RAMANA DAYARAM SHETTY

THE INTERNATIONAL AIRPORT AUTHORITY OF INDIA AND

ORS.

May 4, 1979.

[P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.]

International Airport Authority Act 1971-Whether an instrumentality of State-Authority called for tenders for a iob-lj could accept a tender not confonninR to conditions in notice.

C Administrative law-Statutorybody-When an instnunentality of State.

The first respondent, by a public notice, invited tenders for putting up and running a second class restaurant and two snack bars at the International Airport, Bombay. The notice stated in Paragraph (1) that. sealed tenders in the prescribed form were invited from registered second class hoteliers having at least five years' experience for putting up and running a second cla-, s restaurant and two snack bars at the Bombay Airport for a period of three years.

Paragraph (8) stated that acceptance of the tender would rest v .. ith the Airport Director who does not bind himself to accept ilny tender and reserYe~ to himself the right to reject all or any of the tenders received without as-.igning any reasons therefor.

Out of the six tenders received only the tender of the 4th respoo.dents was complete and offered the highest amount as licence fee.

All the otheI" tenders were rejected because they were incomplete.

Since the fourth respondents did not satisfy the description of "registered second class hoteliers having at least 5 years' experience" prescribed in paragraph (1) of the tender notice, the 1st respondent called upon the fourth respondents to produce documentary ewidence \Vhether they were registered second class hotliers having at least 5 years' experience.

The fourth respondents stated once again that they had considerable experience of catering for various reputed commercial houses, clubs, messes and banks and that they had Eating Houses C.atering Establishment (Canteen) Licence.

Satisfied with the information given by the fourth respondents, the first respondent accepted their tender on the terms and conditions set out in its letter.

The aiipellant filed a writ petition before the High Court challenging the decision of the first respondent in accepting the tender of the fourth respondents.

But it was rejected.

In appeal to this Court it was contended on behalf of the appellants that ( l) the first respondent which is a public authority 'vas bound to give effect to the most important condition of eligibility and acceptance of the tender by the first respondent was in violation of the standard or norm of eligibility set up by the first respondent and (2) had the appellant known that non-fulfilment of tbe condition of eligibility would be no bar for considering a tender he too would he.ve competed for obtaining the contract.

R. D. SHETTY V. AIRPORT AUTHORITY 1015

The fourth respondents, on the other hand, contended that the requirement that the tenderer must be a registered second grade hotlier was meaningless because the grading is given by the Bombay City Municipal Corporation only

to hotels or resta1irants and not to persons running them and, therefore there could be no second grade hotlier; (2) the notice Setting out the conditions of eligibility having had no stautory force, even if there was a departure from the standard or norm of eligibility, it was not justiceablc and the first respondent was competent to give the conract to anyone it thought fit; and (3) the Airport Authority reserved to itself the right to reject all or any of the tenders without assigning any reasons and, therefore, it \\1as competent to it to reject all the tenders or negotiate with any person it considered fit to enter into a contract.

HELD The action of the first respondent in accepting the tender of the fourth respondents, who did not satisfy the standard or norm, was clearly discriminatory since it excluded other persons similarly situate from tendering for the contract and it was arbitrary and without reason.

Acceptance of the tender was invali4 as being violative of the equality c'Iause of the Constitution as also of administrative la\V inhibiting arbitrary action. [1056 C]

(a) What paragraph (1) of the notice required was that only a person rum1ing a registered second class hotel or restaurant and having at least 5 years' experience as such should be eligible to submit the tender.

The test of eligibility laid down in this paragraph was an objective test and not a subjective one..

If a person submitting the tender did not have atleast five years' expe~ rience of running a second class hotel, he was eligible to submit the tender and it would not avail him to say that though he did not satisfy this condition he was otherwise capable of running a second class restaurant and therefore should be considered.

This \Vas in fact how the first respondent unders_tood this condition of eligibility.

The first respondent did not regard this requirement as meaningless or unnecessary and wanted to be satisfied that the fourth respondents had fulfilled this requirement. The fourth respondents were neither running a second grade hotel or. restaurant nor did they have five years' experience of running such a hotel or restaurant.

Therefore the fourth res- pondents did not satisfy the condition of eligibility ltaid down in paragraph( 1) of the noice. [1028 BH]

(b) It is not possible to justify the action of the first respondent on the ground that it could have achieved the same result by rejecting all the tenders and entering into direct negotiations with the fourth respondents.

Although there wa'i no statutory or administrative rule requiring the first respondent to give a contract only by inviting tenders and that on the terms of paragraph 8 of the tender notice, it was not bound to accept any tender, the first respondent did not reject the tenders outright and enter into direct negotiation wit~ the fourth respondents for awarding the contract. The process of awarding a contract by inviting tenders was not terminated or abandoned by the first respondent by rejecting all the tenders but in furtherance of the process the tender of the fourth respondents was accepted by the first respondent. Nor "'as the contract given to the fourth respondents a.s a result of direct negotiations.

[1029 D-G]

2(a) Today v; rith tremendous expansion of welfare and social service functions, increing control of materi2'1 and economic resources and large scale assumption of industrial and comm'ercial activities by the State, the power of

the executive Government to affect the lives of the people is steadily growing.

The attainment of socio-economic justice bein~ a conscious end of State policy, there is a vast and inevitable increase in the frequency with which ordinary citizens come into relatioJ!ship of direct encunter , with State powerholders.

This renders it necessary to structure and restrict the power of the executive Government so as to prevent its arbitrary application or exercise.

Whatever be the concept of the rule of la\\.', there is substantial agreement in juristic thought that the great purpose of the rule of law notion is the protection of the individual against arbitrary exercise of power, wherever it is found. It is unthinkable that in o. democracy governed by the rule of law the executive Government or any of its officers should possess arbitrary power over the interests of the individual. Every action of the executive Governn1ent must be informed with reason and should be free from arbitrariness. That is the very essence of the rule of law and its bare minimal requirement.

And to the application of this principle it makes no differene whether the exercise of the power involves affectation of some right or denial of some privilege.

[1031 F-H]

(b) Today the Government, in a \velfare State:, is the regulator and dispenser of special services and provider of a large number of benefits.

The valuables dispensed by Governn1ent take n1any forms, but they all share one cl1aractcrfa, tic.

They are steadily taking the place of traditional forms of wealth.

These valuables which derive from relationshipsto Government are of many D kinds: leases, licences, contracts and so forth.

With the iOCreasing magnitude and range of governmental functions as we move closer to a welfare State, more and more of our wealth consists of these new forms.

Some of these forn1s of wealth may be in the nature of legal rights but the large majority of them are in the nature of privileges.

But on that account, it cannot be so.id that they do not enjoy any legal protection nor can they be regarded as gratuity furnished by the State so thnt the State may withhold, grant or revoke E it at its pleasure. [1032 E-H]

(c) The law has not been slow to recognize the importance of this ne\v kind of wealth and the need to protect individual interest in it and with that end in view, it has developed new forms of protection. Some interests in Government largess, formerly regarded as privileges, have been recognized as rights \Vhile others have been given legal protilction not only by forging proceJurr.-l safeguards but also by confining/structuring and checking Government discretion in the matter of grant of such largess. The discretion of the Government has been held to be not unlimited in that the Government cannot give or \vith~

hold largess in its arbitrary discretion or at its sweet will. [1033 C-D]

Viterolli v.

Satan 359 U.S. 535: 3 Law Ed. (Second Series) 1012, Erusian Equipn1ent and Chen1icals Lrcl. v. State of West Bengal, [1975] 2 SCR, 674 referred to.

(d) Therefore, where the Government is dealing \\lith the public, whether by way of giving jobs or entering into contracts or issuing quotas or licence<> or granting other forms of largess, the Government cannot act arbitrarily at its sweet will and, like a private individual, deal \Vith any person it pleases, but its action must be in conformity with standard or norm which is not arbitrary, irrational or irrelevant.

The power or discretion of the GoverJ?, ment in the matter of grant of largess including award of jobs, contracts 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

• •

R. D. SHETTY V, AIRPORT AUTHORITY

1 0 I 7

down, unless it can be shown by the Government that the departure was not

arbitrary, but was based on some valid principle \Vhich in itself was non-irraticnal, unreasonable or discriminatory. [1034 F-H]

(e) The Government which represents the executive authority of the State may act through the instrumentality or agency of natural persons or it may empk>y the instrumentality or agency of juridicinl persons to carry out its functions. With the advent of the welfure state the civil service, which traditionalJy carried out functions of Government through natural persons, was found inadequate to handle the new tasks of specialised and highly technical character.

To fill the gap it became necessary to forge a new instrumentality or administrative device for handling these new problems and that is done by public corporations \vhich has become the third arm of the Government. They are regarded as agencies of the Government. In pursuance of the industrial policy resolution of the Government of India corporations were created by the Government for setting up and management of public enterprises and carrying out public functions. The corporations so created, acting as instrumentality or ogency of Government, would obviously be subject to the same limitations in the field of constitutional and administrative law as Government itself though in the eye of law they would be distinct and independent legal entities.

Jf Government, acting through its officers is subject to certain constitutional and public la\v limitations, it must follow a fortiori that Government, -through the instrumentality or agency of corporations, should equally be subject to the same limitations. But the question is how to determine whether a corporation is acting as instrumentality or agency of Government. [1035 A-C, F-HJ

3(a) The factors for dtermining whether a corporation bas becon1e an instrumentality or agency of the Government are; does the State give any finan~ cial assistance and if so what is the magnitude of such assistance ? Is there any control of the management and policies of the corporation by the State, and '~'hat i:oi the nature and extent of such control? Does the corporation enjoy any State conferred or State protected monopoly status and whether the functions carried out by the corporation are nublic functions closely related to governmental functions?

It is not io; e to particularise all the i-elevant factors but no sing]e factor will yield a sansfoctory answer, to the question and the court \viU have to consider the cumulative effect of these various factors and stablish it by its decision on the basis of a particularised enquiry into facts and circumstances of each case. [1041 B-EJ

(b) Sukhdev v. Bhagatram [1975] 3 S.C.R. 619 at 658 explained, Kerr

v. Eneck Pratt Free Library, 149 F. 2d 212, Jack:Jon v. Metropolitan Edison Go. 419 U.S. 345; 42 L.ed. 2d 477, Evans v. Newton 382 U.S. 296; 15 L.•d.

2d 373, Pfizer v. Ministry of Health [1964] 1 Ch. 614, New York v. United

!!tales 326 U.S. 572, Cf. Helvering v. Gerhardt 304 U.S. 405, 426, 427 referred to .

(c) Where a corporation i:i; an irutrumentality or agency of Government it would be subject to some constitutional or public law Jimitations as Government.

The rule inhibiting arbitrary action by Government must apply equaJly where such corporation is dealing with the public and it cannot act arbitrarily and enter into relationship with any person it lit~ at it! sweet will.

Its action must be in conformity with so111e principlt! which meets the test of reason and relevance. (1041 HJ

9'-409 SCI /79


A Rajastha11 Electricity Board

v. Mohan Lal


Sukhdev v. Bhagatram [1975) 3 S.C.R. 619 at 658 followed.


v. General lllanager, Hindustan Steel Li1nited [1970] 3 SCR 363, Sarbhajit Tewmi v. Union of India & Ors. [1975) 1 SCC 485; held inapplicable.

(<l) lt is wen established that Art. 14 requires that State action must not be arbitrary and must be based on some rational and relevant principle which is n6n-discriminatory. It must not be guided by extraneous or irrelevant coniiderations. The State cannot act arbitrarily in entering into relationship, contractual or otherwise, with a third party. Its action must conform to some sta.Rdard or norm which is rational and non-discriminatory. [1042 C]

E. P. Rayappa v. State of Tamil Nadu [1974) 2 SCR 348, Maneka Gandhi

v. Union of India [1978) 2 S.C.R. 621, Rashbihari Panda v. State of Orissa [1969) 3 S.C.R. 374, C. K. Achuthan v. State of Kera/a [1959) S.C.R. 78, referred to.


v. C. A. lmanuel [1969) 3 S.C.R. 773, Heavy Engineering Mazdaar Union v.

