Contractual Power to Cancel Tender Does Not Override Natural Justice Principles When Alleging Fraud: Patna High Court

The Patna High Court recently delivered a significant judgment regarding the interplay between contractual discretion and the principles of natural justice. A division bench comprising Justice Sudhir Singh and Justice Ranjan Kumar Jha ruled that government departments cannot invoke contractual clauses to cancel a tender as a shield to bypass the mandatory requirement of a hearing, particularly when the cancellation order is rooted in allegations of forgery or misconduct against a bidder.

Background of the Case The dispute arose from the "Keshopur Payne Jeernodhar (removation) Scheme" under Tender No. 02/2021-22. M/s Narotam Kumar , the petitioner, was awarded a work order in May 2023 . However, before the agreement could be formalized, a controversy emerged regarding a disputed Memorandum of Association (MOA) allegedly linking the petitioner’s firm with M/s Yuvraj Engicons Pvt. Ltd.

Following a prior High Court directive from September 2024 (CWJC No. 1320 of 2024) to verify the MOA, the departmental authorities eventually branded the document as a forgery. Consequently, the authorities passed an order on February 4, 2025, cancelling the tender and initiating proceedings against the petitioner without providing a fresh opportunity for him to be heard on these specific findings.

Arguments from the Parties The petitioner, represented by counsel, contended that the cancellation was arbitrary, mala fide, and initiated by officers against whom he had previously raised grievances. The primary legal argument was that the authority failed to follow the principles of natural justice, as no show-cause notice was issued before recording the damaging finding of "forgery" and initiating further punitive action.

Conversely, the State relied on Clause 39 of the Notice Inviting Tender (NIT), which permitted the department to cancel the tender process "at any stage" without assigning any reason. The Respondents argued that this clause granted them absolute discretion, effectively insulating their decision from judicial review regarding fair procedure.

The Court’s Legal Analysis The Court drew a sharp, clear distinction between a "simple" tender cancellation and a "stigma-attaching" cancellation. While acknowledging that Clause 39 grants the authority a contractual right, the judges held that this right is not a blank check for procedural negligence.

"A clear distinction exists between a decision cancelling a tender in exercise of contractual powers and a decision which proceeds on a finding that a bidder has indulged in forgery , fraud or other misconduct ," the Court observed. By relying on Supreme Court precedents such as Gorkha Security Services v. Government (NCT of Delhi) and UMC Technologies Pvt. Ltd. v. Food Corporation of India , the Court underscored that any findings casting a stigma on a contractor’s reputation require the observance of the audi alteram partem rule.

Key Observations The judgment explicitly highlights the dangers of circumventing procedural fairness:

• "While the former may fall within the realm of contractual discretion reserved under the tender conditions, the latter undoubtedly visits the affected person with adverse civil consequences and carries an element of stigma."
• "The necessity of compliance with the principles of natural justice by giving the opportunity to the person against whom action of blacklisting is sought to be taken has a valid and solid rationale behind it."
• "An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent."
• "The respondents, therefore, could have cancelled the tender in exercise of the power reserved under Clause 39, but they could not have simultaneously returned findings adverse to the petitioner... without first complying with the principles of natural justice ."

Final Decision and Implications The Patna High Court set aside the order dated February 4, 2025, noting that it was vitiated by the failure to adhere to natural justice. The matter has been remitted back to the competent authority, which is now mandated to issue a proper show-cause notice if they intend to pursue allegations of forgery.

This ruling acts as a critical reminder to public procurement authorities that the use of standard "cancellation without reason" clauses cannot be misused to smear a bidder’s reputation under the guise of administrative convenience. For future contractors and government bodies alike, the judgment reinforces that procedural fairness is the bedrock of public contracting, and stigmatizing a bidder without a hearing is legally indefensible.