Delhi High Court Quashes BSNL’s Rescission of Purchase Order: “Arbitration Clause Does Not Bar Article 226 Petition Alleging Arbitrariness by a Public Entity, Even in Contractual Disputes

Court’s Decision:

The Delhi High Court quashed the rescission of a purchase order issued by BSNL to the petitioner, finding BSNL’s actions unreasonable and arbitrary. It emphasized the obligation of state entities to act fairly, particularly in public procurement, where adherence to procedural fairness is critical. The petition was allowed, setting aside BSNL’s decision to rescind the purchase order.

Facts:

1. Tender and Contract Award: BSNL issued a tender in 2023 for IT hardware and software solutions. The petitioner emerged as the lowest bidder (L1) and was issued an Advance Purchase Order (APO) on June 11, 2024, which led to the final purchase order on July 19, 2024.
2. Petitioner’s Investments: The petitioner placed equipment orders worth over ₹100 crores after receiving the purchase order.
3. BSNL’s Rescission: On August 6, 2024, BSNL rescinded the order, alleging non-compliance with Clauses 32 and 33 of the APO, which pertain to security clearances and submission of a security agreement.
4. Petitioner’s Grievance: The petitioner claimed compliance with all requirements, alleged procedural unfairness by BSNL, and sought judicial intervention.

Issues:

The case centered on the following key legal questions:

1. Was BSNL justified in rescinding the purchase order based on alleged non-compliance with Clauses 32 and 33 of the APO?
2. Could the writ petition be entertained under Article 226, despite the arbitration clause in the contract?
3. Were BSNL’s allegations of fraud, collusion, and non-compliance against the petitioner substantiated?

Petitioner’s Arguments:

1. Compliance with APO Requirements: The petitioner provided all required documents, including clearances from the Trusted Telecom Portal and a signed security agreement.
2. Arbitrariness by BSNL: BSNL’s decision lacked merit and violated principles of natural justice. It was taken without adequate consideration of the petitioner’s submissions.
3. Contractual Sanctity: The petitioner argued that BSNL’s actions undermined the sanctity of contracts and trust in public procurement processes.

Respondent’s (BSNL’s) Arguments:

1. Non-Compliance Allegations: BSNL claimed that the petitioner failed to submit requisite clearances and agreements as per Clauses 32 and 33 of the APO.
2. Fraud and Collusion: Alleged the petitioner’s collusion with BSNL employees and irregularities in local content declarations.
3. Arbitration Clause: Contended that the existence of an arbitration agreement barred the Court from entertaining the petition.

Analysis of the Law:

1. Judicial Review in Contractual Disputes: The Court clarified that Article 226 jurisdiction is maintainable in cases where state actions are arbitrary or violate fundamental rights, even in contractual matters.
2. Compliance with Clauses:
   • Clause 32: The petitioner demonstrated compliance by submitting clearance documents. The Court noted that BSNL’s claims of non-compliance were baseless.
   • Clause 33: The petitioner provided the required security agreement twice, nullifying BSNL’s claim of default.
3. Maintainability of Writ Petition: The Court held that the arbitration clause did not bar the petition, as the issue involved allegations of arbitrariness by a public entity.
4. Fraud Allegations: BSNL’s accusations of fraud and collusion were found speculative and unsupported by evidence.

Precedent Analysis:

The Court relied on Subodh Kumar Singh Rathour v. Chief Executive Officer (2024 SCC OnLine SC 1682), which highlighted the sanctity of public tenders and the need for fairness and transparency in government actions. It emphasized that arbitrary cancellations of contracts discourage participation in public procurement processes and violate principles of natural justice.

Court’s Reasoning:

1. Arbitrariness by BSNL: The Court criticized BSNL for acting on conjectures and failing to provide credible evidence to support its allegations.
2. Principles of Natural Justice: BSNL’s rescission of the purchase order without providing a fair hearing to the petitioner violated the principles of fairness.
3. Public Procurement Integrity: The Court underscored the importance of maintaining trust in public procurement processes and held that state entities must adhere to high standards of transparency and accountability.

Conclusion:

The Court quashed BSNL’s rescission of the purchase order, finding it arbitrary and unsustainable. It emphasized that allegations of fraud or collusion must be supported by credible evidence and cannot be based on mere speculation.

Implications:

1. Reinforcement of Judicial Oversight: The judgment reaffirms the judiciary’s role in ensuring fairness and accountability in state actions, particularly in contractual matters involving public procurement.
2. Trust in Public Procurement: The ruling highlights the importance of adhering to procedural fairness to maintain trust in government contracts and tenders.
3. Clarification on Writ Jurisdiction: The decision reiterates that Article 226 jurisdiction is maintainable in cases of arbitrary state actions, even when alternative dispute resolution mechanisms exist.

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