State of Bihar [1969] 3 SCR, 995, S. L. Aggarwal v. General Manager, Hindustan Steel Limited [1970] 3 SCR. 363, Sarbhajit Tewari v. Union bf India & ors. [1975) 1 sec 485, held in applicable.

4(a) The lnterne.tional Airport Authority-Act, 1971 empowers the Central Government to constitute an authority called the International Airport Authority. The salient features of the Act are: the Authority, which is a body corporate having perpetual succession and a common seal, consists of a Chairmen and certain other Members who are appointed by the Central Government. The Central Government has power to terminate the appointment or to remove a member from the Board of the Authority. Although the Authority bas no share capital of its own, capital needed by it for carrying out its functions is provided wholly by the Central Government. All non-recurring expenditure incurred by the Central Government for or in connection with the purposes of the airports upto the appointed date and dec1a~-red to be capital expenditure by the Central Government shall be treated as capital provided by the Central Government _to the first respondent and all sums of money due to the Central Government in relation to the airports immediately before the appointed date shall be deemed to be due to the first respondent. The functions, which until the appointed date were being carried out by the Central Government, were transferred to the Airport Authority by virtue of s. 16. The first respondent, according to s. 20, should pay the balance of its annual net profits to the Central Government after making provision for reserve funds, bad and doubt ful debts, depreciation in assets and so on. The first respondent, under s. 21, has to submit for the approval of the Central Government a statement of the programme of its activities during the forthcoming financial year. Its accounts are audited by the Comptroller and Auditor General and the audited accounts shall be forwarded to the Central Government. The first respondent is required to submit an account of its activities during a financial year and this report is laid before the Houses of Parliament by the Central Government. The Central Government bas power to divest the first respondent temporarily from

--f-< .•

• .. •

R. D. SHETTY V. AIRPORT AUTHORITY 1019

the management of any airport and direct it to entrust such manngement to any other person. llo'\\'er is conferred under s. 34 on the Central Government to supersede the first respondent under certairi specified circumstances. Section

35 gives pO\VC'f to the Central Government to give directions in writing te> the Airport Authority on questions of policy and the Airport Authority is bound by such directions. Section 37 empowers the Airport Authority to make regulations.

Section 39 provides that contravention of any regulation made by the Airport Authority is punishable.

[1052B-1054C]

(b) A conspectus of the provisions of the Act clearly sho\Vs that every test Jaid down by this Court in deciding whether a statutority authority comes within the purview of Art. 12 of the Constitution is satisfied in the case of the first respondent. They leave no room for doubt that it is an instrumentality or agency of the Central Government and falls within the definition of State.

Therefore, having regard both to the constitutional mandate of Art. 14 and the judicially evolved rule of administrative la\v, the first resp'!n<lent \Vas not -entitled to act arbitrarily in accepting the tender of the fourth respondents but

was bound to conform to the standard or norm le.id down in paragraph 1 of the notice inviting tenders. The standard or norm Jaid down by the notice waa reasonable and non-discriminatory and once it is found that such a standard or norm is laid down, the first respondent was not entitled to depart from it and award the contract to the fourth respondents who did not satisfy the con dition of eligibility rrescribed by standard or norm. If none of the tenderers satisfied the condition the first respondent could have rejected the tender and invited fresh tenders on the basis of less stringent standard or norm, but it could not depart from the prescribed standard or norm. [1055 E-A]

(c) In the instant case the appellant had no real interest in the result of the litigation. There can be no doubt that the litigation was commenced by the appellant not with a view to protecting his own interest, but had been put up by others for depriving the fourth respondents of the benefit of the contract secured by them. The Writ Petition was filed more than five months after the

acceptance of the tender and the position would have been different had tho appellant filed it immediately after the acceptance of the tender. The fourth respondents have incurred a large expenditure in making necessary arrangements under the bona fide belief that their tender had been legally and validly accepted.. It would be most inequitous to set aside the contract at the instance of the appellant

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 895 of 1978.

Appeal by Special Leave from the Judgment and Order dated 23-1-1978 of the High Court at Bombay in Appeal No. 234/77 arising out of Misc. Petition No. 1582/77.

Ashnk H. Desai, Y. S. Chitale, Jai Chinai, P. G. Gokhale and

8. R. Agarwal for the Appellant.

G. B. Pai, 0. C. Mathur and D. N. Mishra for Respondent No. 1.

c l

F. S. Nariman, R. H. Dhebar, S. K. bholakia, h H. Yagnik and B. V. Desai for Respondent No. 4.

The Judgment of the Court was delivered by

BHMWATI, J.-This appeal by special leave raises interesting questions of Jaw in the area of public Jaw. What are the constitutional obligations on the State when it takes action in exercise of its statutory or executi>e power? Is the State entitled to deal with its property in any manner it likes or award a contract to any person it chooses without any constitutional limitations upon it'! What are the parameters of its statutory or executive power in the matter of awarding a contract or dealing with its propery '' These questions fell in the sphere of both administrative law and constitutional law and they assume special significance in a mod.em welfare State which is committed to egalitarian values and dedicated to the rule of law.

But these questions cannot be decided in the abstract.

They can be determined only against the back-ground of facts and hence '<;'c shall proceed to State the facts giving rise to the appeal.

On or about 3rd January, 1977 a notice inviting tenders for putting up and running a second class restaurant and two Snack bars at the International Airpofi at Bombay was issued by the 1st respondent E which is a corporate body constituted under the International Airport Authority Act, 43 of 1971.

The notice stated in the clearest terms in paragraph (1) that "Sealed tmders in the prescribed form are hereby invited from Registered IInd Class Hoteliers having at least 5 years' experience for putting up and running a IInd Class Restaurant and two Snack bars at this Airport fol' a period of 3 years".

The F 1 iatest point of time upto which the tenders could be submitted to the 1st respondent was stipulated in Paragraph 7 of the notice to be 12 p.m. on 25th January, 1977 and it was provided that th~ tenders would be opened on the same date at 12.30 hours.

Paragraph (8) of the notice made it clear that "the acceptance of the tender will rest with G the Airport Director who does not bind himself to accept any tender and reserves to himself the right to reject all or any of the tenders received without assigning any reasons therefor." There were sLx tenders received by the 1st respondent in response to the notice and one of them was from the 4th respondents of offering a licence fee of Rs. 6666.66 per month, and the others were from Cafe Mahim, Cen- H tral Catering Service, one A. S. Irani, Cafe Seaside and Cafo Excelsior

offering progressiveiy oecreasing licence fee very much lower than that offered by the 4th respondents.

The tenders were opened in the

• •

R. D. STIETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1021

office of the Airport Director at 12.30 p.m. on 25th January, 1977 and at that time the 4th respondents were represented by their sole proprietor Kumaria. A. S. Irani was present on behalf of himself, Cafe Mahim, Cafe Seaside and Cafe Excelsior and there was one representative of Central Catering Service.

The tenders of Cafe Mahim, Central Catering Service, Cafe Seaside and Cafe Excelsior were not complete since they were not accompanied by the respective income tax certificates, affidavits of immovable property and solvency certificates, as required by cl. (9) of the terms and conditions of the tender form.

The tender of A. S. Irani was also not complete as it was not accompanied by an affidavit of immovable property held by him and solvency certificates. The only tender which was complete and fully complied with the terms and conditions of the tender form was that of the 4th respondents and the offer contained in that tender was also the highest amongst all the tenders.

Now it is necessary to point out at this stage that while submitting their tender the 4th respondents had pointed out in their letter dated 24th January, 1977 addressed to the Airport Director that they had 10 years' experience in catering to reputed commercial houses, training centres, banks and factories and that they were also doing considerable outdoor catering work for various institutions.

This letter showed that the 4th respondents had experi2nce only of running canteens and not restaurants and it appeared that they did not satisfy the description of "registered IInd Class Hotelier having at least 5 years' experience" as set out in paragraph

(1) of the notice inviting tendern.

The Airport Officer, therefore, by his Jetter dated 15th February, 1977 requested the 4th respondents to inform by return of post whether they were a "registered IInd Class Hotelier having at least 5 years experience" and to produce documentary evidence in this respect within 7 days.

The 4th respondents pointed out to the Airport Officer by their letter dated 22nd Febrnary, 1977 that they had, in addition to what was set out in their earlier letter dated 24th January, 1977, experience of running canteens for Phillips India Ltd. and Indian Oil Corporation and moreover, they held Eating House Licence granted by the Bombay Munici

pal Corporation since 1973 and had thus experience of 10 years in the catering line.

It appears that before this letter of the 4th respondents could reach Airport Officer, another letter dated 22nd February, 1977 was addressed by the Airport Officer once again requesting the 4th respondents to produce documentary evidence to show if they were '"a registered IInd Class Hotelier having at least 5 years experience". The 4th respondents thereupon addressed another letl'er dated

26th February, 1977 to the Director pointing out that they had considerable experience of catering for various reputed commercial houses,

clubs, messes and banks and they also held an Eating House Catering Establishment (Canteen) Licence as also a licence issued under the Prevention of Food Adulteration Act.

The 4th respondents stated that their sole proprietor Kumaria had started his career in catering line in the year 1962 at Hold Janpath, Delhi and gradually risen to his present position and that he had accordingly "experience equivalent to that of a !Ind Class or even 1st Class hotelier." This position was

reiterated by the 4th respondents in a further letter dated 3rd March, 1977 addressed to the Director.

This information given by the 4th respondents appeared to satisfy the 1st respo1ident and by a letter dated 19ti1 April, 1977 the !st respondent accepted the tender of the 4th respondents on the tei; ms and conditions set out in that letter.

The 4th respondents accepted these terms and conditions by their letter dated 23rd April, 1977 and deposited with the 1st respondent by way of security a sum of Rs. 39,999.96 in he form of fixed Deposit Receipts in favour of the Ist respondent and paid to the 1st respondent a sum of Rs. 6666.66 representing licence fee for one month and other amounts representing water, electricity and conser vancy charges.

The 4th respondents thereafter executed and handed over to the Ist respondent an agreement in the form attached to the tender on 1st May, 1977.

The 4th respondents also got pre pared furniture, counters and showcases as also uniforms for the staff, purchased inter alia deep freezers, water coolers, electrical appliances, icecrea1n cabinets, espresso coffee machines, crockery, cutlery and other article~ ; and things and also engaged the necessary staff for the purpose of running the restaurant and the two Snack bars.

But the Ist respondent could not hand over possession of the req•1i

site sites to _!he 4th respondents, since A. S. Irani was rnnning his restaurant and snack bars on these sites under a previous contract with the 1st respondent and though that contract had come to an end, A. S. Irani did not deliver possession of these sites to the Ist respondent.

The 4th respondents repeatedly requested the 1st respondent and the Airport Director who is the 2nd respondent in the appeal, to hand over possession of the sites and pointed out to them that the 4th reeeondents were incurring losses by reason of delay in delivery of possession, but on account of the intransigence of A. S.

Irani the Ist respondent could not arrange to hand over possession of the sites to the 4th respondents.

Meanwhile one K. S. Irani who owned Cafe Excelsior filed Suit No. 6544 of 1977 in the City Civil Court, Bombay against the res- H pondenls challenging the decision of the 1st respondent to accept the tender of the 4th respondents and took out a notice of motion for res'.rair.; ng the !st respondent from taking any further steps pursuant \o

• •

the acceptance of the tender. K. S. Irani obtained an ad-interim injunction against the rS'spondents but after hearing the respondents, the City Civil Court vacated the ad-interim injunction and dismissed the notice of motion by a_n order dated 10th October, 1977.

An appeal was preferred by K. S. Irani against this order, but the appeal was dismissed by the High Court on 19th October, 1977. Immediately thereafter, on the same day, the Ist respondent handed over possession of iwo site~ to the 4th respondents and the 4th respondents proceeded to set up snack bars on the two sites and started business of catering at the two snack bars. These two sites handed over to the 4t11 respondents were different from the sites occupied by A. S.

Jrani, because A. S. Irani refused to vacate the sites in his occupation.

So far as the site for the restaural)t was concerned, the Ist respondent could not hand over the possession of it to the 4th respondents presumably because there was no other appropriate site available other than the one occupied by A. S. Irani. Since A. s.

