correctness of its conclusion is not open to judicial review. We fail to see how the plea of contravention of Article 19(1)(g) or Article 14 can arise in these cases. The Government's power to sell the exclusive privileges set out in Section 22 was not denied. It was also not disputed that those privileges could be sold by public auction. Public auctions are held to get the best possible price. Once these aspects are recognised, there appears to be no basis for contending that the owner of the privileges in question who had offered to sell them cannot decline accept the highest bid if he thinks that the price offered is inadequate. There is no concluded contract till the bid is accepted. Before there was a concluded contract, it was open to the bidders to withdraw their bids — see Union Of India v. Bhim Sen Walaiti Ram . (1969) 3 SCC 146, (1970) 2 SCR 594, AIR 1971 SC 2295. By merely giving bids, the bidders had not acquired any vested rights. The fact that the Government was the seller does not change the legal position once its exclusive right to deal with those privileges is conceded. If the Government is the exclusive owner of those privileges, reliance on Article 19(1)(g) or Article 14 becomes irrelevant. Citizens cannot have any fundamental right to trade or carry on business in the properties or rights belonging to the Government, nor can there be any infringement of Article 14 if the government tries to get the best available price for its valuable rights.”
(emphasis supplied)
In G.B Mahajan v. Jalgaon Municipal Council (1991) 3 SCC 91 it was observed thus:
“The ‘reasonableness’ in administrative law must, therefore, distinguish between proper use and improper abuse of power. Nor is the test the court's own standard of ‘reasonableness’ as it might conceive it in a given situation.”
In State of M.P v. Nandlal Jaiswal (1986) 4 SCC 566, (1987) 1 SCR 1 it was observed thus:
“We must not forget that in complex economic matters every decision is necessarily empiric and it is based on experimentation or what one may call ‘trial and error method’ and, therefore, its validity cannot be tested on any rigid ‘a priori’ considerations or on the application of any strait-jacket formula. The Court must while adjudging the constitutional validity of an executive decision relating to economic matters grant a certain measure of freedom or ‘play in the joints’ to the executive.
The Court cannot strike down a policy decision taken by the State Government merely because it feels that another policy decision would have been fairer or wiser or more scientific or logical. The Court can interfere only if the policy decision is patently arbitrary, discriminatory or mala fide. It is against the background of these observations and keeping them in mind that we must now proceed to deal with the contention of the petitioners based on Article 14 of the Constitution.”
In India Cement Ltd. v. Union of India (1990) 4 SCC 356 a question arose whether the fixation of Rs 100 per tonne of cement as the uniform retention price for the entire industry with the exception of Travancore Cement Ltd. was rational and reasonable. This Court held as under:
“It is, therefore, clear that the fixation of Rs 100 per tonne as the uniform retention price for the entire industry with the solitary exception of M/s Travancore Cement Ltd., Kottayam, for which justification has been shown, was on a rational basis taking into account all relevant data and factors including the cement industry's acceptance of the principle of a uniform retention price for the entire industry, the only difference being in the price actually fixed at Rs 100 per tonne instead of Rs 104 per tonne claimed by the cement industry. It is obvious that the fixation of Rs 100 per tonne being shown to be made on a principle which has not been faulted, the actual fixation of Rs 100 instead of Rs 104 to be received by the industry is not within the domain of permissible judicial review if the principle of a uniform retention price for the entire industry cannot be faulted.”
(emphasis supplied)
The Bench in the above case (1990) 4 SCC 356, after referring to the decision of the Constitution Bench in Sitaram Sugar Co. Ltd. v. Union of India (1990) 3 SCC 223 observed thus:
“It was pointed out that what is best for the industry and in what manner the policy should be formulated and implemented, bearing in mind the object of supply and equitable distribution of the commodity at a fair price in the best interest of the general public, is a matter for decision exclusively within the province of the Central Government and such matters do not ordinarily attract the power of judicial review. It was also held that even if some persons are at a disadvantage and have suffered losses on account of the formulation and implementation of the government policy, that is not by itself sufficient ground for interference with the governmental action. Rejection of the principle of fixation of price unitwise on actual cost basis of each unit was reiterated and it was pointed out that such a policy promotes efficiency and provides an incentive to cut down the cost introducing an element of healthy competition among the units.
It is, therefore, clear that the principle of fixation of a uniform price for the industry is an accepted principle and this has to be done by fixing a uniform price on the basis of the cost of a reasonably efficient and economic representative cross-section of manufacturing units and not with reference to the cost in relation to each unit. Obviously, such a practice is in larger public interest and also promotes efficiency in the industry providing an incentive to the uneconomic units to achieve efficiency and to reduce their cost.”
Regarding the differential treatment given to M/s Travancore Cement Ltd. this Court held that:
“The only surviving question for consideration is the argument in Civil Appeal No. 2193 of 1972 for a differential treatment to the appellant, M/s Chettinad Cement Limited, on the analogy of M/s Travancore Cement Ltd., Kottayam. In the counter-affidavit of Shri G. Ramanathan, Under Secretary to the Government of India, the reason for treating Travancore Cement Limited differently has been clearly stated. It has been stated that it is a sub-standard unit with a capacity of 50,000 tonnes per annum only without any scope for expansion while the standard capacity for a unit is two lakh tonnes per annum; so that this unit is not capable of expanding the capacity and it is on the whole an uneconomic unit deserving a special consideration. No material has been produced by the appellant, M/s Chettinad Cement Corporation Limited, to show that it is a similar sub-standard unit without any capacity for expansion, so that it too must continue to be an uneconomic unit like M/s Travancore Cement Limited, Kottayam deserving a similar treatment. The counter-affidavit, therefore, shows a rational basis for classifying M/s Travancore Cement Limited, Kottayam, differently as a sub-standard and an uneconomic unit without any scope for improvement in comparison to other units. This argument also is untenable.”
In R.K Garg v. Union of India (1981) 4 SCC 675 a Constitution Bench of this Court observed as under:
“Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching the civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud 1 L Ed 2d 1485 (1957) where Frankfurter, J. said in his inimitable style:
‘In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self-limitation can be seen to be the path of judicial wisdom and institutional prestige and stablity.’ ”
(emphasis supplied)
In Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India (1992) 2 SCC 343 the accent (sic extent) of the power of the courts interfering in such economic policy matters was considered and it was held as under:
“The function of the Court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority. It is well settled that a public body invested with statutory powers must take care not to exceed or abuse its power. It must keep within the limits of the authority committed to it. It must act in good faith and it must act reasonably. Courts are not to interfere with economic policy which is the function of experts. It is not the function of the courts to sit in judgment over matters of economic policy and it must necessarily be left to the expert bodies. In such matters even experts can seriously and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts.”
It was further observed thus:
“The function of the Court is not to advise in matters relating to financial and economic policies for which bodies like Reserve Bank are fully competent. The Court can only strike down some or entire directions issued by the Reserve Bank in case the Court is satisfied that the directions were wholly unreasonable or violative of any provisions of the Constitution or any statute. It would be hazardous and risky for the courts to tread an unknown path and should leave such task to the expert bodies. This Court has repeatedly said that matters of economic policy ought to be left to the Government.”
At this juncture it is also necessary to consider whether the policy of the Government in the matter of fixation of price and in allotment of the largess from the point of view of prohibiting monopolistic tendencies and encouraging healthy competition among the units, is in any manner unreasonable or arbitrary. As submitted by the learned counsel, the policy of the Government is to promote efficiency in the administration and to provide an incentive to the uneconomic units to achieve efficiency. The object underlying the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTP Act’ for short) is to prevent the concentration of economic power and to provide for a control on monopolies; prohibition of monopolistic trade practices and restrictive trade practices. The Monopolies Inquiry Commission in its report stated that:
“There are different manifestations of economic power in different fields of economic activity. One such manifestation is the achievement by one or more units in an industry of such a dominant position that they are able to control the market by regulating prices or output or eliminating competition. Another is the adoption by some producers and distributors, even though they do not enjoy such a dominant position, of practices which restrain competition and thereby deprive the community of the beneficient effects of the rivalry between producers and producers, and distributors and distributors to give the best service. It is needless to say that such practices must inevitably impede the best utilisation of the nation's means of production. Economic power may also manifest itself in obtaining control of large areas of economic activity, by a few industrialists by diverse means. Apart from affecting the economy of the country, this often results in the creation of industrial empires, tending to cast their shadows over political democracy and social values.”
