Public procurement contracts, particularly in infrastructure projects are usually awarded through a tender process. This process is typically divided into two stages: the technical stage and the financial stage. Bidders who satisfy the technical qualification criteria proceed to the financial stage, when their financial bids are opened. Bidders who do not qualify the technical criteria are disqualified and their financial bids are not opened. After evaluating the financial bids and other relevant factors in accordance with the tender, the public authority selects the successful bidder (usually L-1), and a Letter of Award (“LOA”) is issued. Following the issuance of the LOA, the successful bidder is required to furnish a Performance Bank Guarantee (“PBG”) within a specified period and sign a formal contract with the owner/employer. In some cases, especially for large infrastructure projects, the successful bidder is permitted to incorporate a Special Purpose Vehicle (“SPV”) to perform the contract. The contract is, thus, signed by the SPV.

Pertinently, while inviting tenders, a draft contract is also annexed with other documents, so that interested bidders are informed in advance about allocation of risks and responsibilities in the project. Although the terms of the draft contract are not sacrosanct, they are not usually modified at the request of the successful bidder. However, in some cases, it has been observed that the tender-issuing authority makes additions or deletions to certain provisions of the draft contract. If such changes are introduced by the Employer/Owner after the submission of the PBG and are not acceptable to the successful bidder, it may put the successful bidder in a quandary, as withdrawing from the project could lead to a default and encashment of the PBG.

At this point, an important question arises: how does the successful bidder protect itself against coercive actions by the public authority i.e., owner/employer? Although the LOA would contain key aspects of the project, such as timelines, cost, and scope of work; it may not include a dispute resolution mechanism, which is included in the draft contract. Though not formally executed, the draft contract forms part of the tender documents, which are released to the Bidder. It is relevant to note that on 03.06.2024, the Ministry of Finance, Govt of India, issued an Office Memorandum No. F.1/2/2024

PPD, whereby all government agencies were directed to restrict the usage of arbitration clause as a routine in procurement contracts/tenders and specifically in disputes with a value of less than Rs. 10 crores.

Whether the issuance of an LOA constitutes a binding contract between the parties? If it does, can the dispute resolution clause in the draft contract be incorporated by reference into the LOA, thereby allowing arbitration proceedings, as provided, to be initiated to challenge the encashment of the PBG? If not, what other remedies would be available to the successful bidder in such situation?

Concluded Contract: Where to draw the line?

The key issue is whether the issuance of a LOA creates a binding contract between the parties, or is the contract only finalized upon the signing of a formal agreement. This is crucial because, if the contract is deemed concluded after the issuance of LOA, the arbitration clause in the draft contract may be incorporated by reference and the remedies provided in the Arbitration & Conciliation Act, 1996 (“Arbitration Act"), may be availed by the aggrieved party for recovery/ stay of encashment of PBG. Section 9 of the Arbitration Act empowers the court to grant interim reliefs before the commencement of arbitration, including a stay on encashment of PBG, till a final adjudication by the Arbitral Tribunal. However, if the contract does not stand concluded by issuance of LOA, the successful bidder will be constrained to seek other legal remedies in a civil court.

While addressing this complex issue pertaining to the binding nature of LOA, Indian courts have not followed a uniform view, especially on account of varying terms and conditions of tender documents in each project. One thing is clear that the answer to this question lies in the manner in which LOA is worded.

Signing of a formal agreement is mandatory in nature

The landmark judgment that directly addresses the issue at hand was pronounced by the Hon'ble Supreme Court in PSA Mumbai Investment PTE Ltd. vs. Jawaharlal Nehru Port Trust [1]. In this case, the LOA was issued to the successful bidder, but the draft agreement was not signed by the parties. During this period, a dispute arose, and the pertinent question before the Court was whether the arbitration clause in the draft agreement could be invoked by the parties to resolve their dispute. The Hon’ble Supreme Court held that, before invoking the arbitration clause, it is imperative that there must be a concluded contract between the parties, which is premised on an absolute and unqualified acceptance of the LOA. However, in this case, certain conditions precedent were attached to the LOA, such as setting up a special purpose vehicle and submission of the PBG before signing a formal contract, which were not satisfied. In view of the above, the Court held that no concluded contract existed between the parties, and accordingly, the arbitration clause in the draft contract could not be relied upon.

