Break Trust and Be Damned (Even in Government Contracts)

'No trust no more deal' is the commonsense rule of any business. Can the government follow the same line in commercial activities? It should, would be the definite commonsensical answer. The concomitant issue is, can the government act the same way a private person behaves in all aspects of commercial activities. Here the answer starts to branch. Its much more simple and easy for a private person to eliminate a non-trustworthy contract partner for future. One just does not deal with her/firm any more. It is a matter of choice, freedom to contract.

Government contract on the other hand is governed by multiple legal aspects; constitutional and statutory. Art. 298 vests the executive with power to enter into contract with the Union and the State Governments. There are various statutes that regulate the commercial activities of the state. Though contract formation essentially is a private law function the public character of one of the party to the contract, i.e., the government, adds certain extra responsibilities in the contract formation. The government in the deal making is expected to act reasonable, non-arbitrary, and fair so as not to attract the tentacles of Article 14. If that were the case when they break the deal what shall guide them is the question dealt in Patel Engineering v. Union of India, Decided on 11th of May, 2012.

For declining to honour a bid, which was initially been accepted, the Government blacklisted the petitioner for a year. Against which a writ was moved and the rejection of which resulted in the present SLP. The two major arguments of the petitioner were that the government lacked the power to blacklist as it is not incorporated in any of the conditions of tender and the punishment is disproportionate.

The court found the power to blacklist is located in the executive power of the state to carry on trade and business. To decline to do business due to legitimate reasons need not flow from any statute as long as state act rationally, non-arbitrarily and for legitimate purposes. The legitimate purpose is to be determined depending on the facts and circumstances.

The crucial question is of blacklisting. The bid document does not confer any power nor does the corresponding statute, the National Highway Authorities Act. The court still finds the power to blacklist with the state in the following way. " … in our opinion, the failure to mention blacklisting to be one of the probable actions that could be taken against the delinquent bidder does not, by itself, disable the 2nd respondent from blacklisting a delinquent bidder, if it is otherwise justified. Such power is inherent in every person legally capable of entering into contracts."

While concluding the judgment Justice Chelameswar even said that the punishment though was argued to be disproportionate cannot be held so. Rather it is setting an example for future delinquents who may behave the same way with the government. Making an example of the one in hand for the future rest has been the order of the old day that still continues.

Blacklisting by a private person has limited to nil consequence compared to blacklisting by governments. This raises certain issues. In commercial matters should the government be treated at par with private players? Should bigger consequence of being blacklisted by government prescribe a different course of action in a commercial activity? Answer to the first seems to be a conditional yes, as long as they act within the precincts of constitutional restrictions. For the second, though consequence in itself cannot prescribe course of action in commercial activities, the shadow of first answer will take care of the concern in the second.