In U.S.A under the Sherman Act of 1890, every contract or combination in the form of trust or otherwise or conspiracy in restraint of trade or commerce is declared to be illegal. By that Act every person who monopolised or attempted to monopolise or combined or conspired with any other person or persons to monopolise any part of the trade or commerce was guilty of misdemeanour.
10. Regarding the constitutionality of the said Act, a passage in American Jurisprudence, 2d, Vol. 54 pages 668-669 reads thus:
“2. Constitutionality:
The Sherman Act (15 USC §§ 1-7) is a constitutional exercise of the commerce power. Its general language does not render it invalid as an unconstitutional delegation of legislative power to the courts or as an unconstitutionally vague criminal statute. Its application to a monopolistic association of newspaper publishers does not abridge freedom of the press; nor does its application to the continuance, after its enactment, of a contract made previously subject it to attack as ex post facto legislation.”
In England, the Competition Act, 1980 controls anti-competitive practices and if a person in the course of his business pursues a course of conduct which has or is intended to have or is likely to have the effect of restricting, distorting or preventing competition in connection with the production, supply or acquisition of goods is deemed to engage in anti-competition practices, which is illegal.
11. Therefore, the avowed policy of the Government particularly from the point of view of public interest is to prohibit concentration of economic power and to control monopolies so that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and to ensure that while promoting industrial growth there is reduction in concentration of wealth and that the economic power is brought about to secure social and economic justice.
12. Bearing the above principles in mind, we shall now proceed to examine the action taken by the railways in the matter of fixation of the price and distribution of quantities and see whether the same has been done pursuant to a policy and thus reasonable or whether there has been an arbitrary exercise of power. We have already noted that it is a case of limited tender meant for the 12 manufacturers who have been supplying the railway bogies. The offers made by the tenderers were got technically evaluated by the RDSO and thereafter they were examined by the Tender Committee as well as by the Railway Board and finally by the competent authority. The assessed capacity of each manufacturer is the one assessed by the RDSO, a wing of the railways and the same is based on the molten capacity of the manufacturers and other relevant factors. After fixing the reasonable price, the quantity distribution can be determined based on the assessed actual capacity of the manufacturers, best performance, outstanding orders to be executed and on the average of previous four years' performance. It is not in dispute that this formula was evolved in 1983. Later, to avoid certain inequalities and better utilisation of the installed capacity by larger units and uneconomic ordered quantity and underutilisation of capacity by smaller units, it was felt that in the interest of the economy, an equitable distribution has to be effected. A perusal of the Tender Committee's recommendations, the endorsements made by the members of the Railway Board and the views expressed by the competent authority would show that for the year in question they want to bring about some changes in the policy of distribution pending a permanent policy being evolved. The Tender Committee in the first instance examined the prices quoted by the tenderers. The Committee decided that while placing orders, only the RDSO permitted deviations will be allowed and the suppliers have to adhere to rest of the specifications as was being done in the earlier years. Then coming to the prices, the Tender Committee noted that the three big manufacturers quoted identical price in terms by forming a cartel among themselves. Having applied the price variation formula, the updated price was fixed at Rs 79,305 as on September 1, 1991. However, taking into consideration the two concessions in respect of import duty and the freight equalisation the Committee ultimately recommended the price of Rs 76,000. The Tender Committee also noted that this price is very near to the lowest among the updated price. Regarding the distribution of quantities the Tender Committee recommended that the same may be distributed among the various manufacturers as shown in the annexure to their recommendations. In recommending such distribution to various manufacturers the Tender Committee has taken into consideration the fact that the four wagon builders namely M/s H.D.C, Texmaco, Cimmco and Burn should be given weightage. The Tender Committee ultimately recommended that a counter-offer at the price of Rs 76,000 for 20.3 T bogies can be made and the quantities can be distributed as indicated in the annexure. This was done on February 4, 1992 and then the post-tender correspondence was there whereby two of the three big manufacturers offered to reduce their price if negotiations be held. Then the file went to the Railway Board. Advisor (Finance) particularly indicated that a view has to be taken whether a large number of manufacturers should continue manufacturing these bogies in small quantities as at present or to permit a small number of manufacturers to expand their production at the cost of other parties and that the policy which has been followed by the railways so far is to encourage a larger number of parties to manufacture the bogies, with the idea of generating competition as also by way of encouraging small scale industries. He, however, pointed out that since the review of policy would take time, the tender could be decided on the basis of the existing policy. The Member (Mechanical) agreed with this recommendation. Then the file went to Financial Commissioner. He noted that the three big manufacturers have formed a cartel and they have given offer to reduce their price if negotiations are held and their intention apparently is to get a larger share on the basis of such negotiated price which would eventually nullify the competition from the other manufacturers and subsequently lead to monopolistic price situation. Having stated so he recommended that the wagon builders and other smaller manufacturers must be given larger quantities and that the three big manufacturers should be given the balance. In the last paragraph, the Financial Commissioner noted thus:
“Now, due to the new economic policy, the structural changes are in a flux and as a monopoly buyer it is incumbent on the part of the railway not to precipitate any crisis by resorting to negotiation on the basis of HDC's letter at SN 26 but to treat carefully and protect smaller firms from being gobbled up. In other words, for short-term gains, we may be sacrificing long-term healthy competition. I, therefore, advocate that this post-tender letter may be ignored as the prices quoted by firms are in the close range of prices updated by Tender Committee for counter-offer.”
With these notings, the file went to the Railway Minister and in his order, he noted that the three big manufacturers have formed a cartel and that under the circumstances all the three of them may be offered a price lower by Rs 11,000 and the quantities also should be suitably adjusted so that the cartel is broken and he ordered 1795, 2376 and 2500 number of bogies to M/s H.D.C, Mukand and Bhartiya respectively. The Minister further observed that since the present formula suffers from serious blemishes as pointed out by the Financial Commissioner, a judicious distribution of order is called for between the other suppliers and that some of them are sick units and owe a lot of money to the nationalised banks and their cases are pending before BIFR, and that it would be in the national interest to give them sufficient order so that they are able to rehabilitate themselves and repay the loans. In this view of the matter, he ordered redistribution of the balance quantities as follows:
“Burn 500 Cimmco 1200 Texmaco 1200 Sri Ranga 1560 Anup 1136 Orient 1050 TSL 1400 Himmat 1150 BECO 1600”
The Minister also ordered that straight away 30% option should be exercised. He further noted that as a result of this policy, the railways would be effecting a saving of about Rs 11 crores. Then the file with this order went back to the Member (Mechanical) and others for being implemented. He, however, noted that the Minister for Railways may consider whether the lower price could be counter offered to all the companies. The Financial Commissioner again noted that dual pricing would be in the national interest and finally the Minister having noted these endorsements of the Member (Mechanical) as well as the Financial Commissioner made an endorsement that if some, who have formed a cartel, are allowed to hold monopoly instead of giving protection to smaller units, they may gang up and fight and fritter the smaller ones and that the railways should always demonstrate its own vision of long term railway interest and not short-term gains and finally agreed with the recommendations of the Financial Commissioner and also the recommendations of the Tender Committee and directed the implementation of the same without further delay. The above documents would show that a particular policy has been adopted by the Government, though it resulted in a change as compared to the previous one. As held by the courts, change of policy by itself does not affect the pursuant action provided it is rational and reasonable.
13. However, the submission is that the decision taken pursuant to this policy in the matter of fixation of price and distribution of quantities is based on wrong grounds and suffers from the vice of unreasonableness. S/Shri Nariman, Venugopal and Shanti Bhushan, learned counsel appearing for M/s Mukand, H.D.C and Bhartiya respectively submitted in this context that the grounds namely that the three big manufacturers formed a cartel and that the post-tender price offered by them was predatory are unfounded and that dual pricing and the ultimate allotment of the quantities in a punitive manner are based on a wrong premise and the final decision arrived at is consequently unreasonable and arbitrary. The further submission is that these manufacturers have a legitimate expectation of being treated in certain ways by the administrative authorities on the basis of practice and policy of the previous years and such a decision, which is punitive and which defeats such legitimate expectation and which is taken without affording an opportunity to these manufacturers to explain, is violative of principles of natural justice.