Irani refused to hand over possession of the sites occupied by him to the 1st respondent, even though his contract had come to an end, and continued to carry on the business of running the restaurant :md the snack bars on these sites, the Ist respondent was constrained to file suit No. 8032 of 1977 against A. S. Irani in the City Civil Court at Bombay and in that suit, an injunction was obtairied by the 1st respondent restraining A. S. Irani from running or conducting the restaurant and the snack bars or from entering the premises save and except for winding up the restaurant and the snack bars. A. S. Irani preferred an appeal against the order granting the injunction, but the appeal was rejected and ultimately a petition for special leave to appeal to this Court was also, turned down on 31st July, 1978.

This was, however, not to be the end of the travails of the 4th respondents, for, as soon as the appeal preferred by K. S. Irani against the order dismissing his notice of motion was rejected by the High Court on 19th October, 1977, A. S. Irani filed another suit being sait

No. 8161 of 1977 in the City Civil Court, Bombay on 24th October, 1977 seeking mandatory injunction for removal of the two snack bars put up by the 4th respondents.

This was one more attempt by A. S.

Irani to prevent the 4th respondents from obtaining the benefit of the contract awarded to them by the Ist respondent.

He, however, did not succeed in obtaining ad-interim injunction and we are told that the notice of motion taken out by him is still pending in the City Civil Court.

It will thus be seen that A. S. Irani failed in his attempts to prevent the 4th respondents from obtaining the contract and enjoying its

benefit. The 4th respondents put up two snack bars on the sites

provided by the !st respondent and started running the two snack bars from 19th October, 1977. 'The restaurant howel<er, could not be put up on account of the inability of the Ist respondent to pro-ride appropriate site to the 4th respondents and, therefore, the licence fee for the two snack bars had to be settled and it was fixed at Rs. 4,500/-

per month by mntual agreement between the parties. But it seems that the 4th respondents were not destined to be left in peace to run the two snack bars and soon after the dismissal of the appeal of A. S.

Irani on 19th October, 1977 and the failure of A. S. Irani to obtain an ad-interim mandatory injunction in the suit filed by him against the !st and the 4th respondents, the appeflant filr l writ petition No. 1582 of 1977 in the High Court of Bobay challenging the decision of the Ist respondent to <tCcept the tender of the 4th respondents. The writ petition was moved before a Single Judge of the High Court on 8th November, 1977 a_fter giving prior notice to the respondents and after hearing the parties, the learned Single Judge sununarily rejected the writ petition.

The appellant preferred an appeal to the Division Bench of the High Court against the order rejecting the writ petition and on notice being issued by the Division Bench, the Ist and the 4th respondents filed their respective affidavits in reply showing cause against the admission of the appeal.

The Division Bench after considering the affidavits and hearing the parties rejected the appeal in limine on 21st February, 1978. The appellant thereupon filed a petition for special leave to appeal to this Court and since it was felt that the questions raised in the appeal were of seminal importance, this Court granted special leave and decided to hear the appeal at an early date after giving a further opportunity to the parties to file their respective affidavits. That is how the appeal has now come before us for fmal hearing with full and adequate material placed before us on behalf of both the parties.

The main contention urged on behalf of the appellant was that in par..graph (1) of the notice inviting tenders the !st respondoot had stipulated a condition of eligibility by providing that a pecson submitting a tender must be a "registered Und class Hotelier having at least 5 years experience." This was a condition of eligibility to be satisfied by every person submitting a tender and if in case of iiny person, this condition was not satisfied. his tender was ineligible for being considered.

The 1st respondent, being a State within the meaning of Art. 12 of the Constitution or in any event a public authority, was bound to give effect to the condition of eligibility set up by it and was not entitled to depart from it at its own sweet will

without rational justification.

The 4th respondents had experience of catering only in canteens and did not have 5 years' experience of running a Ilnd class hotel or restaurant and hence they did not satisfy the condition of eligibility and yet the 1st respondent accepted the tender submitted by them. This was clearly in violation .of lhe standard or norm of eligibility set up by the 1st respondent and the action of the 1st respondent in accepting the tender of the 4th respondents was clearly invalid. Such a departure from the standard or norm of eligibility had the effect of denying equal opportunity to the appellant and others of submitting their tenders and being considered for entering into contract for putting up and running the restaurant and two suack bars.

The appellant too was not a registered 2nd class hotelier with 5 years' experience and was in the same position as the 4th respondents vis-a-vis this condition of eligibility and he also could have submitted his tender and entered the field of consideration for award of the contract, but he did not do so because of this condition of eligibility which he admittedly did not satisfy.

The action of the 1st respondent in accepting the tender of the 4th respondents had, therefore, the effect of denying him equality of opportunity in the matter of consideration for award of the contract and hence it was unconstitutional as being in violation of the equality clause. This contention of the appellant was sought to be met by a threefold argument on behalf of the 1st and the 4th Respondents.

The first head of the argument was that grading is given by the Bombay City Municipal Corporation only to hotels or restaurants and not persons running them and hence there can be a 2nd grade hotel or restaurant but not a 2nd grade hotelier and the requirement in paragraph (l) of the notice that a tenderer must be a registered 2nd grade hotelier was therefore a meaningless requirement and it conld not be regarded as laying down any condition of eligibility.

It was also urged that in any event what paragraph ( 1) of the notice required was not that a person tendering must have 5 years' experience of running a 2nd grade hotel, bnt he should have sufficient experience to be able to run a 2nd grade hotel and the 4th respondents were fully qualified in this respect since they had over 10 years' experience in catering to canteens of well known companies, clubs and banks.

It was further contended in the alternative that paragraph (8) of the notice clearly provided that the acceptance of the tend, er would rest with the Airport Director who did not bind himself to accept any tender and reserved to himself the right to reject all or any of the tenders without assigning any reasons therefor and it was, therefore, competent to the 1st respondent to reject all the tenders and to negotiate with any person it considered fit to enter

into a contract and this is in effect and substance what the 1st respondent did when he accepted the tender of the 4th respondents.

The second head of argument was that paragraph (I) of the notice setting out the condition of eligibility had no statutory force nor was it issued under any administrative rules and, therefore, even if there was any departure from the standard or norm of eligibility set out in th, at paragraph, it was not justiciable and did not furnish any cause of action to the appellant. It was competent to the 1st respondent to give the contract to any one it thought fit and it was not bound by the standard or norm of eligibility set out in paragraph (1) of the notice. It was submitted that in any event the appellant had no right to complain that the' !st respondent had given the contract to the 4th respondents in breach of the condition of eligibility laid down in paragraph (I) of the notice.

And lastly, under the third head of argument, it was submitted on behalf of the !st and the 4th respondents that in any view of the matter, the writ petition of the appellant was liable to be rejected in the exercise of its discretion by the Court, since the appellant had no real interest but was merely a nominee of A. S. Irani who had been putting up one person after another to start litigation with a view to preventing the award of the contract to the 4th respondents.

The appellant was also guilty of !aches and delay in filing the writ petition and the High Court was justified in rejecting the writ petition in limine particulr!y in view of the fact that during the period between the date of acceptance of the tender and the date of filing of the writ petition, the 4th respondents had spent an aggregate sum of about Rs. 1,25,000/- in making arrangements for putting np the restaurant and two snack bars.

These were the rival contentions . urged on behalf of the parties and we shall now proceed to discuss them in the order in which we have

set them out.

Now it is clear from paragraph (I) of the notice that tenders were invited only from "registered 2nd Class hoteliers having at least 5 years' experience". It is only if a person was a registered 2nd Class hotelier having at least 5 years' experience that he could, on the terms of paragraph (1) of the notice, submit a tender. Paragraph (!) of the notice prescribed a condition of eligibility which had to be satisfied by e.very person submitting a tender and if, in a given case, a person submitting a tender did not satisfy this condition, his tender was not eligible to be considered. Now it is true that the terms and conditions, of the tender form did not prescribe that the tenderer mnst be a registered Ilnd Class hotelier having at least 5 years' experience nor was any such stipulation to be found in the form of the agreement

annexed to the tender but the notice inviting tenders published in the newspapers clearly stipulated that tenders may be submitted only by ; t; gistercd !Ind Class hoteliers having at least 5 years' experience and this tender notice was also included amongst the documents handed over to prospective tenderers when they applied for tender forms. Now the question is, what is the meaning of the expression "registered Ilnd Class hotelier", what category of persons fall within the meaning of this description? This is a necessary enquiry in order to determine whether the 4th respondents were eligible to submit a tender. It is clear from the affidavits and indeed there was no dispute about it that different grades arc given by the Bombay City Municipal Corporation to hotels and restaurants and, therefore, there may be a registered Jlnd Class Hotel but no such grades are given to:persons running hotels and restaurants and hence it would be inappropriate to speak of a perwn as a registered Hnd Class hotelier. But on that account would it be right to reject the expression "registered Ilnd Class hotelier" as meaningless and deprive paragraph ( 1) of the notice of any meaning and effect. We do not think such a view would be justified by any canon of construction. It is a well settled rule of interpretation applicable alike to documents as to statutes that, save for compelling necessity, the court should not be prompt to ascribe superfluity to the language of a document "and should be rather at the outset inclined to suppose every word intnded to have some effect or be of some use".

To reject words as insensible should be the last resort of judicial interpretation, for it is an elementary rule based on common sense that no author of a formal document intended to be acted upon by the others should be presumed to use words without a meaning. The conrt must, as far as possible, avoid a construction which would render the words used by the author of the document meaningless and futile or reduce to silence any part of the document and make it altogether inapplicaple. Now, here the expression used in paragraph (1) of the notice was "registered Ilnd Class hotelier" and there can be no doubt that by using this expression the Ist respondent intended to delineate a certain category of persons who alone should be eligible to submit a tender.

The Ist respondent was not acting aimlessly or insensibly in insisting upon this requirement nor was it indulging in a meaningless and futile exercise. It had a definite purpose in view when it laid down this condition of eligibility in paragraph (I) of the notice. It is true that

the phraseology used by the Ist respondent to express its intention was rather inapt but it is obvious from the context that tlie expression "registered llnd Class hotelier" was loosely used to denote a person HI conducting or running a IInd Class hotel or restaurant. It may be ungrammatical but it does not offend common-sense to describe a

person running a registered !Ind grade hotel as a registered Und grade hotelier. This meaning is quite reasonable and does not do any violence to the language and makes sense of the provision contained in paragraph (1) of the notice. We must, in the circumstances, hold that, on a proper construction, what paragraph (1) of the notice required was that only a person running a ref,>istered IInd Class hotel or restaurant and having at least 5 years' experience as such should be eligible to submit a tender. This was a condition of eligibility and it is difficult to see how this condition could be said to be satisfied by any person who did not have five years' experience of running a IInd Class hotel or restaurant. The test of eligibility laid down was an objective test and not a subjective one. What the condition of eligibility required was that the person submitting a tender must have 5 years' cxperi, ence of running a II Class hotel, as this would ensure by an objective test that he was capable of running a II Class restaurant and it should not be left to the Ist respondent to decide in its subjective discretion that the person tendering was capable of running such a restaurant.

If, therefore, a person submitting a tender did not have at least 5 years' experience of running a II Class hotel, he was not eligible to submit the tender and it would not avail him to say that though he did not satisfy this condition, he was otherwise capable of running a Ilnd Class restaurant and should, therefore, be considered.

This was in fact how the I st respondent itself understood this condition of eligibility.

When the 4th respondents submitted their tender along with their letter dated 24th January. 1977. it <1ppeared from the documents submitted by the 4th respondents that thev did not have 5 years' experience of running a II Class restaurant. The 1st respondent by its letter dated 15th February, 1977 required the 4th respondents to produce documentary evidence to show that they were "registered II Class hotelier having at least 5 years' experience." The 1st respondent did not regard this requirement of eligibility as meaningless or unnecessary and wanted to be satisfied that the 4th respondent did fulfil this requirement.

Now, unfortunately for the 4th respondents, they had over 10 years' experience of running canteens but at the date when they submitted their tender, they were not running a II grade hotel or restaurant nor did they have 5 years' experience of running such a hotel or restaurant.

Even if the experience of the 4th respondents in the catering line were taken into account from 1962 onwards, it would not cover a total period of more than 4 years 2 months so far as catering experience in IInd Grade hotels and restaurants is concerned.

