Legal Position in India on Grant of ‘Interim Order of Stay’ in Contractual Matters – By Neeraj Kumar

Contractual matters are often fought tooth and nail in courts in India by the interested aggrieved parties who have not been awarded the contract, whether it is by a private party or by a public body or the Government or State (“State”), for one and the other reason.  

Usually when the contract is awarded by a public body or the State, the mechanism for moving the court is either writ petition or public interest litigation.

In the present article, we are considering the legal position which needs to be kept in mind by the court while granting ‘interim order of stay’ in contractual matters when court is moved through writ petition or public interest litigation and in the same vein that could be a torchlight for litigant as well what needs to be kept in mind when moving court through its petition.

Though, the legal principle on the same has been elucidated way back by the Hon’ble Supreme Court of India (SC) in Raunaq International Ltd. vs I.V.R. Construction Ltd. & Ors. (1999) 1 SCC 492 (“Raunaq International”). However, the guiding principles have not been uniformly followed by courts and litigants and they are swayed away by extraneous considerations. Recently, SC reaffirmed the principles by following the same in Rajasthan State Warehousing Corporation vs Star Agriwarehousing and Collateral Management Ltd. & Ors., Civil Appeal Nos. 2651-2656 of 2020 pronounced on June 24, 2020 (“Rajasthan State Warehousing Corporation”).

In the present circumstances of COVID-19 where investment through private bodies has come down significantly, the country is looking towards expenditure by State or public body, and the award of contract by public body or State require us to be well rooted on the legal position on ‘grant of interim order of stay in contractual matters’.       

Award of contract is commercial transaction

First of all, we need to understand that the award of contract is a commercial transaction and for arriving at a decision in such transactions, whether it be by a private party or by a public body or the State, commercial considerations are of paramount importance; what would amount to commercial consideration, a glimpse of the same has also been discussed in Raunaq International (supra). However, when the State or a public body or an agency of the State enters into such a contract, there could be, in a given case, an element of public law or public interest involved even in such a commercial transaction. 

The same has been explained by SC in Raunaq International as below:

“9. The award of a contract, whether it is by a private party or by a public body or the State, is essentially a commercial transaction. In arriving at a commercial decision considerations which are of paramount importance are commercial considerations. These would be:

(1) The price at which the other side is willing to do the work; 

(2) Whether the goods or services offered are of the requisite specifications;

(3) Whether the person tendering has the ability to deliver the goods or services as per specifications. When large works contracts involving engagement of substantial manpower or  requiring specific skills are to be offered, the financial ability of the tenderer to fulfil the requirements of the job is also important;

(4) the ability of the tenderer to deliver goods or services or to do the work of the requisite standard and quality; 

(5) past experience of the tenderer, and whether he has successfully completed similar work earlier;

(6) time which will be taken to deliver the goods or services; and often 

(7) the ability of the tenderer to take follow up action, rectify defects or to give post contract services. 

Even when the State or a public body enters into a commercial transaction, considerations which would prevail in its decision to award the contract to a given party would be the same. However, because the State or a public body or an agency of the State enters into such a contract, there could be, in a given case, an element of public law or public interest involved even in such a commercial transaction.”

Elements of public interest

Elements of public interest have always been found to be one of the essential ingredients when a court is moved through public interest litigation. However, when a court is moved under writ petition it is not always necessary that in every award of contract elements of public interest are found.  

But what could be the elements of public interest have been vividly explained by SC in Raunaq International at para 10: 

“(1) Public money would be expended for the purposes of the contract;

(2) The goods or services which are being commissioned could be for a public purpose, such as, construction of roads, public buildings, power plants or other public utilities.

(3) The public would be directly interested in the timely fulfilment of the contract so that the services become available to the public expeditiously.

(4) The public would also be interested in the quality of the work undertaken or goods supplied by the tenderer.” 

Though, it is generally understood by litigants that once their bid is found to be lowest amongst all the bidders, they are going to be awarded contract by public body or State. But, it is not the case. There is need of elimination of poor quality of work or goods where public interest is involved and the said concern has been highlighted by SC in Raunaq International. However, the court usually don’t go to look into such details to intervene when it is found that empowered committee for awarding contract has taken reasonable decision while taking all such factors into account and it’s not arbitrary or mala fide.     

Apart from considering commercial considerations and elements of public interest in award of contract, court needs to satisfy itself on various other counts as well before entertaining a writ petition or public interest litigation.    

Satisfaction of court in writ petition

The SC in Raunaq International has explained that when a writ petition is filed challenging award of contract the court must satisfy itself before entertaining such petition that there is some element of public interest involved in such petition. Unless the court is satisfied that there is substantial public interest or the transaction is entered into malafide it should refrain itself from intervening in disputes under Article 226 of the Constitution of India, 1950 (“Constitution”) between two rival tenderers. 