14. First we shall consider the submissions regarding the formation of cartel by these three big manufacturers. The word “cartel” has a particular meaning with reference to monopolistic control of the market. In Collins English Dictionary, the meaning of the word “cartel” is given as under:
“cartel — 1. Also called: trust, a collusive international association of independent enterprises formed to monopolize production and distribution of a product or service, control prices etc ….”
In Webster Comprehensive Dictionary, International Edition, the meaning of the word “cartel” is given thus:
“cartel … 3. An international combination of independent enterprises in the same branch of production, aiming at a monopolistic control of the market by means of weakening or eliminating competition ….”
In Chambers' English Dictionary the word “cartel” is defined thus:
“cartel — A combination of firms for certain purposes especially to keep up prices and kill competition ….”
In Black's Law Dictionary, Fifth Edition the meaning of the word “cartel” is given thus:
“cartel— A combination of producers of any product joined together to control its production, sale, and price, and to obtain a monopoly in any particular industry or commodity …. Also, an association by agreement of companies or sections of companies having common interests, designed to prevent extreme or unfair competition and allocate markets, and to promote the interchange of knowledge resulting from scientific and technical research, exchange of patent rights, and standardization of products.”
In American Jurisprudence 2d Vol. 54, page 677 it is mentioned thus:
“A cartel is an association by agreement of companies or sections of companies having common interests, designed to prevent extreme or unfair competition and to allocate markets, and perhaps also to exchange scientific or technical knowledge or patent rights and to standardize products, with competition regulated but not eliminated by substituting competition in quality, efficiency, and service for price-cutting. An international cartel arrangement providing for a worldwide division of a market has been held a per se violation of 15 USC S 1. An American corporation violates the Sherman Act by entering into agreements with English and French companies to (1) allocate world trade territories among themselves; (2) fix prices on products of one sold in the territory of the others; (3) cooperate to protect each other's markets and eliminate outside competition; and (4) participate in cartels to restrict imports to and exports from the United States.”
In A Dictionary of Modern Legal Usage by Bryan A. Garner, it is noted thus:
“cartelize - to organize into a cartel. See -IZE. Yet cartel has three quite different meaning: (1) ‘an agreement between hostile nations’; (2) ‘an anticompetitive combination usu. that fixes commercial prices’; and (3) ‘a combination of political groups that work toward common goals’. Modern usage favors sense (2).”
The cartel therefore is an association of producers who by agreement among themselves attempt to control production, sale and prices of the product to obtain a monopoly in any particular industry or commodity. Analysing the object of formation of a cartel in other words, it amounts to an unfair trade practice which is not in the public interest. The intention to acquire monopoly power can be spelt out from formation of such a cartel by some of the producers. However, the determination whether such agreement unreasonably restrains the trade depends on the nature of the agreement and on the surrounding circumstances that give rise to an inference that the parties intended to restrain the trade and monopolise the same. Dealing with the provisions of Sherman Anti-Trust Act, in National Electrical Contractors Associations, Inc. v. National Constructors Association. it was observed as under:
“We know of no better statement of the rule than that of this court in United States v. Society of Ind. Gasoline Marketers 465 (4th Cir 1979), 449 US 1078 where stated: ‘Since in a price-fixing conspiracy the conduct is illegal per se, further inquiry on the issues of intent or the anti-competitive effect is not required. The mere existence of a price-fixing agreement establishes the defendants’ illegal purpose since the aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition'.”
It was also observed that:
“The critical analysis in determining whether a particular activity constitutes a per se violation is whether the activity on its face seems to be such that it would always or almost always restrict competition and decrease output instead of being designed to increase economic efficiency and make the market more rather than less competitive.”
Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corpn. is a case where American manufacturers of consumer electronic products brought suit against a group of their Japanese competitors in the United States District Court alleging that these competitors had violated Sections 1 and 2 of the Sherman Act and other federal statutes. It was alleged that the Japanese companies had conspired since 1950 to drive domestic firms from the American market, by maintaining artificially high prices for these products in Japan while selling them at a loss in the United States. The District Court after excluding bulk of evidence, finally granted the Japanese companies' motion for summary judgment dismissing the claims. The United States Court of Appeal reversed and remanded for further proceedings. On a certiorari, the United States Supreme Court while considering the standards supplied by the Court of Appeals in evaluating the summary judgment, observed thus:
“To survive petitioners' motion for summary judgment, respondents must establish that there is a genuine issue of material (475 US 586) fact as to whether petitioners entered into an illegal conspiracy that caused respondents to suffer a cognizable injury.”
It was further observed that:
“A predatory pricing conspiracy is by nature speculative. Any agreement to price below the competitive level requires the conspirators to forgo profits that free competition would offer them. The forgone profits may be considered an investment in the future. For the investment to be rational (475 US 589) the conspirators must have a reasonable expectation of recovering, in the form of later monopoly profits, more than the losses suffered.
The alleged conspiracy's failure to achieve its ends in the two decades of its asserted operation is strong evidence that the conspiracy does not in fact exist. Since the losses in such a conspiracy accrue before the gains, they must be ‘repaid’ with interest. And because the alleged losses have accrued over the course of two decades, the conspirators could well require a correspondingly long time to recoup. Maintaining supracompetitive prices in turn depends on the continued cooperation of the conspirators, on the inability of other would-be competitors to enter the market, and (not incidentally) on the conspirators' ability to escape antitrust liability for their minimum price-fixing cartel. Each of these factors weighs more heavily as the time needed to recoup losses grows. If the losses have been substantial — as would likely be necessary (475 US 593) in order to drive out the competition — petitioners would most likely have to sustain their cartel for years simply to break even.”
(emphasis supplied)
In this context, one of the submissions is that the price of Rs 67,000 offered by these manufacturers during the post-tender stage was not predatory and that the view taken by the authorities that such an offer of lower price was predatory one confirming the formation of a cartel, is also unwarranted. In Matsushita case it was observed that predatory pricing conspiracies are by nature speculative and that the agreement to price below the competition level requires the conspirators to forgo profits that free competition would offer them. It was also held therein as under:
“To survive a motion for a summary judgment, a plaintiff seeking damages for a violation of Section 1 of the Sherman Act must present evidence ‘that tends to exclude the possibility’ that the alleged conspirators acted independently. Thus, respondents here must show that the inference of a conspiracy is reasonable in light of the competing inferences of independent action or collusive action that could not have harmed respondents.”
(emphasis supplied)
Therefore mere offering of a lower price by itself, though appears to be predatory, cannot be a factor for inferring formation of a cartel unless an agreement amounting to conspiracy is also proved.
15. In Webster Comprehensive Dictionary, International Edition, the meaning of the word “predatory” is given as under:
“predatory — 1. Characterized by or undertaken for plundering. 2. Addicted to pillaging. 3. Constituted for living by preying upon others, as a beast or bird; raptorial.”
In A Dictionary of Modern Legal Usage by Bryan A. Garner, “predatory” is defined thus:
“Predatory — preying on other animals. The word is applied figuratively in the phrase from antitrust law, predatory pricing. The forms predaceous, predatorial, and predative are needless variants. The spelling predacious has undergone differentiation and means ‘devouring; rapacious’.”
In Collins English Dictionary “predatory” is defined thus:
“Predatory — 1. Another word for predacious (sense 1) 2. of, involving, or characterized by plundering, robbing, etc ….”
In Black's Law Dictionary, “predatory intent” is defined as under:
“Predatory intent. ‘Predatory intent,’ in purview of Robinson-Patman Act, means that alleged price discriminator must have at least sacrificed present revenues for purpose of driving competitor out of market with hope of recouping losses through subsequent higher prices. International Air Industries, Inc. v. American Excelsior Co. C.A Tex.”