The 4th r, ospondenlli thus did not satisfy the condition of eligibility laid down in paragraph ( 1 ) of the notice and in fact this was impliedly conceded -Oy

the 4th respondents in their letter dated 26th February, 1977 where they stated that they had "experience equivalent to that of a 2nd class or even 1st class hotelier." The 4th respondents were, accordingly, not eligible for submitting a tender and the action of the 1st respondent in accepting their tender was in contravention of paragraph (1) of the notice.

~ It was suggested on behalf of the 1st and the 4th respondents that there was nothing wrong in the 1st respondent giving the conr tract to the 4th respondents since it was competent to the 1st res- ;. ptmdent to reject all the tenders received by it and to negotiate ' directly with the 4th respondents for giving them the contract and it made no difference that instead of follo.<'ing this procedure, which perhaps might have resulted in t!Je 4th respondents offering a smaller licence fee and the 1st respondent suffering a loss in the process, the 1st respondent accepted the tender of the 4th respondents.

We do not think there is any force in this argument. It is true that there was no statutory or administrative rule requiring the 1st respondent to give a contract only by inviting tenders and hence the 1st respondent was entitled to reject all the tenders and, subject to tlte constitutional norm laid down in Art 14. negotiate directly for

.~ entering into a contract.

Paragraph (8) of the notice also made it clear that the 1st respondent was not bound to accept any tender and could reject all the tenders received by it.

But here the 1st respondent did not reject the tenders outright and enter into direct negotiations "with the 4th respondents for awarding the contract. The process of awarding a contract by foviting tenders was not terminated or abandoned by the !st respondent by rejecting all the tenders but in furtherance of the process, the tender of t!Je 4th respondents was accepted by the I st respondent.

The contract was not given to the I _ 4th respondents as a result of direct negotiations.

Tenders were r invited and out of the tenders received, the one submitted by the

~ 4th respondents was accepted and t!Je contract was given to them . . ,..

Jt is, therefore, not possible to justify the action of the 1st respon- • dent on the ground that t!Je 1st respondent could have achieved the same result by rejecting all the tenders and entering into direct • negotiations with the 4th respondents.

That takes us to the next question whether t!Je acceptance of the tender of the 4th respondents was invalid and liable to be set aside at the instance pf the appellant.

It was contended on behalf of the 1st and the 4th respondents that the appellant had no locus to maintain t!Je writ petition since no tender was submitted by him and he was a mere stranger.

The argument was that if the appellant

did not enter the field of competition by submitting a tender, what did it matter to him whose tender was accepted; what grievance could he have if the tender of the 4th respondents was wrongly accepted.

A person whose tender was rejected might very well complain that the tender of someone else was wrongly accepted, but it was submitted, how could a person who never tendered and who was at no time in the field, put forward such a complaint ?

This argument, in our opinion, is mis-conceived and cannot be sustained for a moment.

The grievance of the appellant, it may be noted, was not that his tender was rejected as a result of improper acceptance of the tender of the 4th respondents,. but that he was differentially treated and denied equality of opportuni!f with the 4th respondents in submitting a tender.

His complaint was that if it were known that non-fulfilment of the condition of eligibility would be no bar to consideration of a tender, he also would have submitted a tender and competed for obtaining a contract.

But he was precluded from submitting a tender and entering the field of consideration by reason of the condition of eligibility, while so far as the 4th respondents were concerned, their tender was entertained and accepted even though they did not satisfy the condition of eligib1lity and this resulted in inequality of treatment which was constitutionally impermissible.

This was the grievance made by the appellant in the writ petition and there can be no doubt that if this grievance were well founded, the appellant would be entitled to maintain the writ petition. The" question is whether this grievance was justified in law and the acceptance of the tender of the 4th respondents was vitiated by any legal infirmity.

Now, there can be no doubt that what paragraph (1) of the notice prescribed was a condition of eligibility which was required to be satisfied by every person submitting a tender.

The condition of eligibility was that the person submitting a tender must be conducting or running a registered 2nd class hotel or restaurant and be must have at least 5 years' experience as such and if he did not satisfy this condition of eligibility his tender would not be eligible for consideration.

This was the standard or norm of eligibility laid down by the l st respondent and since the 4th respondents did not satisfy this standard or norm, it was not competent to the 1st respondent to entertain the tender of the 4th respondents. It is a well settled rule of admini.strative law that an executive authority must be rigorously held to the standards by which it professes its actions to be judged and it must scrupnlously observe those standards on pain of invalidation of an act in violation of them.

This rule was enunciat-

• • •

ed by Mr. Justice Frankfurter in Vitera/I; v. Seton(') where the Ieai:ned Judge said :

"An executive agency must be rigorously held to the standards by which it professes its action to be judged.

Accordingly, if dismissal from employment is based op. a defined procedure, even though generous beyond the requirements that bind such agency, that procedure must be scrupulously observed.

This judicially evolved rule of administrative law is now firmly established and, if I may add, rightly so. He that takes the procedurnt sword shall perish with the sword."

This Court accepted the rule as valid and applicable in Jndia In

A. S. Ahluwalia v. Punjab(2 ) and in subsequent decision given in Sukhdev v. Bhagatram,(') Mathew, J., quoted the above-referred observations of Mr. Justice Frankfurter with approval. It may be noted' that this rule, though supportable also as emanation from Article 14, does not rest merely on that article. It has an independent existence apart from Article 14. It is a rule of administrative law which has been judicially evolved as a check against exercise of arbitrary power by' the executive authority. If we turn to the judgment of Mr. Justice Frankfurter and examine it, we find that he has not sought to draw support for the rule from the equality clause of the United States Constitution, but evolved it purely as a - rule of .administrative law.

Even in England, the recent trend in administrative law is in that direction as is evident from what is

sted at pages 540-41 in Prof.

Wade's Administrative Law 4th edition.

There is no reason why we should hesitate to adopi this rule as a part of our continually expanding administrative law.

Today with tremendous expansion of welfare and social service functions, increasing control of material and economic resources and large scale assumption of industrial and commercial activities by the State, the power of the executive Government to affect the lives of the people i.s steadily. growing.

The attainment of socio-economic justice being a conscious end of State poficy, there is a vast and ineVitable increase in the frequency with which ordinary citizens come into relationship of direct encounter with State power-holders.

This renders it necessary to structure and restrict the power of the executive Government so as to prevent its arbitrary applicatio.n or

(I) 359 U.S. 535 : 3 Law. Ed. (Second series) 1012 :(2) (1975] 3. s. c. R. 82.

; (3)[19751 3. S. C. R. 619.

exercise.

Whatever be the concept of the rule of law, whether it be the meaning given by Dicey in his "The Law of the Constitution" or the definition given by Hayek in his "Road to Serfdom" and "Constitution of liberty" or the exposition set-forth by Harry Jones in his "The Rule of Law and the Welfare State", there is, as pointed out by Mil thew, J., in his article on "The Welfare State, Rule of Law and Natural Justice" in "Democracy, Equality and Freedom," "substantial agreement is in juristic thought that the great purpose of the rule of law notion is the protection of the individual against arbitrary exercise of power, wherever it is found". It is indeed unthinkable that in a democracy governed by the rule of law the executive Govermnent or any of its officen; should possess arbitrary power over the interests of the individual. Every action of the executive Government must be informed with reason and should be free from arbitrariness.

That is the very essence of the rule of law and its bare minimal requirement And to the application of this principle it makes no difference whether the exercise of the power involves affection of some right or denial of some privilege.

To-day the Government, is a welfare State, is the regulator and dispenser of special services and provider of a large number of benefits, including jobs contracts, licences, quotas, 1nineral rights etc.

The Government pours forth wealth, money, benefits, services, contracts, quotas and licences.

The valuables dispensed by Government take many forn1s, but they all share one characteristic.

They are steadily taking the place of traditional forms of wealth.

These valuables which derive from relationships to Goven.ment are of many kinds.

They comprise social security benefits, cash grants for politiCal sufferers and the. whole scheme of State and local welfare.

Then again, thousands of people are employed in the State and the1 Central Governments and local authorities.

Licences arc required •. ......, l. before one can engage in many kinds of business or work.

The 7 ... power of giving licences means power to withhold them and this gives control to the Government or to the agents of Government on the lives of many people.

Many individuals and many more businesses enjoy largess in the form of Government contracts.

These contracts often resemble subsidies.

It is virtually impossible to lose money on them and many enterprises are set up primarily to do business with Government.

Government owns and controls hundreds of acres of pubic land valuable for mining and other purposes.

These resources are available for utilisation by private corporations and individuals by way of lease or licence.

All these mean growth in the Government largess and with the increamng

.,..

... •

~ I

I I

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magnitude and range of governmental functions as we move closer to a welfare State, more and more of our wealth consists of these new forms.

Some of these forms of wealth may be in the nature of legal rights but the large majority of them are in the nature of privileges.

But on that account, can it be said that they do not enjoy any legal protection?

Can they be regarded as gratuity furnished by the State so that the State may withhold, grant_ or revoke it at its pleasure ? Is the position of the Government in this respect the same as that of a private giver ? We do not think so.

The law has not been slow to recognise. the importance of this new kind of wealth and the need to protect individual interest in it and with that end in view, it has developed new forms of protection. Some

interests in Government largess, formerly regarded as privileges, have been recognised as rights while others have been given legal protection not only by forging procedural safeguards but also by confinling/structuring ; tnd checking Government discretion in lhe inatter of grant of such largess.

The discretion of the Government has been held to be not unlimited in that the Government cannot give or withhold largess in its arbitrary discretion or at its sweet will.

It is insisted, as pointed out by Prof.

Reich in ari especially. stimulating article on "The New Property" in 73 Yale Law Journal 733, "that Government action be based on standards that are not arbi- ·

trary or unauthorised." "The Government cannot be permitted to say that it will give jobs or enter into contracts or issue quotas or licences only in favour of those having grey hair or belonging to a particular political party or professing a particular religious faith.

The Government is still the Government when it acts in the matter of granting largess and it cannot act arbitrarily. It does not stand in the same position as a private individual.

We agree with the observations of Mathew, J., in V. Punnan Thomas v. State of Kera/a(') that : "The Gowrnment is not and should not be as free as an individual in selecting the recepients for jts largess.

Whatever its activity, the Government is still the Government and will be subject to restraints, inherent in its position in a democratic society.

A democratic Government cannot lay down arbitrary and capricious standards fur the choice of pesons with whom alone it will deal".

The same point was made by this court in Erusian Equipment dJld Chemicals Ltd. v. State of West Benga/(2) where the question was whether black-listing of a person without

(1) AIR 1969 Kerala 81.

(2) [1975) 2 S.C.R. 674.

10-409 SCI/79

A giving him an opportunity to be heard was bad? Ray, C. J., speaking on behalf of himself and his colleagues on the Bench pointed out that black-listing of a person not only affects his reputation which is in Poundian terms an interest both of personality and substance, but also denies him equality in the matter of entering into contract with the Government and it cannot, therefore, be supported without fair hearing. It was argued for the Government that no person has a right to enter into contractual relationship with the Government and the Government, like any other private individual, has the absolute right to enter into contract with any one it pleases.

But the Court, speking through the learned Chief Justice, responded that the Government is not like a private individual who can pick and choose the person with whom it will deal, but the Government is still a Government when it enters into contract or when it is admin1stering largess and it cahnot, without adequate reason, exclude any person from dealing with it or take away largess arbitrarily.

The learned Chief Justice said that when the Government is trading with the public, "the democratic fom1 of Government demands equality and absence of arbitrariness and discrimination in such transactions. The artivities of the Government have a public element and, therefore, there should be fairness and equality. The State nee.d not enter into any contract with anyone, but if it does so, it must do so fairly wjthout discrimination and without unfair procedure." This proposition would hold good in all cases of dealing by the Government with the public, where the interest songht 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 fotms 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 nornis 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 ration~!, 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.

Now, it is obvious that the Government which represents the : executive ""lhority of the State, may act through the instrumentality

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R. D. SHETTY v. AIRPORT AUTllORITY (Bhagwati, J.) 1035

or agency of natural persons or it may employ the instrumentality or agency of juridical persons to carry out its functions. In the early days, when the Government had limited functions, it could operate effectively through natural persons constituting its civil service and they were found adequate to discharge governmental functions, which were of traditional vintage.