Satisfaction of court in public interest litigation (PIL)

The SC in Raunaq International has explained that when a petition is filed as a PIL challenging the award of contract the court must satisfy itself that party is litigating bonafide for public good and PIL is not merely a cloak for attaining private ends of a third party or of the party bringing the petition. The court can examine the previous record of public service rendered by the organisation bringing public interest litigation. Even when a public interest litigation is entertained the court must be careful to weigh conflicting simple interests before intervening. Where the decision in awarding contract has been taken bonafide and a choice has been exercised on legitimate considerations and not arbitrarily then court should not entertain such petition. 

Principle underlying intervention by the court

Carefully weighing conflicting public interest is sine qua non before entertaining any writ petition or PIL and passing any interim orders of stay in such petitions. The court should intervene only when it is satisfied on aforementioned various aspects and there is overwhelming public interest in such petition. The principle can best be explained in the words of SC in Raunaq International (followed in the case of Rajasthan State Warehousing Corporation) as below:

“13. Hence before entertaining a writ petition and passing any interim orders in such petitions, the court must carefully weigh conflicting public interests. Only when it comes to a conclusion that there is an overwhelming public interest in entertaining the petition, the court should intervene.

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18. The same considerations must weigh with the court when interim orders are passed in such petitions……..”

Principle underlying accountability of parties at whose instance interim order of stay is passed by court

When the litigation started by the party fails then loss occurred due to interim order of stay at the instance of such party needs to be compensated to the public and accountability ought to be fixed by putting adequate provision in the interim order itself applying the principle of restitution otherwise such order may be counterproductive.

To safeguard the interest of public the SC in Raunaq International (followed in the case of Rajasthan State Warehousing Corporation) held as follows:

“18. ……… The party at whose instance interim orders are obtained has to be made accountable for the consequences of the interim order. The interim order could delay the project, jettison finely worked financial arrangements and escalate costs. Hence the petitioner asking for interim orders in appropriate cases should be asked to provide security for any increase in cost as a result of such delay or any damages suffered by the opposite party in consequence of an interim order. Otherwise public detriment may outweigh public benefit in granting such interim orders. Stay order or injunction order, if issued, must be moulded to provide for restitution.

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25. Therefore, when such a stay order is obtained at the instance of a private party or even at the instance of a body litigating in public interest, any interim order which stops the project from proceeding further must provide for the reimbursement of costs to the public in case ultimately the litigation started by such an individual or body fails. The public must be compensated both for the delay in implementation of the project and the cost escalation resulting from such delay. Unless an adequate provision is made for this in the interim order, the interim order may prove counterproductive.”

Principle for entertaining petition against interim orders under Article 136 of the Constitution 

A plenary jurisdiction exercisable on assuming appellate jurisdiction has been conferred upon the SC under Article136 of the Constitution. However, being an extra-ordinary jurisdiction extra-ordinary care and caution has to be observed while exercising such jurisdiction. When there is question of law of general public importance or a decision which shocks the conscience of the court are some of the prime requisites for grant of special leave under Article 136. (Manish Goel  vs Rohini Goel AIR 2010 SC 1099).  

When there is singular lack of any acceptable reason in the impugned order the Hon’ble Supreme Court is not hesitant in setting aside such order as the same may shock the conscience of the court. The SC explained its position in Nitco Tiles Ltd. v. Gujarat Ceramic Floor Tiles Mfg. Assn. (2005) 12 SCC 454 (followed in Rajasthan State Warehousing Corporation) and held as under:

“7. We are also aware of the well-established principle that this Court normally does not interfere either with a court’s decision not to relegate a writ petitioner to an alternative remedy or with the grant of interim relief. It is unnecessary to cite any authority in support of this as the proposition cannot admit of any controversy. However, having regard to the singular lack of any acceptable reason in the impugned order we have no hesitation in interfering with this particular exercise of discretion by the High Court and set aside the same.”

Conclusion

Thus, from the above discussion it is apparent that when the award of contract is a commercial transaction having elements of public interest then court ought to satisfy itself while moving either through writ petition or public interest litigation (PIL) keeping the underlying principles in mind at the time of intervention while granting ‘interim order of stay’. The court while balancing the interest ought to keep in mind the principles for making the party accountable at whose instance ‘interim order of stay’ is passed by court applying the principle of restitution. The court, particularly the Hon’ble Supreme Court, is not bound by technicalities when the impugned order is sans raison d’etre.  

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Neeraj Kumar is Advocate-on-Record, Supreme Court of India and Partner at Agarwal Jetley & Co., Advocates & Solicitors. He can be contacted at neerajkumar@agarwaljetley.com He is into dispute resolution/ litigation involving different areas of law which includes constitution, civil, commercial, arbitration, labour, service, matrimonial and criminal.

Disclaimer: The views or opinions expressed are solely of the author.