In The Oxford English Dictionary, Vol. VIII, “predatory” is defined thus:
“Predatory — 1. Of, pertaining to, characterized by, or consisting in plundering, pillaging, or robbery …. 2. Addicted to, or living by, plunder; plundering, marauding, thieving, in modern use sometimes applied to the criminal classes of great cities …. 3. Destructive, consuming, wasteful, deleterious …. 4. Of an animal; That preys upon other animals; that is a beast, bird, or other creature of prey; carnivorous. Also, of its organs of capture ….”
We have noticed that the monopoly is the power to control prices or exclude competition from any part of the trade or commerce among the producers. The price fixation is one of the essential factors. In American Jurisprudence, 2d Vol. 54, a passage at page 695 reads thus:
“The Sherman Act does not outlaw price uniformity. An accidental or incidental price uniformity, or even pure conscious price parallelism, is not itself unlawful. Moreover, a competitor's sole decision to follow price leadership is not a violation of 15 USC S 1.
On the other hand, a price-fixing conspiracy does not necessarily involve an express agreement, oral or written. It is sufficient that a concert of action is contemplated and that the defendants conform to the arrangement. The fixing of prices by one member of a group pursuant to express delegation, acquiescence, or understanding is just as illegal as the fixing of prices by direct joint action. A price-fixing combination is illegal even though the prices are fixed only by one member and without consultation with the others.”
(emphasis supplied)
16. A mere offer of a lower price by itself does not manifest the requisite intent to gain monopoly and in the absence of a specific agreement by way of a concerted action suggesting conspiracy, the formation of a cartel among the producers who offered such lower price cannot readily be inferred. In the instant case, the fact that two of the three big manufacturers entered into post-tender correspondence and also offered a lower price of Rs 67,000 is not in dispute. Though they did not place the necessary material in support of their offer as to how it is viable and workable, they, however, sought to contend before us that the price offered by them is not predatory and is only a reasonable price. By our earlier order dated January 14, 1993 we directed the Tender Committee to examine the matter afresh regarding the reasonable price on the basis of the data that may be placed by these big manufacturers in support of their offer of Rs 67,000. Therefore no conclusion can be reached definitely that offer of the price of Rs 67,000 by itself was predatory and the manufacturers who offered such a price consequently formed a cartel.
17. Therefore, whether in a given case, there was formation of a cartel by some of the manufacturers which amounts to an unfair trade practice, depends upon the available evidence and the surrounding circumstances. In the instant case, initially the Tender Committee formed the opinion that the three big manufacturers formed a cartel on the ground that the price initially quoted by them was identical and was only a cartel price. This, in our view, was only a suspicion which of course got strengthened by post-tender attitude of the said manufacturers who quoted a much lesser price. As noticed above it cannot positively be concluded on the basis of these two circumstances alone. In the past these three big manufacturers also offered their own quotations and they were allotted quantities on the basis of the existing practice. However, a mere quotation of identical price and an offer of further reduction by themselves would not entitle them automatically to corner the entire market by way of monopoly since the final allotment of quantities vested in the authorities who in their discretion can distribute the same to all the manufacturers including these three big manufacturers on certain basis. No doubt there was an apprehension that if such predatory price has to be accepted the smaller manufacturers will not be in a position to compete and may result in elimination of free competition. But there again the authorities reserved a right to reject such lower price. Under these circumstances though the attitude of these three big manufacturers gave rise to a suspicion that they formed a cartel but there is not enough of material to conclude that in fact there was such formation of a cartel. However, such an opinion entertained by the concerned authorities including the Minister was not malicious nor was actuated by any extraneous considerations. They entertained a reasonable suspicion based on the record and other surrounding circumstances and only acted in a bona fide manner in taking the stand that the three big manufacturers formed a cartel.
18. S/Shri Nariman, Venugopal and Shanti Bhushan, learned counsel appearing for M/s Mukand, H.D.C and Bhartiya respectively contended that the railways were bound to follow the rules and standards pertaining to the tender system and on the basis of these provisions and the course of conduct followed by the railways in the matter of fixation of price and allotment of quota in the past let the manufacturers believe that the same course of conduct would be followed and the manufacturers legitimately expected that they would be treated equally and in a non-arbitrary manner and such legitimate expectation is a right guaranteed under Article 14.
19. In Food Corpn. of India v. Kamdhenu Cattle Feed Industries (1993) 1 SCC 71, JT (1992) 6 SC 259 Justice J.S Verma speaking for the Bench observed as under:( and 8)
“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 discretion in public law. A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is ‘fair play 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 necessary component of the decision making process in all State actions. To satisfy this requirement of non-arbitrariness in a State action, it is, therefore, 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. 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.
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 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 expectation of the claimant is reasonable or legitimate 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 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 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.”
(emphasis supplied)
In Navjyoti Coop. Group Housing Society v. Union of India (1992) 4 SCC 477 Justice G.N Ray speaking for the Bench observed as under:( and 16)
“… In the aforesaid facts, the Group Housing Societies were entitled to ‘legitimate expectation’ of following consistent past practice in the matter of allotment, even though they may not have any legal right in private law to receive such treatment. The existence of ‘legitimate expectation’ may have a number of different consequences and one of such consequences is that the authority ought not to act to defeat the ‘legitimate expectation’ without some overriding reason of public policy to justify its doing so. In a case of ‘legitimate expectation’ if the authority proposes to defeat a person's ‘legitimate expectation’ it should afford him an opportunity to make representations in the matter. In this connection reference may be made to the discussions on ‘legitimate expectation’ at page 151 of Volume 1(1) of Halsbury's Laws of England — Fourth Edition (re-issue). We may also refer to a decision of the House of Lords in Council of Civil Service Unions v. Minister for the Civil Service (1984) 3 All ER 935. It has been held in the said decision that an aggrieved person was entitled to judicial review if he could show that a decision of the public authority affected him of some benefit or advantage which in the past he had been permitted to enjoy and which he legitimately expected to be permitted to continue to enjoy either until he was given reasons for withdrawal and the opportunity to comment on such reasons.
It may be indicated here that the doctrine of ‘legitimate expectation’ imposes in essence a duty on public authority to act fairly by taking into consideration all relevant factors relating to such ‘legitimate expectation’. Within the conspectus of fair dealing in case of ‘legitimate expectation’, the reasonable opportunities to make representation by the parties likely to be affected by any change of consistent past policy, come in. We, have not been shown any compelling reasons taken into consideration by the Central Government to make a departure from the existing policy of allotment with reference to seniority in Registration by introducing a new guideline.”
(emphasis supplied)
20. Relying on these decisions, it was contended that the decision of the railways in fixing the price and in allotment of the quantities is arbitrary and unreasonable affecting the right to such legitimate expectation.
21. To appreciate these contentions, it becomes necessary to refer to some of the rules governing these contracts and followed by the railways, before we examine the impact of the doctrine of ‘legitimate expectation’. The rules prescribed by the Minister for Railways for entering into contracts lay down certain norms and contains guidelines. The rules provide for constitution of Tender Committee and the procedure to be followed in the matter of inviting tenders. They also provide for negotiations but lays down that selection of contracts by negotiations is an exception rather than a rule and can be resorted to only under certain circumstances. Regarding splitting of tendered quantity in more than one form, we find some guidelines in Annexure 50 the relevant portion of which reads as under:
“3.0 Where warranted, the tendered quantity may be split and tender decided in favour of one or more firms on merits of each case, in consultation with Associate Finance and with the approval of the authority competent to accept the tender, having due regard to the following factors:
(i) Vital/Critical nature of the items;
(ii) quantity to be procured;
(iii) delivery requirements;
(iv) capacity of the firms in the zone of consideration;
(v) past performance of firms.
5.0 Splitting should not be done merely with a view to utilising developed capacity of the different sources but should be for valid reasons to be recorded in writing for splitting the tendered quantity.”
Annexure 213 contains the Railway Board letter dated April 19, 1990 addressed to General Managers, All Indian Railways and others, dealing with the subject of non-acceptance of late/delayed/post/tender offers. The relevant portion reads thus:
“2. Instances have come to notice of the Board where on a strict application of the above instructions even late tenders submitted by public sector firms for highly specialised equipments have been rejected.