In the matter of National Highways and Infrastructure Development Corporation vs. BSCPL Infrastructure Ltd [2], the Hon'ble Supreme Court again faced a similar question, whether an arbitration clause in the draft contract comes into effect after the acceptance of the LOA by the successful bidder, or whether it is necessary to execute a formal agreement. Relying on PSA Mumbai (supra), the Supreme Court observed that if a dispute arises after acceptance of the LOA, it cannot be resolved through the dispute resolution mechanism outlined in the draft agreement, as no binding contract has been formed between the parties due to non-compliance with the condition precedent attached to the LOA.

A similar view was echoed by the Hon’ble Delhi High Court in Sadhbav Engineering Ltd. vs. National Thermal Power Corporation [3], wherein it was held that a dispute resolution clause in the draft agreement is merely informational, which is intended to inform prospective bidders that if a contract is executed with the successful bidder and a dispute later arises, it will be resolved through the mechanism of arbitration. Thus, the arbitration clause cannot be invoked for the resolution of disputes when no concluded contract exists between the parties. Pertinently, in this case, the LOA had not been issued.

Execution of a formal agreement is merely a formality, and LOA creates a binding contract

Conversely, there are a line of judgments which hold that the issuance of an LOA creates a binding contract between the parties, and the subsequent requirement of signing a formal contract is merely a formality. It is relevant to highlight that the terms of the tender documents are extremely crucial, and the determination of a binding and concluded contract by LOA primarily depends on such terms.

In the case of Mihan India vs. GMR Airports Ltd. and Ors. [4], one of the questions before the Bombay High Court was whether, in the absence of executing a formal concession agreement, the issuance of the LOA could be considered a concluded contract. Answering this in the affirmative and distinguishing it from PSA Mumbai (supra), the Hon'ble Court noted that in the case of PSA Mumbai (supra), there was a specific clause stating that the “bidding process” would continue until the concession agreement was executed, and that the party failed to take an important step of setting up a special purpose vehicle after the issuance of the LOA. However, in the case under consideration, the only requirement after the issuance of the LOA was the execution of a formal contract, which is a formality, and a binding contract had already come into effect after the acceptance of the LOA by the successful bidder.

Similarly, the Hon’ble Delhi High Court, in the matter of Yorktech Private Limited vs. DDA [5], held that to determine whether a concluded contract exists between the parties, it is essential to examine the material terms and conditions of the tender documents and the LOA. If the tender documents do not include any conditions precedent, such as third-party approvals or the setting up of a separate entity, a binding agreement is formed as soon as the LOA is issued. In another matter before the Hon’ble Gauhati High Court, General Manager (Cons) N.F. Railway vs. AR-Allied Subhadra (JV) and Ors. [6], the Hon’ble Court observed that the issuance of the LOA constitutes a binding contract between the parties, and the execution of a formal agreement is a mere formality.

Importantly, in the matter of UNISSI India Pvt. Ltd. vs. PGI [7], the Hon’ble Supreme Court held that post-issuance of the LOA, if the successful bidder starts acting in furtherance of the same and complies with its obligations mentioned therein, it becomes a concluded contract. Accordingly, the arbitration clause in the draft contract will be incorporated by reference into the LOA and can be used for resolution of disputes arising between the parties.

In view of the above, it is clear that the terms of the tender determine the stage at which the contract is concluded and whether the dispute resolution mechanism outlined in the draft agreement becomes operative. If the acceptance of the LOA is absolute and no condition precedent is attached thereto, the signing of a formal contract would be considered a mere formality.

Invocation of Writ Remedy: A viable recourse against manifest arbitrariness:

As discussed earlier, in the public procurement process, tenders are issued by public authorities, which fall within the definition of ‘State’ under Article 12 of the Constitution, and, therefore, a writ petition may be filed for any action that is alleged as arbitrary, disproportionate, or contrary to the principles of natural justice.

While deprecating the practice of making unilateral changes by the tender issuing authority, the Hon’ble Supreme Court, in the matter of Union of India vs. Vertex Broadcasting [8], held that after the issuance of a Letter of Intent (LOI), tender-issuing authorities are not permitted to make holistic and substantial changes to the formal contract to be executed between the parties. If the successful bidder is aggrieved by such changes and decides not to proceed further, the bid security cannot be encashed by the authority. Further, the Supreme Court observed that writ jurisdiction can be invoked against such an arbitrary action.

This view was reaffirmed by the Hon’ble Supreme Court in Mihan India vs. GMR Airports Ltd. and Ors [9], wherein it was unequivocally held that the annulment of the entire bidding process by the tender-issuing authority, after the issuance of the LOA, on arbitrary and unjustifiable grounds, cannot be sustained, and a writ petition will be maintainable in such cases. Public authorities are obligated to uphold fairness, equality, and the rule of law. They must ensure impartiality, avoid favoritism, and maintain the highest level of transparency throughout the entire bidding process to comply with constitutional mandates.