But as the tasks of the Government multiplied with the advent of the welfare State, it began to be increasingly felt that the framework of civil service was not sufficient to handle the new tasks which were often of specialised and highly technical character.

The inadequacy of the civil service to deal with these new problems came to be realised and it became necessary .to forqe a new instrumentality or. administrtive . device for

handling these new problems. It was m these clfcumstances and with a view to supplying this administrative need that the public corporation came into being as the third arm of the Government. As early as 1819 the Supreme Court of the United States in Mac Cul/ough

v. MGryfond(') held that the Congress has power to charter corporations as incidental to or in aid of governmental functions and, as pointed out by Mathew, J., in Sukhdev v. Bhagat Ram (supra) such federal corporations would ex-hypothesi be agencies of the Government.

In Great Britain too, the policy of public administration through separat~ corporations was gradually evolved and the conduct of basic industries through giant corporations has now become a permanent feature of public life.

So far as India is concerned, the genesis of the emergence of corporations as instrumentalities or agencies of Government is to be found in the Government of India Resolution on Industrial Policy dated 6th April, 1948 where it was stated inter alia that "management of State enterprises will as a rule be through the medium of public corporation under the statutory control of the Central Government who will assume such powers as may k necessary to ensure this." It was in pursuance of the polic; envisaged in this and subsequent resolutions on Industrial Polici that corporations were created by Government for setting up and management of public enterprises and carrying out other public functions.

Ordinarily these functions could have been earrieJ out by Government departmentally through its service personnel, but the instrumentality or agency of the corporations was resorted to in these cases having regard to the nature of the task to be performed.

The corporations acting as instrumentality or agency of Government would obviously be subject to the same limitations in the field of constitutional and administrative law as Government itself, though

(1) 4 Wheat 315

A in the eye of the law, they would be distinct and independent legal entities. If Government acting through its officers is subject to certain constitutional and public law limitations, it must follow a fortiori that Government acting through the instrumentality or agency of corporations should equally be subject to the . same limitations. /But the question is how to determine whether a corporation is acting B as instrumentality or agency of Government. It is a question not entirely free from difficulty.

A corporation may be created in one of two ways.

It may be either established by statute or incorporated under a law such as the Companies Act 1956 or the Societies Registration Act 1860. Where a Corporation is wholly controlled by Government not .:mly in its policy making but also in carrying out the functions entrusted to it by the law establishing it or by the Charter of its incorporation, there can be no doubt that it would be an instrumentality or agency of Government.

But ordinarily where a corporation is established by statute, it is autonomous in its working, subject only to a provision, often times made, that it shall be bound by any directions that may be issued from time to time by Government in respect of policy matters.

So also a corporation incorporated under law is managed by a board of directors or committee of management in accordance with the provisions of the statute under whicn it is incorporated.

When does such a corporation become an instrumentality or agency of Government ? Is the holding of the entire share capital of the Corporation by Government enough or is it necessary that in addition, there should be a certain amount of direct control exercised by Government and, if so, what should be the nature of such control ? Should the functions which the corporation is charged to carry out poi; sess any particular characteristic or feature, or is the nature of the functi6ns immaterial? Now, one thing is clear that if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instru1nentaliy or agency of Government. But, s is quite often the case, a corporation established by statute may have no shares or shareholders, in which case it would be a relevant factor to consider whether the administration is in the hands of a board of directors appointed by G; ivernmcnt, though this consideration also may 11ot be determinative, because even where the directors are appointed by Government, they may be completely free from governmental control in the discharge of their functions.

What then arc the tests to determine whether a corporation established by statute or incorporated under law is an instrumentality

or agency of Government ? lt is not possible to formulate an allinclusive or exhaustive test which would adequately answr this question.

There is no cut and dried formula, wjiich would provide the correct division of corporations into those which are instrumentalities or agencies of Government and those which are not.

The analogy of the concept of State action as developed in the United States may not, however, be altogether out of place while considering this question.

The decisions of the court in the United States seem to suggest that a private agency, if suported by extraordinary assistance given by the State, may be subject to the same constitutional limitations as the State.

Of course, it may be pointed out that "the State's general common law and statutory structure under which its people carry on their private affairs, own property and contrac_t, each enjoying equality in terms of legal capacity, is not such State assistance as would transform private conduct into State action".

But if extensive and unusual financial assistance is given and the purpose of the Government in giving such assistance coincides with the purpose for which -the corporation is expected to use the assistance and such purpose is of public character, it may be a relevant circumstance supporting an inference that the corporation is an instrumentality or agency of Government. The leading case on the subject in the United States is Kerr v. Eneck Pratt Free Library('). The Library system in question in this case was established by private donation in 1882, but by 1944, 99 per cent of the system's budget was SUJl' plied by the city, title to the library property was held by the city, employees were paid by the city payroll officer and a high degree of budget control was exercised or available to the city government.

On th".>e facts the Court of Appeal required the trustees managing the system to abandon a discriminatory admission policy for its library training courses.

It will be seen that in this case there was considerable amount of State control of the library system in addition to extensive financial assistanoe and it is difficult to say whether, in the absence of such control it would have been possible to say that the action of the trustees constituted State action.

Thomas P. Lewis has expressed the opinion in his article on "The meaning of State Action" (60 Columbia Law Review 1083) that in this case "it is extremely unlikely that absence of public control would have changed the result as long as 99% of the budget of a nominally private institution. was provided by government.

Such extensive governmental support should be sufficient identification with the Government to subject the institution to the provisions of the Fourteenth Amendment".

(l) 149 F. 2d. 212.

It may, therefore, be possible to say that where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with governmental character. But where fmnncit>l assistance is not so extensive, it may not by itself, without anything more, render the corporation an instrumentality or agency of government, for there are many privaN! institutions which are in receipt of financial assistance from the State and merely on that account, they cannot be classified as State agencies. Equally a mere finding of some control by the Stnte would not be determinative of the question "since a State has considerable measure of control under its police power over all types of business operations". But 'a finding of State financial support plus an unusual degree of control over the management and policies might lead one to characterise an operation as State action" vide Sukhdev v. Bhagatram ( 1). So also the existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality. It may also be a relevant factor to consider whether the corporation enjoys monopoly status which is State conferred or State protected. There can be little doubt that State conferred or State protected monopoly status would be highly relevant in assessing the aggregate weight of the corporation's ties to the State.

Vide the observations of Douglas, J., in Jackson v. Metropolitan Edison Co. ( 2)

There is also another factor which may be r<:garded as having a bearing on this issue and it is whether the operation of the corporation is an important public function. It has been held in the United States in a number of cases that the concept of private action must yield to a conception of State action where public functions are being performed.

Vide Arthur S. Miller : "The ConstitutiolUll Law of the Security State" ( 10 Stanford Law Review 620 at 664). It was pointed out by Douglas, J., in Evans v. Newton( 3 ) that "when private individuals or groups are endowed by the State with powers or functions governmental in nature, they become agencies or instrumentalities of the State".

Of course, with the growth of the welfare State, it is very difficult to define what functions are governmental and what are not, because, as pointed out by Villmer, L.J., in Pfizer v. Ministry of Health,(') there has been, since mid-Victorian times,' "a revolution in political thought and a totally different conception prevails today as to what is and what is not within the functions of Gvernment".

(I) 11975] 3 S. C.R. 619 at 658.

(2) 419 U.S. 345 : 42 L. ed. 2nd 477.

(3) 382 U.S. 296: 15 L. ed 2nd 373.

(4) [1964] 1 Ch. 614.

) " X'

Douglas, J., also observed to the same effect in New York v. United

StatesC) : " A State's project is as much a legitimate governmental activity whether it is traditional or akin to private enterprise, or conducted for profit." Cf. Helvering v. Gerhardt('). A State may deem it as essential to its economy that it own and operate a railroad, a mfll, or an irrigation system as it does to own and operate bridges, street lights, or a sewage disposal plant.

What might have been viewed in an earlier day as an improvident or even dangerous extension of state activities may today be deemed indispensible. It may be noted that besides the so called traditional functions, the modern State operates a multitude of public enterprises and discharges a host of other public functions. If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.

This is prcisely what was pointed out by Mathew, J., in Sukhdev v. Bhagatwi (supra) where the learned Judge said that

"institutions engaged in matters of high public interest or performing public functions are by virtue of the nature of the functions performed government agencies.

Activities which are too fundamental to the society are by definition too important not to be considered government functions."

This was one of the principal tests applied by the United States Supreme Court in Marsh v. Alabama(') for holding that a corporation which owned a Company town was subject to the same con_stitutional limitations as the State. This case involved the prosecution of Marsh, a member of the Johevah's witnesses sect, under a state trespass statute for refusing to leave the side walk of the company town where she. was distributing her religious pamphlets.

She was fined $ 5/- and aggrieved by her conviction she carried the matter right upto the Supreme Court contending successfully that by reason of the action of the corporation her religious liberty had been denied. The Supreme Court held that administration of private property such as a town, though privately carried on, was, nevertheless, in the nature of a public function and that the private rights of the corporation must therefore be cxerci5"d within constitutional limitations and the coniction fo; trespass was reversed.

The dominant theme of the majority opinion written by Mr. Justice Black was that the property of the corporation used as a town not recognisably different from other towns lost its

~~:_ati~~-a_s_ purely private property. It was said that a ; own may

(!) 326 u .s. 572.

(2) 304 u. s. 405, 426, 427.

(3) 326 U.S. 501 : 19 L. ed. 265.

be privately owned and managed but that does not necessarily allow the corporation to treat it as if it was wholly in the private sector and the exercise of constitutionally protected rights on the pablic itreet of a company town could not be denied by the owner. "The more an owner, for his advantage, opens up his property for use by the public in general, the more do his rights become circumscribed by the statutory and constitutional rights of those who use it ... Thus, the owners of privately held bridges, ferries, turnpikes and railroads may not operate them as freely as a farmer does bis farm. Since these facilities are built and operated primarily to benefit the public and since their operation is essentially a public function, it is subject to state regulation". Mr. Justice Frankfurter, concurring, reduced the case to simpler terms.

He found )n the realm of civil liberties the need to treat a town, private or not, as a town. The function exercised by the corporation was in the nature of municipal function and it was, therefore, subject to the constitutional limitations placed upon State action.

We find that the same test of public or governmental character of !he function was applied by the Supreme Court of the United States in Evans v. Newton (supra) and Smith v. Allwight.(1') But the deci, ions show that even this test of public or governmental character of the function is not easy of application and does not invariably lead to the correct inference because the range of governmental activity is broad and varied and merely because an activity may be such as may legitimately be carried on by Government, it does not mean that a corporation, which is otherwise a private entity, would be an instrumentality or agency of Government by reason of carrying on such activity. In fact, it is difficult to distingui§h betwen governmental functions and non-governmental functions.

Perhaps the distinction between governmental and non-governmental functions is not valid any more in a social welfare State where the laissez faire is an outmoded concept and Herlx:rt Spencer's social statics bas no place.

The contrast is rather between governmental activities which are private and private .activities which are governmental. (Mathew, J. Sukhdev v. Bhagatram (supra) at p. 652). But the public nature of the function, if impregnated with governmental character or "tied

or entwined with Government" or fortified by some other additional factor, may render the corporation an instrumentality or agency of Government. Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference.

(I) 321 U. S. 649.

> ..

< .

It will thus be seen that there are several factors which may have to be considered in deNrmining whether a corporation is an agency or instrumentality of Government. We have referred to some of these factors and they may be summarised as under : whether there is any financial assistance given by the State, and if so, what is the magnitude of such assistance whether there is any other form of assistance, given by the Stare, and if so, whether it is of the usual kind or it is extraordinary, whether there is any control of the management and policies of the corporation by the State and what is the nature and extent of such control, whether the corporation enjoys State conferred or State protected monopoly status and whether the functions carried out by the corporation are public functions closely related to governmental functions.

This particularisation of relevant factors is however not exhaustive and by its very nature it cannot be, because with increasing assumption of new tasks, growing complexities of management and administration and the necessity of continuing adjustment in relations between the corporation and Government calling for flexibility, adapt ability and innovative skills, it is not possible to make an exhaustive enumeration of the tests which would invariably and in all cases provide an unfailing answer to the question whether a corporation is governmental instrumentality or .agency.