3. The matter, has therefore been reconsidered by the Board and it has been decided that where late tenders from established/reliable suppliers and conferring a substantial financial advantage is to be considered, notwithstanding the general ban, it will be open to the railways to seek the Board's approval for the consideration of such Tenders, since this should be a very exceptional situation, such cases should be recommended for consideration of the Board with the personal approval of the General Manager, duly concurred in by the F.A & C.A.O
4. The railways should not enter into any dialogue with the agency submitting a delayed tender without obtaining Board's prior clearance.”
22. Now coming to the notice inviting tender in the instant case, we have already noted that the price quoted is subject to price variation clause and the railways reserved a right to accept the lowest price or accept the whole or any part of the tender or portion of the quantity offered. The notice, however, mentioned that the tenderer is at liberty to tender for the whole or any portion or to state in the tender that the rate quoted shall apply only if the entire quantity is taken from him. From these provisions it becomes clear that the tenderer cannot expect that his entire tender should be accepted in respect of the quantity and that the railways have a right to accept the tender as a whole or a part of it or portion of the quantity offered. It is not in dispute that in the past also there were many instances where the Railways as per the procedure followed, arrived at decisions in respect of both price and quantity for good and justifiable reasons. In the year 1991 the quantities of M/s H.D.C and Bhartiya were in fact reduced from the allocations made by the Tender Committee which made its recommendations on the basis of certain data. It has to be noted that the Tender Committee is not a statutory authority and its proposals are recommendatory in nature and have to be considered in the distribution procedure culminating in the decision of the approving authority who as a matter of fact, also can take decisions in respect of price and allotment of quantities taking into consideration various other aspects from the point of view of public interest. Therefore it is evident that there is no legally fixed procedure regarding fixation of price and particularly regarding allotment giving scope to a legitimate expectation. However, with this factual background, we shall consider the contention regarding ‘legitimate expectation’.
23. In Halsbury's Laws of England, Fourth Edition, Volume I(I) 151 a passage explaining the scope of “legitimate expectations” runs thus:
“81. Legitimate expectations.— A person may have a legitimate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation, or from consistent past practice.
The existence of a legitimate expectation may have a number of different consequences; it may give locus standi to seek leave to apply for judicial review; it may mean that the authority ought not to act so as to defeat the expectation without some overriding reason of public policy to justify its doing so; or it may mean that, if the authority proposes to defeat a person's legitimate expectation, it must afford him an opportunity to make representations on the matter. The courts also distinguish, for example in licensing cases, between original applications, applications to renew and revocations; a party who has been granted a licence may have a legitimate expectation that it will be renewed unless there is some good reason not to do so, and may therefore be entitled to greater procedural protection than a mere applicant for a grant.”
(emphasis supplied)
24. We find that the concept of legitimate expectation first stepped into the English Law in Schmidt v. Secretary of State for Home Affairs (1969) 2 Ch 149, (1969) 1 All ER 904 wherein it was observed that an alien who had been given leave to enter the United Kingdom for a limited period had a legitimate expectation of being allowed to stay for the permitted time and if that permission was revoked before the time expires, that alien ought to be given an opportunity of making representations. Thereafter the concept has been considered in a number of cases. In A.G of Hong Kong v. Ng Yuen Shiu (1983) 2 AC 629, (1983) 2 All ER 346 Lord Fraser said that “the principle that a public authority is bound by its undertakings as to the procedure it will follow, provided they do not conflict with its duty, is applicable to the undertaking given by the Government of Hong Kong to the respondent … that each case would be considered on its merits”.
25. In Council of Civil Service Unions v. Minister for the Civil Service (1984) 3 All ER 935 a question arose whether the decision of the Minister withdrawing the right to trade union membership without consulting the staff which according to the appellant was his legitimate expectation arising from the existence of a regular practice of consultation, was valid. It was contended that the Minister had a duty to consult the staff as per the existing practice and that though the employee did not have a legal right, he had a legitimate expectation that the existing practice would be followed. On behalf of the Minister on the basis of the evidence produced, it was contended that the decision not to consult was taken for reasons of national security. The Court held as under:
“An aggrieved person was entitled to invoke judicial review if he showed that a decision of a public authority affected him by depriving him of some benefit or advantage which in the past he had been permitted to enjoy and which he could legitimately expect to be permitted to continue to enjoy either until he was given reasons for its withdrawal and the opportunity to comment on those reasons or because he had received an assurance that it would not be withdrawn before he had been given the opportunity of making representations against the withdrawal. The appellants' legitimate expectation arising from the existence of a regular practice of consultation which the appellants could reasonably expect to continue gave rise to an implied limitation on the minister's exercise of the power contained in Article 4 of the 1982 order, namely an obligation to act fairly by consulting the GCHQ staff before withdrawing the benefit of trade union membership.
Once the minister produced evidence that her decision not to consult the staff before withdrawing the right to trade union membership was taken for reasons of national security, that overrode any right to judicial review which the appellants had arising out of the denial of their legitimate expectation of consultation. The appeal would therefore be dismissed.
Administrative action is subject to control by judicial review under three heads: (1) illegality, where the decision-making authority has been guilty of an error of law, e.g by purporting to exercise a power it does not possess; (2) irrationality, where the decision-making authority has acted so unreasonably that no reasonable authority would have made the decision; (3) procedural impropriety, where the decision-making authority has failed in its duty to act fairly.”
(emphasis supplied)
Therefore the claim based on the principle of legitimate expectation can be sustained and the decision resulting in denial of such expectation can be questioned provided the same is found to be unfair, unreasonable, arbitrary and violative of principles of natural justice. (vide Food Corpn. of India case (1993) 1 SCC 71, JT (1992) 6 SC 259 and Navjyoti Coop. Group Housing Society case (1992) 4 SCC 477).
26. The learned counsel for these three big manufacturers, however, relied on various decisions in Amarjit Singh Ahluwalia v. State of Punjab (1975) 3 SCC 503, (1975) 3 SCR 82, Ramana Dayaram Shetty case (1979) 3 SCC 489, (1979) 3 SCR 1014 and Peerless General Finance and Investment Co. Ltd. case (1992) 2 SCC 343 and contended that failure to follow the existing procedure resulting in denial of a right directly arising out of legitimate expectation is per se arbitrary and unreasonable and therefore illegal and consequently violative of Article 14 of the Constitution.
27. Of late the doctrine of legitimate expectation is being pressed into service in many cases particularly in contractual sphere while canvassing the implications underlying the administrative law. Since we have not come across any pronouncement of this Court on this subject explaining the meaning and scope of the doctrine of legitimate expectation, we would like to examine the same a little more elaborately at this stage. Who is the expectant and what is the nature of the expectation? When does such an expectation become a legitimate one and what is the foundation for the same? What are the duties of the administrative authorities while taking a decision in cases attracting the doctrine of legitimate expectation.
28. Time is a three-fold present: the present as we experience it, the past as a present memory and future as a present expectation. For legal purposes, the expectation cannot be the same as anticipation. It is different from a wish, a desire or a hope nor can it amount to a claim or demand on the ground of a right. However earnest and sincere a wish, a desire or a hope may be and however confidently one may look to them to be fulfilled, they by themselves cannot amount to an assertable expectation and a mere disappointment does not attract legal consequences. A pious hope even leading to a moral obligation cannot amount to a legitimate expectation. The legitimacy of an expectation can be inferred only if it is founded on the sanction of law or custom or an established procedure followed in regular and natural sequence. Again it is distinguishable from a genuine expectation. Such expectation should be justifiably legitimate and protectable. Every such legitimate expectation does not by itself fructify into a right and therefore it does not amount to a right in the conventional sense.
29. It has to be noticed that the concept of legitimate expectation in administrative law has now, undoubtedly, gained sufficient importance. It is stated that “legitimate expectation” is the latest recruit to a long list of concepts fashioned by the courts for the review of administrative action and this creation takes its place beside such principles as the rules of natural justice, unreasonableness, the fiduciary duty of local authorities and “in future, perhaps, the principle of proportionality”. A passage in Administrative Law, Sixth Edition by H.W.R Wade page 424 reads thus:
“These are revealing decisions. They show that the courts now expect Government departments to honour their published statements or else to treat the citizen with the fullest personal consideration. Unfairness in the form of unreasonableness here comes close to unfairness in the form of violation of natural justice, and the doctrine of legitimate expectation can operate in both contexts. It is obvious, furthermore, that this principle of substantive, as opposed to procedural, fairness may undermine some of the established rules about estoppel and misleading advice, which tend to operate unfairly. Lord Scarman has stated emphatically that unfairness in the purported exercise of a power can amount to an abuse or excess of power, and this seems likely to develop into an important general doctrine.”