Recently, the Gauhati High Court, in the matter of Premier Energies Ltd. vs. Assam Power Distribution Company [10], dealt with a similar facts, where the terms of the tender were altered at the time of issuing the LOA, and new terms were unilaterally added, to which the successful bidder had not agreed upon. When the bidder raised objections, the LOA was terminated, and the bid security was forfeited. Aggrieved by this action, the successful bidder invoked writ jurisdiction under Article 226 of the Constitution of India. The Hon’ble High Court ruled that the writ petition was maintainable, as the government authority was not permitted to unilaterally alter or modify the tender terms to the bidder's disadvantage. Additionally, the Court noted that even if an alternative remedy is available to the bidder, it would not preclude the exercise of writ jurisdiction in exceptional circumstances.

It can, therefore, be said that invoking writ jurisdiction may be a suitable remedy when there is a manifest or egregious violation of the principles of fair play, natural justice, and utmost transparency by public authorities, particularly when there is no rationale for introducing changes or annulling the bid process. However, it is pertinent to note that when there is a disputed question of fact, the Constitutional Courts are generally disinclined to entertain a writ petition. For instance, if there are counter-allegations of non-compliance with contractual requirements by the successful bidder and a detailed enquiry is required to ascertain the same, it is most likely that the Court may not entertain a writ petition.

Remedy of civil suit seeking damages

If LOA does not bind the parties and dispute resolution mechanism embodied in the draft agreement is not available, as also a writ petition, then what is the remedy? Once the LOA is issued, any unilateral changes made thereafter, may allow the successful bidder to file a civil suit. The aggrieved successful bidder may seek damages for modifications to the draft contract and the encashment of the PBG, if any. For claiming damages under Section 73 of the Indian Contract Act, 1872, the successful bidder would be required to prove actual loss or injury due to such encashment and other consequential losses with cogent evidence. As the final adjudication of the suit involves a considerable period of time, the successful bidder may file an application for an interim injunction preventing the encashment of PBG or an order restraining the opposite party from disposing off its assets, except its normal course of its business under Order XXXIX Rule 1 of the Code of Civil Procedure, 1908.

Conclusion

Indian judiciary has repeatedly criticized the practice of making unilateral changes to the terms of tender documents by the employer/owner particularly at the final stage, due to the bidder's limited bargaining power. In such a vulnerable situation, where the authority is threatening to forfeit the PBG, the remedy against such threat depends on the terms and conditions of the tender documents and LOA. If there is no condition precedent attached to the LOA, or if the parties have commenced performance of contractual obligations in accordance with the same, this may be considered a binding contract, and the dispute resolution clause in the draft contract, which is incorporated by reference, can be invoked by the aggrieved party.

Further, if the tender-issuing authority has acted in complete disregard of its contractual mandate, and the impugned action is vitiated by arbitrariness, excessiveness, and violation of natural justice, a writ petition under Article 226 of the Constitution may also be entertained by the High court, provided that no disputed questions of fact are involved. However, if serious disputed questions are involved requiring detailed inquiry, the appropriate remedy for the successful bidder would be invoke dispute resolution provisions of the draft contract agreement provided the same have become operative and binding. If not, then the civil suit is the remedy.

References

  1. PSA Mumbai Investment PTE Ltd. vs. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525.
  2. National Highways and Infrastructure Development Corporation vs. BSCPL Infrastructure Ltd, (2019) 15 SCC 25.
  3. Sadhbav Engineering Ltd. vs. National Thermal Power Corporation, 2022 SCC OnLine Delhi 600.
  4. Mihan India vs. GMR Airports Ltd. and Ors., 2021 SCC OnLine Bom 2132.
  5. Yorktech Private Limited vs. DDA, 2022 SCC OnLine Del 3564.
  6. General Manager (Cons) N.F. Railway vs. AR-Allied Subhadra (JV) and Ors., 2023 SCC OnLine Gau 2491.
  7. UNISSI India Pvt. Ltd. vs. PGI, (2009) 1 SCC 107.
  8. Union of India vs. Vertex Broadcasting, (2015) 16 SCC 198.
  9. Mihan India vs. GMR Airports Ltd. and Ors, 2022 SCC OnLine SC 574.
  10. Premier Energies Ltd. vs. Assam Power Distribution Company, 2022 SCC OnLine Gau 989.