Moreover even amongst these factors which we hav'e described, no one single factor will yield a satisfactory answer to the question and the court will have to consider the cumulative effect of these various factors and arrive at its decision on the basis of a particularised inquiry into the facts and circumstances of each case. "The dispositive question in any state action case," as pointed out by Douglas, J., in Jackson v. Metropolitan Edison Company (supra) "is not whether any single fact or relationship presents a sufficient degree of state involvement, but rather whether the aggregate of all relevant factors compels a finding of state

responsibility." It is not enough to examine seriatim each of the factors upon which a corporation is claimed to be an instrumentolity or agency of Government and to dismiss each individually as being insufficient to support a finding of that effect. It is the aggregate or cumulative affect of all the relevant factors that is controlling.

Now, obviously where a corporation is an instrumentality or agncy of Government, it would, in the exercise of its power or discretion,

be subject to the saine constitutional or public law limitations as Govermnent. The rule inhibiting arbitrary action by Government which we have discussed above mnst apply equally where such cor- H poration is dealing with the public, whether by way of giving jobs or entering into contracts or otherwise, and it cannot act arbitrarily

and enter into relationship with any person it likes at its sweetwill, but its action must be in conformity with some principle which meets the test of reason and relevance.

This rule also flows directly from the doctrine of equality embodied in Art. 14. It is now well settled as a result of the decisions of this Court in E. P. Rayappa v. State of Tamil Nadu(') and Mancka Gandhi

v. Union of India(') that Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment.

It requires that State action must not be arbitrary but must be based on some rational and relevant principle which is non-discriminatory : il must not be guided by any extraneous or irrelevant considerations, because that would be denial of equality. The principle of reasonableness and rationality which is legally as well as philosophically an essential element of equality or non-arbitrariness is protected by Article 14 and it must characterise every State action, whether it be under authority of Jaw or in exercise of executive power without making of law.

The State cannot, therefore act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational and non-discriminatory.

This principle was recognised and applied by a Bench of this Court presided over by Ray, C.J., in Erusian Equipment and ChemicaLY v.

State of West Bengal (supra) where the learned Chief Justice painted out that "the State can carry on executive function by making a law or without making a law. The exercise of such powers and functions in trade by the State is subject to Part III of the Constitution. Article 14 speaks of equality before the law and equal protection of the laws.

Equality of oppartunity should apply to matters of public contracts.

The State has the right to trade.

The State has there the duty to observe equality. An ordinary individual can choose not to deal with any person.

The Government cannot choose to exclude persons by discrimination. The order of black-listing has the effect of depriving a person of equality of opportunity in the matter of public contract.

A person who is on the approved list is unable to enter into advantageous relations with the Governm_!'nt because of the order of blacklisting. . . . A citizen has a right to claim equal treatment to enter into a contract which may be proper, necessary and essential to his lawful calling .... It is true that neither the petitioner nor the respondent has any right to enter into a contract but they are entitled to equal treatment with others who offer tender or quotations for the purchase of the

(I) [1974] 2 S. C. R. 348.

(2) 1978j 2 S. C.R. 621.

y- •

goods." It must, therefore follow as a necessary corollary from the principle of cqualfry enshrined in Article 14 that though the State is entitled to refuse to enter into relationship with any one, yet if it does so, it cannot arbitrarily choose any person it likes for entering into such relationship and discriminate between persons sil)1ilarly c; rcumstanced, but it must act in conformity with some standard or principle which meets the test of reasonableness and non-discrimination and any departure from such standard or principle would be invalid unless it can be supported or justified on some rational and non-discrimina• tory ground.

It is interesting to find that this rule was recognised and applied by a Constitut; on Bench of this Court in a case of sale of kendu leaves by the Government of Orissa in Rashbihari Panda v. State of Orissa.(') The trade of kendu leaves in the State of Orissa was regulated by the Orissa Kendu Leaves (Control of Trade) Act, 1961 and this Act created a monopoly in favour of the State so far as purchase of kendu leaves from growers and pluckers was concerned. Section 10 of the Act authorised the Government to sell or otherwise dispose of kendu leaves purchased in such manner as the Government might direct. The Government first evolved a scheme under which it offered to renew the licences of those traders who in its view had worked satisfactorily in the previous year and had regularly paid the amount due from them. The scheme was cha!Jenged and realising that it might be struck down, the Government withdrew the scheme and instead, decided .to invite tenders for advance purchase of kendu leaves but restricted the invitation to those individuals who had carried out contracts in the previous year without default and to the satisfaction of the Government.

This method of sale of kendu leaves was also challenged by filing a writ petition on the ground inter alia that it was violative of Articles 14 and 19 (1) (g) and this challenge, though negatived by the High Court, was upheld by this Court in appeal. The Court pointed out that the original scheme of offering to enter into contracts with the old licences and to renew their terms was open to grave objection, since it sought arbitrarily to exclude many persons interested in the trade and the new scheme under which the Government restricted the invitation to make offers to those traders who had carried out their <:ontracts in the previous year without default and to the satisfaction of the Government was also objectionable, since the right to make tenders for the purchase of kendu leaves being restricted to a limited


class of persons, it effectively shut out all other persons carrying on trade in kendu leaves and also the new entrants into that business and hence it was ex-facie discriminatory and imposed unreasonable restrictions' upon the right of persons other than t~Je existing contractors to carry on business. Both the schemes evolved by the Government were thus held to be violative of Articles 14 and 19(1) (g) because they "gave rise to a monopoly in the trade in kendu leaves to certain traders and singled out other trader. for d; scriminatory treatment".

The argument that existing contractors who had carried out their obligations in the previous year regularly and to the satisfaction of the Government formed a valid basis of classification bearing a just and reasonable relation to the object sought to be achieved by the sale, namely, effective execution of the monopoly in the public interest, was also negatived and it was pointed out that : "exclusion of all persons interes'ted in the trade, who were not in the previous year licencees, is ex facie arbitrary; it had not direct relation to the object of preventing exploitation of pluckers and growers of kendu leaves, nor had it any just or reasonable relation to the securing of the full benefit from the trade, to the State".

The Court referred to the offer made by a well known manufacturer of bidis for purchase o..f the entire crop of kendu leaws for a sum of Rs. 3 crores which was turned down by the Government and expressed its surprise that no explanation was attempted to be given on behalf of the State as to why such an offer, from which the State stood to gain more than Rs. 1 crore, was rejected by the Government.

It will be seen from this judgment that restricting the invitation to submit tenders to a limited class of persons was held to be violative of the equality clause, because the classification did not bear any just and reasonable relation to the object sought to be achieved, namely, selling of kendu leaves in the interest of general public. The standard or norm laid down by the Government for entering into contracts of sale of kendu leaves with third parties was discriminatory and could

nt stand the scrutiny of Article 14 and hence the scheme was held to be inval:d.

The Court rejected the contention of the Government that by reason of section 10 it was entitled to dispose of kendu leaves in such manner as it thought fit and there was no limitation upon its power to enter into contracts for sale of kendu leaves with such persons it liked.

The Court held that the Government was, in the exercise of its power to enter into contracts for sale of kendu leaves, subject to the constitutional limitation of Article 14 and it could not act arbitrarily in selecting persons with whom to enter into contracts and discriminate against others similarly situate.

The Court criticisea

'"i •

R. D. SllETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1045

the Government for not giving any explanation as to why an offer for a Jarcre amount was not accepted, the clearest implication being that the Government must act in the public interest; it cannot act arbitrarily and without reason and if it does so, its action would be liable to be invalidated. This decision wholly supports the view we are taking in regard to the applicability of the rule against arbitrariness in State; action.

We may also in this connection refer to the decision of this Court in C. K. Achuthan v. State of Kera/a('), where Hidayatullah, J., speaking on behalf of the Court made certain observation which was strongly relied upon on l; chalf of the respondents.

The facts of this case were that the petitioner and the 3rd respondent Co-operative Milk Supply Union, Canancre, submitted tenders for the supply oE milk to the Government hospital at Cannanore for the year 1948-49. The Superintendent who scrutinised the tenders accepted that of the petitioner and communicated the reasons for the decision to the Director of Public Health.

The resulting contract in favour of the petitioner was, however, subsequently cancelled by issuing a notice in terms of clause (2) of the tender, in pursuance of the policy of the Government

that in the mat\er of supply to Government Medical Institutions the Co-vpcrativc Miik Supply Union should be given contract on the basis of prices fixed by the Revenue Department.

The petitioner challenged the decision of the Government in a petition llilder Article 32 of the Constitution on the ground inter alia that there had been discrimination against him vis-a-vis the 3rd respondent and as such, there was contravention of Article 14 of the Constitution. The Constitution Bench rejected this contention of the petitioner and while doing so, Hidayatullah, J., made the following observation : "There is no discrimination, because it is perfectly open to the Government, even as it is to a private party, to choose a person to their liking, to fulfil contracts which they wish to be performed.

When one person is choosen rather than another, the aggrieved party cannot claim the protection of Article 14, because the choice of the person to fulfil a particular contract must be left to tfJe Government." The respondents relied very strongly on this observation in support of their contention that it is open to the 'State' to ente.r into contract with any one it likes aµd choosing one person in preference to another for entering into a contract does not involve violation of Article 14.

Though the language in which this observation is couched is rather wide, we do not think that in making this observation, the Court intended to Jay down any absolute proposition permitting the state to act arbitrarily in the matter of entering into contract with

(I) [1959] Supp. I S C. R. 787.

third parties.

We have no doubt that the Court could not have intended to lay down such a proposition because Hidayatullah J. who delivered the judgment of the Court in this case was also a party to the judgment in Rashbihari Panda v. State of Orissa (supra) which was also a decision of the Constitution Bench, where it was held in so many terms that the Stale cannot act arbitrarily in selecting persons with whom to enter into contracts. Obviously what the Court meant to say was that merely because one person is chosen in preference to another, it does not follow that there is a violation of Article 14, because the Government must necessarily be entitled to make a choice.

But that does not mean that the choice be arbitrary or fanciful.

The choice must be' dictated by public interest and must not be unreasoned or unprincipled.

The respondents also relied on the decision of this Court in Triloc/1111 Mishra v. State of Orissa & Ors.(') The complaint of the petitioner in that case was that the bids of persons making the highest tenders were not accepted and persons who had made lesser bids were asked to raise their bids to the highest offered and their revised bids were accepted.

The Constitution , Bench negatived this complaint and speaking through Mitter, J., observed :

'With regard to the grievance that in some cases the bids of persons making the highest tenders were not accepted, the facts are that persons who had made lower bids were asked to raise their bids to the highest offered before the same were accepted. . Thus there was no loss lo Government and merely because the Government preferred one tender tO another no complaint can be entertained. Government certainly has a right to enter into a contract with a

person well known to it and specially one who has faithfully performed his contracts in the past in preference to an undesirable or unsuitable or untried person. Moreover, Government is not bound to accept the highest tender but may accept a l.ower one in case it thinks tht the person offering the lower tender is on an overall consideratioll to be preferred to the higher 1enderer."

We fai: tc see how this obervation can help the contention of the respondents. It does not say that the Government can enter into contract with any one it likes arbitrarily and without reason.

On the contrary, it potulates that the Government may reject a higher tender and accept a lower one only when there is valid reason to do so, as for example, where it is satisfied that the person offering the !ewer

I) [19711 3 S. C. C. 153.

) Y'

tcilder is on an overall consideration preferable to the higher tenderer.

There must be some relevant reason for preferring one tenderer to another, and if there is, the Government ca1_1 certainly enter into contract with the form_er evn though his tender may be lower but it cannot do so arbitrarily or for extraneous reason.

There was also one other decision of this Court in State of Orissa

v. Hari11Auayan Jaiswal & Ors.(') which was strongly relied upon on behalf of the respondents.

There the respondents were the highest bidders at an auction held by the Oria Government through the Exdse Commissioner for the exclusive privilege of selling by retail country liquor in some shops.

The auction was held pursuant to an order dated 6th January, 1971 issued by the Government of Orissa in exercise of the power conferred under section 29(2) of the Bihar & Oris>a Excise Act, 1915 and clause (6) of this Order provided that "no sale shall be deemed to be final unless confirmed by the State Government who shall be at liberty to accept or reject any bid without assigning any reason therefor".