Another passage at page 522 in the above book reads thus:
“It was in fact for the purpose of restricting the right to be heard that ‘legitimate expectation’ was introduced into the law. It made its first appearance in a case where alien students of ‘scientology’ were refused extension of their entry permits as an act of policy by the Home Secretary, who had announced that no discretionary benefits would be granted to this sect. The court of appeal held that they had no legitimate expectation of extension beyond the permitted time, and so no right to a hearing, though revocation of their permits within that time would have been contrary to legitimate expectation. Official statements of policy, therefore, may cancel legitimate expectation, just as they may create it, as seen above. In a different context, where car-hire drivers had habitually offended against airport byelaws, with many convictions and unpaid fines, it was held that they had no legitimate expectation of being heard before being banned by the airport authority.
There is some ambiguity in the dicta about legitimate expectation, which may mean either expectation of a fair hearing or expectation of the licence or other benefit which is being sought. But the result is the same in either case; absence of legitimate expectation will absolve the public authority from affording a hearing.”
(emphasis supplied)
30. In some cases a question arose whether the concept of legitimate expectation is an impact only on the procedure or whether it also can have a substantive impact and if so to what extent. Attorney General for New South Wales v. Quin (1990) 64 Aust LJR 327 is a case from Australia in which this aspect is dealt with. In that case the Local Courts Act abolished Courts of Petty Sessions and replaced them by Local Courts. Section 12 of the Act empowered the Governor to appoint any qualified person to be a Magistrate in the new court system. Mr Quin, who had been a Stipendiary Magistrate in charge of a Court of Petty Sessions under the old system, applied for, but was refused, an appointment under the new system. That was challenged. The challenge was upheld by the appellate court on the ground that the selection committee had taken into account an adverse report on him without giving a notice to him of the contents of the same. In the appeal by the Attorney-General against that order before the High Court, it was argued on behalf of Mr Quin that he had a legitimate expectation that he would be treated in the same way as his former colleagues considering his application on its own merits. Coming to the nature of the substantive impact of the doctrine, Brennan, J. observed that the doctrine of legitimate expectations ought not to “unlock the gate which shuts the court out of review on the merits”, and that the courts should not trespass “into the forbidden field of the merits“ by striking down administrative acts or decisions which failed to fulfil the expectations. In the same case Mason, C.J was of the view that if substantive protection is to be accorded to legitimate expectations that would encounter the objection of entailing “curial interference with administrative decisions on the merits by precluding the decision-maker from ultimately making the decision which he or she considers most appropriate in the circumstances”.
31. In R v. Secretary of State for the Home Department ex parte Ruddock (1987) 2 All ER 518 Taylor, J. after referring to the ratio laid down in some of the above cases held thus:
“On these authorities I conclude that the doctrine of legitimate expectation in essence imposes a duty to act fairly. Whilst most of the cases are concerned, as Lord Roskill said, with a right to be heard, I do not think the doctrine is so confined. Indeed, in a case where ex hypothesi there is no right to be heard, it may be thought the more important to fair dealing that a promise or undertaking given by a minister as to how he will proceed should be kept. Of course such promise or undertaking must not conflict with his statutory duty or his duty, as here, in the exercise of a prerogative power. I accept the submission of counsel for the Secretary of State that the respondent cannot fetter his discretion. By declaring a policy he does not preclude any possible need to change it. But then if the practice has been to publish the current policy, it would be incumbent on him in dealing fairly to publish the new policy, unless again that would conflict with his duties. Had the criteria here needed changing for national security reasons, no doubt the respondent could have changed them. Had those reasons prevented him also from publishing the new criteria, no doubt he could have refrained from doing so. Had he even decided to keep the criteria but depart from them in this single case for national security reasons, no doubt those reasons would have afforded him a defence to judicial review as in the GCHQ case.”
(emphasis supplied)
In Breen v. Amalgamated Engineering Union (1971) 2 QB 175, (1971) 1 All ER 1148, 1154 (f-h) Lord Denning observed as under:
“If a man seeks a privilege to which he has no particular claim — such as an appointment to some post or other — then he can be turned away without a word. He need not be heard. No explanation need be given; see the cases cited in Schmidt v. Secretary of State for Home Affairs (1993) 1 SCC 71, JT (1992) 6 SC 259 at pages 170-171. But if he is a man whose property is at stake, or who is being deprived of his livelihood, then reasons should be given why he is being turned down, and he should be given a chance to be heard. I go further. If he is a man who has some right or interest, or some legitimate expectation, of which it would not be fair to deprive him without a hearing, or reasons given, then these should be afforded him, according as the case may demand.”
(emphasis supplied)
32. At this stage it is necessary to consider the scope of judicial review when a challenge is made on the basis of the doctrine of legitimate expectation. In Findlay v. Secretary of State for the Home Department (1984) 3 All ER 801 it was observed as under:
“The doctrine of legitimate expectation has an important place in the developing law of judicial review. It is, however, not necessary to explore the doctrine in this case, it is enough merely to note that a legitimate expectation can provide a sufficient interest to enable one who cannot point to the existence of a substantive right to obtain the leave of the court to apply for judicial review. These two applicants obtained leave. But their submission goes further. It is said that the refusal to accept them from the new policy was an unlawful act on the part of the Secretary of State in that his decision frustrated their expectation. But what was their legitimate expectation? Given the substance and purpose of the legislative provisions governing parole, the most that a convicted prisoner can legitimately expect is that his case will be examined individually in the light of whatever policy the State sees fit to adopt, provided always that the adopted policy is a lawful exercise of the discretion conferred on him by the statute. Any other view would entail the conclusion that the unfettered discretion conferred by the statute on the minister can in some cases be restricted so as to hamper, or even prevent, changes of policy. Bearing in mind the complexity of the issues which the Secretary of State has to consider and the importance of the public interest in the administration of parole, I cannot think that Parliament intended the discretion to be restricted in this way.”
In Council of Civil Service Unions' case (1984) 3 All ER 935 Lord Diplock observed thus:
“To qualify as a subject for judicial review the decision must have consequences which affect some person (or body of persons) other than the decision-maker, although it may affect him too. It must affect such other person either (a) by altering rights or obligations of that person which are enforceable by or against him in private law or (b) by depriving him of some benefit or advantage which either (i) he has in the past been permitted by the decision-maker to enjoy and which he can legitimately expect to be permitted to continue to do until there has been communicated to him some rational ground for withdrawing it on which he has been given an opportunity to comment or (ii) he has received assurance from the decision-maker will not be withdrawn without giving him first an opportunity of advancing reasons for contending that they should not be withdrawn. I prefer to continue to call the kind of expectation that qualifies a decision for inclusion in class (b) a ‘legitimate expectation’ rather than a ‘reasonable expectation’, in order thereby to indicate that it has consequences to which effect will be given in public law, whereas an expectation or hope that some benefit or advantage would continue to be enjoyed, although it might well be entertained by a ‘reasonable’ man, would not necessarily have such consequences.”
In Attorney General for New South Wales case (1990) 64 Aust LJR 327 it is observed as under:
“Some advocates of judicial intervention would encourage the courts to expand the scope and purpose of judicial review, especially to provide some check on the Executive Government which nowadays exercises enormous powers beyond the capacity of the Parliament to supervise effectively. Such advocacy is misplaced. If the courts were to assume a jurisdiction to review administrative acts or decisions which are ‘unfair’ in the opinion of the court — not to product of procedural fairness, but unfair on the merits — the courts would be assuming a jurisdiction to do the very thing which is to be done by the repository of an administrative power, namely, choosing among the courses of action upon which reasonable minds might differ.
