Explained| Is there an absolute bar on judicial review of State’s ‘arbitrary’ action in matters arising from non-statutory contracts? 

Supreme Court: On the issue of the scope of judicial review of action by the State in a matter arising from a statutory or non-statutory contract, the bench of KM Joseph* and Hrishikesh Roy, JJ has held that even if a contract is non-statutory, there is no absolute bar in dealing with a cause of action based on acts or omission by the State or its instrumentalities. The Court explained that the mere fact that relief is sought under a contract which is not statutory, will not entitle the respondent-State in a case by itself to ward-off scrutiny of its action or inaction under the contract, if the complaining party is able to establish that the action/ inaction is, per se, arbitrary.

Principle laid down by the Court on the issue are summarised as follows:

Arbitrary action

To decide when an act is to be treated as arbitrary, the court must find out whether the impugned decision is based on any principle. If not, it may unerringly point to arbitrariness. Some circumstances that may point towards arbitrariness of an action are:

  • If the act betrays caprice or the mere exhibition of the whim of the authority.
  • If there is absence of good faith and the action is actuated with an oblique motive.
  • A total nonapplication of mind without due regard to the rights of the parties and public interest.
  • A wholly unreasonable decision which is little different from a perverse decision under the Wednesbury doctrine.

However, ordinarily visiting a party with the consequences of its breach under a contract may not be an arbitrary decision.

Private law remedy vis-à-vis Private Dispute

It is, undoubtedly, true that the writ jurisdiction is a public law remedy. A matter, which lies entirely within a private realm of affairs of public body, may not lend itself for being dealt with under the writ jurisdiction of the Court. However, after the contract is entered into, there can be a variety of circumstances, which may provide a cause of action to a party to the contract with the State, to seek relief by filing a Writ Petition.

For example, there may be circumstances that may include the relief of seeking payment of amounts due to the aggrieved party from the State. The State can, indeed, be called upon to honour its obligations of making payment, unless it be that there is a serious and genuine dispute raised relating to the liability of the State to make the payment. Such dispute, ordinarily, would include the contention that the aggrieved party has not fulfilled its obligations and the Court finds that such a contention by the State is not a mere ruse or a pretence.

Existence of an alternate remedy – Effect

The existence of an alternate remedy, is, undoubtedly, a matter to be borne in mind in declining relief in a Writ Petition in a contractual matter. Again, the question as to whether the Writ Petitioner must be told off the gates, would depend upon the nature of the claim and relief sought by the petitioner, the questions, which would have to be decided, and, most importantly, whether there are disputed questions of fact, resolution of which is necessary, as an indispensable prelude to the grant of the relief sought.

  • Undoubtedly, while there is no prohibition, in the Writ Court even deciding disputed questions of fact, particularly when the dispute surrounds demystifying of documents only, the Court may relegate the party to the remedy by way of a civil suit.
  • The existence of a provision for arbitration, which is a forum intended to quicken the pace of dispute resolution, is viewed as a near bar to the entertainment of a Writ Petition.
  • In a case the State is a party to the contract and a breach of a contract is alleged against the State, a civil action in the appropriate Forum is, undoubtedly, maintainable. But this is not the end of the matter. Having regard to the position of the State and its duty to act fairly and to eschew arbitrariness in all its actions, resort to the constitutional remedy on the cause of action, that the action is arbitrary, is permissible.
  • What must be involved in the case must be action/inaction, which must be palpably unreasonable or absolutely irrational and bereft of any principle. An action, which is completely malafide, can hardly be described as a fair action and may, depending on the facts, amount to arbitrary action. The question must be posed and answered by the Court and all we intend to lay down is that there is a discretion available to the Court to grant relief in appropriate cases.
  • A lodestar, which may illumine the path of the Court, would be the dimension of public interest subserved by the Court interfering in the matter, rather than relegating the matter to the alternate Forum.
  • If the Court has entertained the matter, then, while it is not tabooed that the Court should not relegate the party at a later stage, ordinarily, it would be a germane consideration, which may persuade the Court to complete what it had started, provided it is otherwise a sound exercise of jurisdiction to decide the matter on merits in the Writ Petition itself.
  • Violation of natural justice has been recognised as a ground signifying the presence of a public law element and can found a cause of action premised on breach of Article 14.

Overwhelming public interest in the context of judicial review in a contractual matter

The concept of overwhelming public interest has essentially evolved in the context of cases relating to the award of contract by the State. It cannot be said that consideration of public interest should not at all enter the mind of the court when it deals with a case involving repudiation of a claim under a contract or for that matter in the termination of the contract. However, there is a qualitative difference in the latter categories of cases. Once the State enters into the contract, rights are created. If the case is brought to the constitutional court and it is invited to interfere with State action on the score that its action is palpably arbitrary, if the action is so found then an appeal to public interest must be viewed depending on the facts of each case. If the aspect of public interest flows entirely on the basis that the rates embodied in the contract which is arbitrarily terminated has with the passage of time become less appealing to the State or that because of the free play of market forces or other developments, there is a fall in the rate of price of the services or goods then this cannot become determinative of the question as to whether court should decline jurisdiction.

[M.P. POWER MANAGEMENT COMPANY LIMITED v. SKY POWER SOUTHEAST SOLAR INDIA PRIVATE LIMITED, 2022 SCC OnLine SC 1591, decided on 16.11.2022]


*Judgment by: Justice KM Joseph


For Appellant: ASG K.M. Natraj

For Respondent: Sr Advs Dr. A.M. Singhvi and Naman Nagrath

For Madhya Pradesh State Load Despatch Centre: Sr Adv V. Giri

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