The Government of Orissa did not accept any of the bids made at the auction and subsequently sold the privilege by negotiations with some other parties. O; ie of the cont.entions raised on behalf of the petitioners in that case was that the power retained by the Government "to accept or reject any bid without any reason therefor" was an arbitrary power violative of Articles 14 and 19(1) (g). This contention was negatived andHegde, J. speaking on behalf of the Court observed :

"The Government is the guardian of the finances of the State. It is expected to protect the financial interest of the

State.

Hence quite naturally, the legislature has empowered the Government to see that there is no leakage in its revenue.

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 performing 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 Governmel]!'s power to sell the exclusive privi lcge set out in section 22 was not denied. It was also not disputed that these 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

(1) [1972] 2 s.c.c. 36.

in question who had offered to sell them cannot decline to accept the highest bid if he thinks that the price offered is

inadequate."

It will be seen from these observations that the validity of clause (6) of the order dated 6th January, 1971 was upheld by this Court on the ground that having regard to the object of holding the auction, namely, to raise revenue, the Government was entitled to reject even the highest bid, if it thought that the price offered was inadequate.

The Government was not bound to accept the tender of the person who offered the highest amount and if the Government rejected all the bids made at the auction, it did not involve any violation of Article .14 or 19(1) (g).

This is a self-evident proposition and we do not see how it can be of any assistance to the respondents.

The last decision to which reference was made on behalf of the respondents was the decision in P. R. Quenin v. M. K. Tendel(1) This decision merely reiterates the principle laid down in the earlier decisions in Trilochan Mishra v. State of Orissa (supra) and Stale of Orissa v. Harinarayan Jaiswal (supra) and points out that a condition that the Government shall be at liberty to accept or reject any bid without assigning any reason therefor is not violative of Article 14 and that "in matters relating to contracts with the Government, the latter is not bound to accept the tender of the person who offers the highest amount". Now where does it say that such a condition permits the Government to act arbitrarily in accepting a tender or that under the guise or pretext of such a condition, the Government may enter into a contract with any person it likes, arbitrarily and without reason.

In fact the Court pointed out t the end of the jndgment that the act of the Government was not "shown to be vitiated by such arbitrariness as should call for interference by the Court'', recognising clearly that if the rejection of the tender of the 1st respondent were arbitrary, the Collft would have been justified in striking it down as invaJid.

Now this rule, flowing as it does from Article 14, applies to every State action and since "State" is defined in Article 12 to include not only the Government of India and the Government of each of the States, but also "all local or other authorities within the territory of Iridia or under the control of the Government of India", it must apply to action of "other authorities" and they must be held subject to the same qonstitutional limitation as the Government. But the question arises what are the "tjther authorities" contemplated by Article 12 which fall within the definition of 'State'? On this ques-

(1) [19741 3 S. C.R. 64.

• -t.

I!. D. SHETTY v. AIRPORT AUTHORITY (!Jha.gwati, J.)

I 04 9

tion considerable light is thrown by the decision of this Court in Rajasthail Electricity Board v. Mohan Lal('). That was a case in which this Court was called upon to consider whether the Rajasthan Electricity Board was an 'authority' within the meaning of the exe!ession "other authorities" in Art. 12.

Bhargava, J., delivering the judgment of the majority pointed out that the expression "other

authorities" in Art. 12 would include all constitutional and slatuto1y authorities on whom powers are conferred by law.

The learned Judge a.lso said that if any body of persons has authority to issue directions the disobedience of. which would be punishable as a criminal offence, that would be an indication that that authority is 'State'.

Shah, J., who delivered a separate judgment, agreeing with the conclusion reached by the majoriy, preferred to gjve a slightly different meaning to the expression "other authorities".

He said thJlt authorities, con§!itutional or statutory, would fall within the expres- •ion "other authorities" only if they are invested with the sovereign power of the State, namely, the power to mak~ rules and regulations which have he force of law.

The ra!io of this decision may thus be stated to be that a constitution~! or slatutmy authority would be within the meaning of the expression "other authorities", if it has been invested with statutory power to issue binding directions to third parties, the disobedience of which would enlai! penal consequence or it has the sovereign power to make rules and regulations having the force of law. This test was followed by Ray, C.J., in Sukhdev v. Bhagat

Ram (supra).

Mathew, J., however, in the same case, propounded a broader test, namely, whether the statutory corporation or other body or authority, claimed to fall within the definition of 'State', is an instrumentality or agency of Government : if it is, it would fall within the meaning of the expression 'other authorities' and would be 'State'.

Whilst accepting the test laid down in Rajasthan Electricity Board v.

Mohan Lal (supra), and followed by Ray, C. J., in Sukhdev v. Bhagat Ram (supra), we would, for reasons already discnssed, prefer to adopt the test of Governmental instrumentality or agency as one more test and perhaps a more satisfactory one for determining whether a 11tatutory corporation, body or other authority falls within the definition of 'State'. If a statutory corporation, body or other authority is an instrumentality or agency of Government, it would be an 'authority' .and therefore 'State' within the meaning of that expression in Article 12.

It is necessary at this stage to refer. to a few decisions of this Court which seem to bear on this point and which require a little

(1) [1967) 3 S. C R 377

11-904 SCl/79.

explanation. The first is the decision in Praga Tools Corporation v. C. A. lmanuel.(') This was a case in which some of the workmen songht a writ of mandamus against Praga Tools Corporation which was a company with 56 per cent of its share capital held by the Central Government, 32 per cent by the Andhra Pradesh Government and 12 per cent by private individuals. The Court held that a writ of mj:lndrimus did not lie, because Praga Tools Corporation "being a nonstatutory body and one incorporate_d under the Companies Act, there was neither a statutory nor a public duty imposed on it by a statute in respect of which enforcement could be sought by means of mandamus, nor was there in its workmen any corresponding legal right for enforcement of any such statutory or public duty." (emphasis supplied). It is difficult to see how this decision can be of any help

in deciding the present issue before us. This was not a case where Praga Tools Corporation claimed to be an instrumentality of government or an 'authority' within the meaning of Article 12. The only question was whether a writ of mandamus could lie and it was held !hat since there was no duty imposed on Praga Tool Corporation by statute, no writ of mandamus could issue against it.

The second decision to which we must refer is that in Heavy Engineering Mazdoor Union v. State of Bihar( 2 ). The question which arose in this case was whether a reference of an industrial dispute between the Heavy Engineering Corporation Limited (hereinafter referred to as the 'Corporation') and the Union made by the State of Bihar under section 10 of the Industrial Disputes Act, 1947 was valid. The argument of the Union was that the industry in question was "carried on under the authority of the Central Government" and the reference could, therefore, be i:nade only by the Central Governmen!.

The Court held that the words "under the authority" mean "i:ursuant to the authority, such as where an agent or a servant acts under or pursuant to the authority of his principal or master" and on this view, the Court addressed itself to the qu(!stioo. whether !he Corporatiori could be said to be carrying on business pursuant to the authority of the Central Government.

Th~ answer to this question was obviously 'no' because the Corporation was carrying on business . in virtue of the authority derived from its memorandnm and articles of association and not by reason of any authority granted by the Central

Government.

The Corporatiori, in carrying on business, .was acting on its own behalf and not on behalf of the Central Government and it was therefore not a servant or agent of the Central Government in B the sense that its actions would bind the Central Government. There

(!) [1969] 3 S. C. R. 773.

(2) [1%9] 3 S. C.R. 995.

R, Q.1SHETTY v. ;\IRPORT AUTHORITY (Bhagwati, J.) .1051

\fas no question in: this case whether the Corporation was an instrn- .A mentality of the Central Government and therefore an 'authority' withlh the meaning of Article 12.

We may point out here that when we speak of a Corporation being an instrwnentality or agency of Govetriment, we do not mean to suggest that the Corporation should be an agent of the Government ii! the sense that whatever it does B should be binding on the Government. It is not the relationship of /

principal and agent which is relevant and material but whether the Corporation is an instrumentality of the Governent in the sense that a part of the governing power of the State i$ located in the Corporation and though the Corporation is acting on its own behalf and not on behalf of the Govel}!_ment, its action is really in the nature of c State action.

Tills decision dealing with an altother different point has no bearing on the present issue.

We may then refer to the decision in S. L. Aggarwal v. General Manager, Hindustan Steel Limited. (11) This decision has also no relevance to the point at issue before us, since the on)y question in that case was whether an Assistant Surgeo1;1 in the employment of Hindustan Steel Lintited could be said to be holding a. civil post under the Union or a State so as to be entitled to the protection of Article 311 (2) of the Constitution.

The Court held that H.industan Steel Limited was not a department of the Government nor were its employees holding posts under the State within the meaning Qf Article 311 (2). The decision was clearly right and indeed it could not be otherwise, since Hindustan Steel Lipiited, which was a distinct and independent legal entity, was not a departmeµt of the Government and could not be regarded as State for the purpose of Article 311 (2). It may be noted that the Court was not concerned with the question whether Hindustan Slee! Limited was an 'authority' within the meaning of Article 12.

Lastly, we must refer to the decision in Sarbhajit Tewari v. Union of lnd41 & Ors.(2) where the question was whether the Conncil of Scientific and Indutrial Research was an 'authority' within the meanig of Article 12.

The Court no doubt took the view ori the basis of facts relevant to the constitution and functioning of the Council that it was not an 'authority', but we do not find any discussion in this case as to what are the features which must be present before a corporation can be regrded as an 'authority' within the meaning of Article 12.

This decision 'does not Jay down any principle or test for the, purpose of determining when a corporation can be said to be an 'authority'. If at all any t.est can be gleaned from the decision, it is

(!) !19i0] 3 S. C R. 363.

:~) (1975] I S. C. C. 485.

I 1152

SUPREME COURT REPORTS [1979] 1 s.c.tt.

A whether the Corporation is "reaJly agency of the Governmeat".

The Court seemed to hold on the facts that the Council was net an agency of the Government and was, therefore, not an 'authority'.

W c may examine, in the light of this discussion, whether the 1st respondent, name!ly, the International Airport Authority of India, can be said lo be an authority falling within the definition of 'State' in Article 12. It is necessary to refer to some of the provisions of the International Airport Authority Act, 1971 (hereinafter referred to as the Act) for the purpose of determining this question. Sub-section ( 1) of section 3 of the Act provides that the Central Government shall constitute an authority to be called the International Airport Authority of India, to whom we shall hereafter refer as the 1st respondent. Sub-section (2) states that the 1st respondent shall be a body corporate having perpetual succession and a common seal and sulr'section (3) enacts that the Ist respondent shall consist of a Chairman to be appointed by the Central Government, the Director General of Civil Aviation exoflicio and not less than six and not more than thirteen members to be appointed by the Central Government.

The term of office of every member of the 1st respondent is prescribed by sub-section ( 1) of section 5 to be 3 years, but the Central Government is given under the Proviso power to terminate the appointment of any member who is not a servant of the Govemn1cnt after giving him notice as also to terminate at any time the appointment of any member who is a servant of the Government.

The power to remove a member in certain specified cir-. cumstances is also vested b the Central Government under section 6.

Sectio~ J 2, sub-section (1) provides that as from the date appointed by the Central Government all properties and other assets vested in the Central Government for the purposes of the airport and administered by the Director General of Civil Aviation immediately before such date shall vest in the 1st respondent and all debts, obligations and liabilities incurred, all contracts entered into and all matters and things engaged to be done by, with or for the Central Government immediately before such date shall be deemed to have been incurred, entered into and engaged to be done by, with or for the !st respondent. This sub-section also says that all non-recurring expenditure incurred by the Central Government for or in connection with the purposes of the airport upto the appointed date and declared to be capital expenditnre by the Central Govemment shall be treated as the capit"l provided by the Central Government to the 1st respondent and all sums of money due to the Central Government in relation to the airport immediately before the appointed date shall be deemed to be due to the 1st respondent. The 1st respondent is also given the power to institute or continue all suits

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and other legal proceedings instituted or which could have been instituted by or against the Central Government for any matter in relation to the airport and every employee holding any office under the, Central Government immediately before the appointed date solely or mainly for or in connection with the affairs of the airport shall be treated as on deputation wlth the 1st respondent. Sub-section ( 1) of section 12 also enacts similar provisions with regard to the air navigation services and the buildings used exclusively for such services immediately before the appointed date. The functions of the 1st r•, spondent are specified 1n

section 16 : sub-section (1) provides that, subject to the rules, if any, made by the Central Government in this behalf, it shall be the function of the l st respondent to manage the airports efficiently and su]:)..,; ection

(2) casts an obligation on the !st respondent to provide at the airports such services and facilities as are necessary or desirable for the efficient operation of air transport services and certain 'specific functions to be performed by the lst respondent are particularised in sub-s•cction (3).