If judicial review were to trespass on the merits of the exercise of administrative power, it would put its own legitimacy at risk. The risk must be acknowledged for a reason which Frankfurter, J. stated in Trop v. Dulles (1958) 35 US 86:
‘All power is, in Madison's phrase, “of an encroaching nature” …. Judicial power is not immune against this human weakness. It also must be on guard against encroaching beyond its proper bounds, and not the less so since the only restraint upon it is self-restraint.’
If the courts were to postulate rules ostensibly related to limitations on administrative power but in reality calculated to open to the gate into the forbidden field of the merits of its exercise, the function of the courts would be exceeded: of R. v. Nat Bell Liquors Ltd. (1922) 2 AC 128 If the courts were to define the content of legitimate expectations as something less than a legal right and were to protect what would be thus defined by striking down administrative acts or decisions which failed to fulfil the expectations, the courts would be truncating the powers which are naturally apt to affect those expectations. To strike down the exercise of administrative power solely on the ground of avoiding the disappointment of the legitimate expectations of an individual would be to set the courts adrift on a featureless sea of pragmatism. Moreover, the notion of a legitimate expectation (falling short of a legal right) is too nebulous to form a basis for invalidating the exercise of a power when its exercise otherwise accords with law. The authority of the courts and their salutary capacity judicially to review the exercise of administrative power depend in the last analysis on their fidelity to the rule of law, exhibited by the articulation of general principles.
To lie within the limits of judicial power, the notion of ‘legitimate expectation’ must be restricted to the illumination of what is the legal limitation on the exercise of administrative power in a particular case. Of course, if a legitimate expectation were to amount to a legal right, the court would define the respective limits of the right and any power which might be exercised to infringe it so as to accommodate in part both the right and the power or so as to accord to one priority over the other. (That is a commonplace of curial declarations.) But a power which might be so exercised as to affect a legitimate expectation falling short of a legal right cannot be truncated to accommodate the expectation.
So long as the notion of legitimate expectation is seen merely as indicating ‘the factors and kinds of factors which are relevant to any consideration of what are the things which must be done or afforded’ to accord procedural fairness to an applicant for the exercise of an administrative power (see per Mahoney, JA in Macrae, at 285), the notion can, with one important proviso, be useful. If, but only if, the power is so created that the according of natural justice conditions its exercise, the notion of legitimate expectation may useful focus attention on the content of natural justice in a particular case; that is, on what must be done to give procedural fairness to a person whose interests might be affected by an exercise of the power. But if the according of natural justice does not condition the exercise of the power, the notion of legitimate expectation can have no role to play. If it were otherwise, the notion would become a stalking horse for excesses of judicial review.”
(emphasis supplied)
In this very case, Brennan, J. after referring to Schmidt case (1969) 2 Ch 149, (1969) 1 All ER 904 observed thus:
“Again, when a court is deciding what must be done in order to accord procedural fairness in a particular case, it has regard to precisely the same circumstances as those to which the court might refer in considering whether the applicant entertains a legitimate expectation, but the inquiry whether the applicant entertains a legitimate expectation is superfluous. Again, if an express promise be given or a regular practice be adopted by a public authority, and the promise or practice is the source of a legitimate expectation, the repository is bound to have regard to the promise or practice in exercising the power, and it is unnecessary to inquire whether those factors give rise to a legitimate expectation. But the court must stop short of compelling fulfilment of the promise or practice unless the statute so requires or the statute permits the repository of the power to bind itself as to the manner of the future exercise of the power. It follows that the notion of legitimate expectation is not the key which unlocks the treasury of natural justice and it ought not unlock the gate which shuts the court out of review on the merits. The notion of legitimate expectation was introduced at a time when the courts were developing the common law to suit modern conditions and were sweeping away the unnecessary archaisms of the prerogative writs, but it should not be used to subvert the principled justification for curial intervention in the exercise of administrative power.”
(emphasis supplied)
In the same case, Dawson, J. observed thus:
“It also follows that the required procedure may vary according to the dictates of fairness in the particular case.
Thus, in order to succeed, the respondent must be able to point to something in the circumstances of the case which would make it unfair not to extend to him the procedure which he seeks. There is no doubt that the respondent had a legitimate expectation of continuing in his position as a stipendiary magistrate such that it would, apart from statute, have been unfair to remove him from that position without according him a hearing. If the principle of judicial independence extended to a stipendiary magistrate, then, no doubt, that would have strengthened his expectation. But the respondent was not removed from his position of stipendiary magistrate by administrative decision. He was removed by a statute which abolished the position of stipendiary magistrate and established the new position of magistrate. Not only that, the statute, the Local Courts Act, clearly contemplated that not all the former stipendiary magistrates would be appointed as magistrates pursuant to its terms. Accordingly it made provision for those who were not so appointed. It may be possible to deprecate the manner in which the statute removed the respondent from office, but it is not possible to deny its effect. Any unfairness was the product of the legislation which conferred no right upon the respondent to a procedure other than that which it laid down.”
(emphasis supplied)
33. On examination of some of these important decisions it is generally agreed that legitimate expectation gives the applicant sufficient locus standi for judicial review and that the doctrine of legitimate expectation is to be confined mostly to right of a fair hearing before a decision which results in negativing a promise or withdrawing an undertaking is taken. The doctrine does not give scope to claim relief straightaway from the administrative authorities as no crystallised right as such is involved. The protection of such legitimate expectation does not require the fulfilment of the expectation where an overriding public interest requires otherwise. In other words where a person's legitimate expectation is not fulfilled by taking a particular decision then decision-maker should justify the denial of such expectation by showing some overriding public interest. Therefore even if substantive protection of such expectation is contemplated that does not grant an absolute right to a particular person. It simply ensures the circumstances in which that expectation may be denied or restricted. A case of legitimate expectation would arise when a body by representation or by past practice aroused expectation which it would be within its powers to fulfil. The protection is limited to that extent and a judicial review can be within those limits. But as discussed above a person who bases his claim on the doctrine of legitimate expectation, in the first instance, must satisfy that there is a foundation and thus has locus standi to make such a claim. In considering the same several factors which give rise to such legitimate expectation must be present. The decision taken by the authority must be found to be arbitrary, unreasonable and not taken in public interest. If it is a question of policy, even by way of change of old policy, the courts cannot interfere with a decision. In a given case whether there are such facts and circumstances giving rise to a legitimate expectation, it would primarily be a question of fact. If these tests are satisfied and if the court is satisfied that a case of legitimate expectation is made out then the next question would be whether failure to give an opportunity of hearing before the decision affecting such legitimate expectation is taken, has resulted in failure of justice and whether on that ground the decision should be quashed. If that be so then what should be the relief is again a matter which depends on several factors.
34. We find in Attorney General for New South Wales case (1990) 64 Aust LJR 327 that the entire case-law on the doctrine of legitimate expectation has been considered. We also find that on an elaborate and erudite discussion it is held that the courts' jurisdiction to interfere is very much limited and much less in granting any relief in a claim based purely on the ground of ‘legitimate expectation’. In Public Law and Politics edited by Carol Harlow, we find an article by Gabriele Ganz in which the learned author after examining the views expressed in the cases decided by eminent judges to whom we have referred to above, concluded thus:
“The confusion and uncertainty at the heart of the concept stems from its origin. It has grown from two separate roots, natural justice or fairness and estoppel, but the stems have become entwined to such an extent that it is impossible to disentangle them. This makes it very difficult to predict how the hybrid will develop in future. This could be regarded as giving the concept a healthy flexibility, for the intention behind it is benign; it has been fashioned to protect the individual against administrative action which is against his interest. On the other hand, the uncertainty of the concept has led to conflicting decisions and conflicting interpretations in the same decision.”
However, it is generally accepted and also clear that legitimate expectation being less than right operates in the field of public and not private law and that to some extent such legitimate expectation ought to be protected though not guaranteed.
35. Legitimate expectations may come in various forms and owe their existence to different kind of circumstances and it is not possible to give an exhaustive list in the context of vast and fast expansion of the governmental activities. They shift and change so fast that the start of our list would be obsolete before we reached the middle. By and large they arise in cases of promotions which are in normal course expected, though not guaranteed by way of a statutory right, in cases of contracts, distribution of largess by the Government and in somewhat similar situations. For instance discretionary grant of licences, permits or the like, carry with it a reasonable expectation, though not a legal right to renewal or non-revocation, but to summarily disappoint that expectation may be seen as unfair without the expectant person being heard. But there again the court has to see whether it was done as a policy or in the public interest either by way of G.O, rule or by way of a legislation. If that be so, a decision denying a legitimate expectation based on such grounds does not qualify for interference unless in a given case, the decision or action taken amounts to an abuse of power. Therefore the limitation is extremely confined and if the according of natural justice does not condition the exercise of the power, the concept of legitimate expectation can have no role to play and the court must not usurp the discretion of the public authority which is empowered to take the decisions under law and the court is expected to apply an objective standard which leaves to the deciding authority the full range of choice which the legislature is presumed to have intended. Even in a case where the decision is left entirely to the discretion of the deciding authority without any such legal bounds and if the decision is taken fairly and objectively, the court will not interfere on the ground of procedural fairness to a person whose interest based on legitimate expectation might be affected. For instance if an authority who has full discretion to grant a licence prefers an existing licenceholder to a new applicant, the decision cannot be interfered with on the ground of legitimate expectation entertained by the new applicant applying the principles of natural justice. It can therefore be seen that legitimate expectation can at the most be one of the grounds which may give rise to judicial review but the granting of relief is very much limited. It would thus appear that there are stronger reasons as to why the legitimate expectation should not be substantively protected than the reasons as to why it should be protected. In other words such a legal obligation exists whenever the case supporting the same in terms of legal principles of different sorts, is stronger than the case against it. As observed in Attorney General for New South Wales case (1990) 64 Aust LJR 327: “To strike down the exercise of administrative power solely on the ground of avoiding the disappointment of the legitimate expectations of an individual would be to set the courts adrift on a featureless sea of pragmatism. Moreover, the notion of a legitimate expectation (falling short of a legal right) is too nebulous to form a basis for invalidating the exercise of a power when its exercise otherwise accords with law.” If a denial of legitimate expectation in a given case amounts to denial of right guaranteed or is arbitrary, discriminatory, unfair or biased, gross abuse of power or violation of principles of natural justice, the same can be questioned on the well-known grounds attracting Article 14 but a claim based on mere legitimate expectation without anything more cannot ipso facto give a right to invoke these principles. It can be one of the grounds to consider but the court must lift the veil and see whether the decision is violative of these principles warranting interference. It depends very much on the facts and the recognised general principles of administrative law applicable to such facts and the concept of legitimate expectation which is the latest recruit to a long list of concepts fashioned by the courts for the review of administrative action, must be restricted to the general legal limitations applicable and binding the manner of the future exercise of administrative power in a particular case. It follows that the concept of legitimate expectation is “not the key which unlocks the treasury of natural justice and it ought not to unlock the gates which shuts the court out of review on the merits”, particularly when the element of speculation and uncertainty is inherent in that very concept. As cautioned in Attorney General for New South Wales case (1990) 64 Aust LJR 327 the courts should restrain themselves and restrict such claims duly to the legal limitations. It is a well-meant caution. Otherwise a resourceful litigant having vested interests in contracts, licences etc. can successfully indulge in getting welfare activities mandated by directive principles thwarted to further his own interests. The caution, particularly in the changing scenario, becomes all the more important.
36. In view of our conclusions in respect of the quantities allotted and the price fixed it may not be necessary for us to enter into further discussion on this aspect. We have already directed that the Tender Committee should consider afresh as to what should be the reasonable price and to that extent the price of Rs 67,000 fixed in respect of smaller manufacturers is set aside and directed to be revised. So far these three big manufacturers are concerned, we held that on their own commitment they are bound to supply at the rate of Rs 67,000 per bogie. So far the quantities are concerned, we held that these three big manufacturers should be allotted the quantities as per the recommendations of the Tender Committee. However, we considered this aspect to some extent only to show that the decision in respect of price fixation as well as allotment of quantities even though to some extent at variation with the procedure followed during the previous years, was not based on any irrelevant consideration. The railways particularly the Financial Commissioner as well as the Minister and initially the Tender Committee formed an opinion that these three big manufacturers formed a cartel and also quoted an unworkable predatory price at the post-tender stage. Therefore from the point of view of preventing monopoly in the public interest the decision in question was taken in a bona fide manner. However, on a factual basis we held that the alleged formation of a cartel was only in the realm of suspicion and in that view the decision was modified, as already indicated. However, we make it clear that the said modifications by way of judicial review is not on the ground of legitimate expectation and violative of principles of natural justice but on the other ground namely the decision of the authorities was based on wrong assumption of formation of a cartel.
37. The next submission is that the decision taken by the railways resulting in reduction of the quantities and making a counter-offer of Rs 65,000 to these three big manufacturers is punitive in nature visiting with civil consequences and such a decision taken without giving an opportunity to these manufacturers is violative of principles of natural justice. In view of our above-mentioned conclusions resulting in modification of the decision of the authorities both in respect of price fixation and in allotment of quantities, there is no necessity to consider this aspect again in detail.
38. It was next contended that the consideration that some manufacturers are small and others are BIFR companies taken into account by the approving authority for deviating from the age-old practice in allocation of quantities is irrelevant and discriminatory and therefore the decision is bad. It may be mentioned that status of a manufacturer being a BIFR company or a small manufacturer was not taken into account so far as the fixation of the price is concerned and these considerations were deemed relevant only for the purpose of allocation of quantities. The stand taken by the railways is that smaller manufacturers should survive from the point of view of arresting monopolistic tendencies and from the point of view of public interest. The Tender Committee proceedings would indicate that on the basis of certain formulae namely the past performance, capacity etc. the allotment was being made. Therefore these cannot be said to be irrelevant considerations and as a matter of fact they had been duly given effect to and weightage was given accordingly in respect of allotment of quantities to various manufacturers within the four corners of the limited tender.
39. The learned counsel, however, contended that the allotment of the quantities to the smaller manufacturers also is not based on any acceptable principle and that some of them are given larger quantities without any justification rendering the decision bad because of arbitrariness. The proceedings mentioned above particularly the notings of the Financial Commissioner as well as the competent authority would show that some of the smaller manufacturers namely M/s Himmat, Texmaco and Sri Ranga were BIFR companies. As no price preferential treatment was given to anyone of them, the approving authority considered that enhancement in allocation of quantities was necessary. Likewise M/s Cimmco and Texmaco who are wagon builders and whose business is entirely with the railways were also given some weightage. We cannot say that these are irrelevant considerations for the purpose of arriving at a decision. In the past also there were such variations based on these circumstances. In any event for different reasons we have varied this decision and directed that the three big manufacturers should be given allotment as per the recommendations of the Tender Committee. In our earlier order we have noticed that there has been some departure in respect of one or two smaller manufacturers in allotting the quantities. We have already indicated that the railway authorities should in future make a proper consideration of the relevant factors in respect of each tenderer in an objective manner in allotting the quantities.
40. Now coming to the question of dual pricing, the submission is that in respect of same set of manufacturers, some of them cannot be made to supply at a lower price and the others namely smaller manufacturers cannot be given advantage to supply at a higher price and such dual pricing is unreasonable and arbitrary. As already noted, the Tender Committee worked out an upgraded price and taking other relevant factors like cost of the material etc. into consideration and applying the formula as was being done in the past and particularly taking into consideration the two concessions in respect of custom and freight fixed Rs 76,000 as the reasonable price. This was very close to the price quoted by the three big manufacturers. But at a post-tender stage, they entered into correspondence offering a lower price and ultimately the three big manufacturers committed themselves to supply at the rate of Rs 67,000 per bogie. In our earlier order we indicated that these big manufacturers formed a different category namely that they may be in a position to supply at that rate as is evident from their own commitment but to apply the same price which is much lower than the reasonable and workable price fixed by the Tender Committee to other smaller manufacturers would again result in ending the competition between the big and the small which ultimately would result in monopoly of the market by the three big manufacturers. That is a very important consideration from the point of view of public interest. However, as already mentioned we directed the Tender Committee to consider the matter afresh and even if it results in dual pricing, it would not be bad in the circumstances mentioned above.
41. These are all the reasons in support of our conclusions given in our order dated January 14, 1993.
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