Thestl functions were, until the appointed date, being carried out by the Central Government but now under Section 16 they are transferred to the I st respondent. Section 20 provides that after making provision for reserve funds, bad and doubtful debts, depreciation in assets aud all other matters which are usually provided for by companies, the !st respondent shall pay the balance of its annual net profits to the Central Government. Section 21 requires the !st respondent to submit for the approval of the Central Govermnent a statement of the programme of its activities during the forthcoming financial year as wen as its financial estimate in respect thereof at least three months before the commencement of each financial year and section 24 provides that the accounts of the I st respondent shall be audited annually by the Comptroller and Auditor General and the accounts as certified by the ComptroNer and Auditor General or auy other person~ appointed by him in this behalf, together with the audit report thereon, shall be for; ya:rded to the Central Government and the Central Government shi!ll cause the san1e to be laid before both Houses of Parliament. The 1st respoud•ent is also required by section 25 to prepare and submit to the Central Government, as soon as may be after the end of each finaucial year, a report giving an account of its activities duriT\g the financial year and this report has to be laid. before both Houses of Parliament by the Central Government.

The officers and employees of the 1st respondent are deemed by section 28 to be public servants and section 29 gives them immunity from suit, prosecution or other legal proceeding for anything in good faith done or intended to be done in. pursuance of the Act or any rule or regulation made under it.

Section 33 confers power on the central Government

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(1979] 3 S.C.R,

to :•cmporarily divest the 1st re5pondent from the management of any

airport and to direct the 1st respondent to entrust such management to any other person.

The Central Government is also empowered by section 34 to sup"rsede the 1st respondent under certain 8pecified circumstllnce5. Section 35 gives power to the Central Government to i:ive directions in writing from time to time on questions of policy and provides that the 1st respondent shall in the dischar!je of its functiohs, and duties, be bound by such directions. Section 36 confers rule making power on the Central Government for carrying out the purposes of the Ac: and power to make regulations is conferred on the 1st respondent under section 37. Section 39 provides that any regulation made by the

1st respondent under any of the clauses (g) to (m) of sub-section (2) of section 37 may make it penal to contravene such regulation.

It will be seen from these provisiorus that there am certain features of the 1st respondent which are eloquent a'nd throw considerable light on the true nature of the !st respondent.

In the first place, the chairman and members of the !st respondent are all persons nominated by the Central Government and the Ceittral Government has also the power to terminate their appointment as also to remove them in certain 'specified circumstances.

The Central Government is also vested with the power to take away the management of any airport from the !st respondent and to entrust it to any other person or authority and for certain specified reasons, the Central Government can also supersede the 1st respondent.

The Central Government has also power to give directions in writing from time to time on questio_!ls of policy and these directions are declared binding on the 1st respondent. The !st respondent has no share capital but the capital needed by it for carrying out its functions is provided wholly by the Central Government.

The balance of the net profit made by the 1st respondent after making provision for various charges, such as reserve funds, bad and doubtful debts depreciation ia assets etc. does not remain with the 1st respondent and is required to be paid over to the Central Government.

The 1st respondent is alo required to submit to the Central Government for its approval a statement of the programme of its activities as also the financial estimte and it must follow as a necessary corollary that the 1st respondent can carry out only such activities and incur only such expenditure as is approved by the Ce'ntral Government. The audited accounts of the 1st reSpondent together with the audit rej)ort have. to be forwarded to the Central Government and they are required to be laid before both Houses of

Parliamc::rt. So far as the functions of the 1st respondent are concerned, the entire department of the Central Govemmel)t relating tci .the administration. of airports and air nevigation servicel! toiiether with. illl

properties and assets, debts, obligations and liabilities, contracts, causes of action and pending litigation is transferred to the 1st respondent and the 1st respondent is charged with carrying ont the same functions which were, until the appointed date, being carried out by the Central Government.

The employees and officers on the 1st respondent are also deemed to be public servants and the 1st respondent as well as its members, officers and employees are given immunity for anything which is in good faith done or intended to be done in pursuance of the Act or any rule or regulation made under it. The 1st respondent is also given power to frame Regulations and to provide that contrdvention of certain specified Regulations shall entail penal consequence.

These provisions clearly show that every test discussed above is satisfied in the case of the 1st respondent and they leave no doubt that the 1st respondent is an instrumentality or agency of the Central Government and falls within the definition of 'State' both on the 'narrow view taken by the majority in Sukhdev v. Bhagat Ram (supra) as also on the broader view of Mathew, J., adopted by us.

It is, therefore, obvious that both having regard to the constitutional mandate of Article 14 as also the judicially evolved rule of administrative law, the 1st respondent was not entitled to act arbitrarily in accepting the tender of the 4th respondents, but was bound to conform to the standard or norm laid down in paragraph 1 of the notice inviting tenders which required that only a person running a registered llnd Class hotel or restaurant and having at least S years' experience as such should be eligible to tender. It was not the contention of the appellant that this standard or norm prescribed by the 1st respondent was discriminatory having no just or re; i.sonable relation to the object of inviting tenders namely, to award the contract to a sufficiently experienced person who would be able to run efficiently a Ilnd class restaurant at the irport. Admittedly the standard or nonn was reasonable and non-discriminatory and once such a standard'or norm for running a Ilnd Class restaurant should be awarded was laid down, the 1st respondent was not entitled to depart f'om it and to awardthe contract to the 4th respondents who did not satisfy the condition . of eligibility prescribed by the standard or norm. If there was no acceptable tender from a person who satisfied the condition of eligibility, the !st Nspondent could have rejected the tenders and invited • fresh tenders on the basis of a less stringent standard or norm, but it could not depart from the standard or norm prescribed by it and arbitrarily. accept the tender of the 4th responde'nts.

When the 1st res- : pondent entertained the te!!Jler of the 4th respondents even though -, they did not have 5 years' experience of running a Ilnd Class

restaurant or hot>el, denied equality of opportunity to others similarly situate in the matter of tendering for the contract. There might have been many other pernons, in fact the appella'nt himself claimed to be one such person, who did not have 5 years' experience of running a llnd Class restaurant, but who were otherwise competent to run such a restaurant and they might also have competed with the 4th respondents for obtaining the contract, but they were precluded from doing so by the condition of eligibility requiring five years' experience. The action of the !st respondent in accepting the tender of the 4th respondents, even though they did not satisfy the prescribed condition of eligibility, was clearly discriminatory, since it excluded other person similarly situate from tendering for the contract and it was plainly arbitrary and without reason. The acceptance of the tender of the 4tb respondents was, in the circumstances invalid as being violative of the

C<juality clause of the Constitution as also of the rule of administrative law inhibiting arbitrary action.

Now, on this view we should have ordinarily set aside the decision of the 1st respondent accepting the tender of the 4th respondents and the contract resulting from such acceptance but in view of the peculiar facts and circumstances of the present case, we do not think it would be a sound exercise of discretion on our part to upset that decision and void the contract.

It does appear from the affidavits filed by the parties that the appellant has no real interest in the result 0f the litigation, but has been put up by A. S. Irani for depriving the 4th respondents of the benefit of the contract secured by them. We find that a number of proceedings have been instituted for this purpose from time to time by A. S. Irni either personally or by instigating others to take such proceedings.

The first salvo in the battle against the 4th respondents was fired by K. S. Irani, proprietor of Cafe Excelsior, who filed a suit challenging the decision of the 1st respondent to accept the tender of the 4th respondents, but in this suit he failed to obtain an interim injunction and his appeal was dismissed by the

High Court on 19th October, 1977. It is significant that when the tenders were opened in the office of the Airport Director, Cafe Excelsior was represented by A. S. Irani, which shows that either Cafe

Excelsior was a nominee of A. S. Irani or in any event K. S. Irani, proprietor of Cafe Excelsior, was closely connected with A. S. _Irani.

Moreover, it is interesting to note that though the tender of the 4th respondents was accepted as far back as 19th April, 1977, K.

Irani did not adopt any proceedings immediately but filed the suit only after A. S. Irani W!\S jnformed by the Airport Director on 22nd August, 1977 that a final order has been received from the Ministry

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R. D. SHETTY v. AIR PORT AUTHORITY (Bhagwati, J.) l 057

requiring A. S. Irani to immediately close dow11 his restaurant and snack bars. It is also a circumstance not without significance that A. S. Irani did not immediately take any proceeding for challenging the acceptance ol the tender of the 4th respondents, but filed a suit in his own name only after the appeal of K. s. Irani was dismissed by the High Court on 19th October, 1977. These circumstances clearly indicate that the suit was filed by K. s: Irani at the instance of A. S.

Iran_i or in any event in concert with him and when the suit of K. S.

Irani failed to achieve the dcs_ired result, A. S. Irani stepped into the arena and filed his own suit.

This suit was for a numdatory injunction seeking removal of the two snack bars which had in the meantime been put up by the 4th respondents pursuant to the acceptance of their tender Qy the 1st respondent.

But in this proceeding also A. S. Irani failed to obtain an ad-interim injunction. It was only after the failure to obtain interim relief in these two proceedings, one by K. S. Irani and the other by A. S. Irani, that the appellant filed the present writ petition in the High Court of Bombay challenging the decision of the 1st respondent to accept the tender of the 4th respondents. Now, it appears from the record that the appellant was at the material time conducting a restaurant called Royal Restaurant and Store which was owned in partnership by three persons, namely, J. K.

Irani. K. M. Irani and G. S. Irani.

G. S. Irani is the brother of A. S.

Irani and he was managing and looking after the restaurant of A. S.

Irani at the airport.

It would, therefore, be a fair inference to make that the appellant was well connected with A. S. Irani and from the manner in which proceedings with a view to thwarting the attempt of the 4th respondents to obtain the benefit of their contract, have been adopted one after the other in different names, it does appear that the appellant has filed the writ petition at the instance of A. S. Irani with a view to helping him to obtain the CO!ltract for the restaurant

~,1d the snack bars.

It is difficult to understand why the appellant should have waited until 8th November, 1977 to file the writ petition when the tender of the 4th respondents was accepted as far back as 19th April, 1977.

The explanation given by the appellant is that he was not aware of. the acceptance of the tender of the 4th respondents but that is a rather naive explanation which cannot be easily accepted.

It is not possible to believe that the appellant who was so well connected with A. S. Irani and G. S. Irani did not know that A. S. Irani had failed to obtain the contract for running the restaurant and the •nack bars and that t.his contract had been awarded to the

4th respondents as a result of which A. S. Irani was being pressed B to close down his restaurant and snack bars. We have grave doubts whether this writ peti.tion was commenced by the appellant bona fide

with a view to protecting his own interest. Moreover, the writ petition was filed by the app$llan\ more than five months after the acceptance of the tender of the 4th respondents and during this period, the 4th respondents incurred considerable expenditure aggregating to about Rs. 1,25,000/- in making arrangements for putting up the restaurant and the snack bars and in fact set up the snack bars and started running the same. It would now be most inequitous to set aside the contracts of the 4th respondents at the instance of the appellant.

The position would have been different if the appellant had filed the writ petition immediately after the acceptance of the tender of the 4th respondents but the appellant allowed a period of over five months to elapse during which the 4th respondents altered their position.

We are, therefore, of the view that this is not a fit case in which we should interfere and grant relief to the appellant in the exercise of our discretion under Article 136 read with Article 226 of the Constitution.

We accordingly dismiss the appeal and confirm the order of the High Court rejecting the writ petition. But in the circumstances of the case there will be no o.rder as to costs throughout.

P. B. R.

Appeal dismissed.

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