The Litigation team of Singhania & Partners LLP, comprising of Mr. Ravi Singhania, (Managing Partner), Ms. Madhu Sweta (Partner) and Ms. Kanika Tandon (Associate) have successfully obtained a favorable judgment in favour of National Highways Authority of India (NHAI) in the Supreme Court (SC) in the matter of NHAI v. Gwalior Jhansi Expressway Ltd[1], which holds that the right to exercise ‘Right of First Refusal (ROFR)’ by any Contractor would come into play only if he participates in the tender process pursuant to notice inviting tenders from other interested parties.

While the rational and analysis in the judgment makes for a very interesting read, in this update, we have attempted to focus only on the impact of “Right of First Refusal” and its impact on Contractors and the potential impact on the Government Bodies who engage in the issuance of such tenders.

INTRODUCTION

The SC in the aforesaid case had the opportunity to pen down the rules and directions that govern a Contractor’s ‘Right of First Refusal’ in a tender process. The Supreme Court relied on the principles laid down in VHCPL-ADCC Pingalai Infrastructure Pvt. Ltd. & Anr v. Union of India & Ors[2], in relation to the consequences of non-participation by a Contractor in the tender process and yet exertion of ROFR. It ruled that, having failed to participate in the tender process and, more so, despite the express terms in the tender documents, whose validity whereof has not been challenged, the Contractor cannot be heard to contend that it had acquired a ‘Right of First Refusal’ in the tender process. Only those entities who participate in the tender process pursuant to a tender notice can be allowed to make grievances about the non-fulfillment or breach of any of the terms and conditions of the concerned tender documents.

FACTS OF THE CASE

NHAI, entered into a Concession Agreement (dt. 17.12.2006) with the Contractor (Gwalior Jhansi Expressway Ltd.)  for widening of two-lane portion on NHA-75 to four lanes in the State of Uttar Pradesh and Madhya Pradesh.

Owing to delayed progress and eventual abandonment by the Contractor, the Appellant (NHAI) terminated the Agreement. Disputes arose, and the matter was referred to Arbitration. The Contractor during the pendency of the Arbitration proceedings, moved a Section 17 application of the Act[3],wherein it prayed that either (A) NHAI should infuse a sum of Rs. 400 Cr so as to complete the balance works of the project , or (B) as an interim measure, NHAI shall be allowed to invite tender/bid for executing the balance work under the Concession Agreement, subject to the Contractor being granted the right of first refusal for matching the lowest bid, and in the event, the Contractor matches the lowest bid, the Contractor being allowed complete the said balance works on the terms and conditions of the tender/bid invited.

In consonance with prayer B, NHAI issued a tender for balance work vide a Notice Inviting Tender dt. 28.11.2016 which was brought to the notice of the Contractor and Arbitral Tribunal on 10.12.2016.Despite such Notice by NHAI which was readily available in public domain, the Contractor willingly chose to abstain itself from participating in the tender. Technical bids and Financial bids were opened by NHAI on 05.01.2017 and 29.03.2017 respectively. It was only after 25.04.2017, that the Contractor moved another application u/s 17 seeking permission from the Arbitral Tribunal to complete the balance work and prayed for exercising the option of ROFR.

The Arbitral Tribunal decided the said Section 17 application in favor of the Contractor on the ground of equity without no plausible explanation vide its order dated 14.05.2017, which was challenged by NHAI under Section 37(2)(b) before the High Court of Delhi. The Delhi High Court dismissed the appeal of NHAI and upheld the view of the Arbitral Tribunal. Upon dismissal of the said appeal by the Delhi High Court, NHAI preferred an appeal before the Supreme Court.

HELD

The issue before the Supreme Court related to the rights and liabilities of the parties in respect of a tender process for awarding of a contract in relation to the unfinished and balance work of the Highway Project. The plain wording of the eligibility clause in the tender documents and incidental stipulations make it explicit that the Contractor was obligated to participate in the tender process by submitting its sealed bid (technical and financial) in order to exercise the option of ROFR. The Contractor who chose to stay away from the tender process, cannot be heard to whittle down, in any manner, the rights of the eligible bidders who had participated in the tender on the basis of the written and express terms and conditions.

The contention of the Contractor was based on the premise that in view of Prayer (B) of the Application advanced by the Contractor, the Contractor was exempted from participating in the proposed tender process and yet it could still exercise ROFR before the letter of intent was issued to the lowest bidder.

The SC rejecting such contention of the Contractor has held that, having failed to participate in the bidding process in consonance with the terms and conditions, the Contractor has lost its opportunity to  match the lowest bid or exercise ROFR. In the matter of tender process, there can be no tacit or implied exemption from participation. An entity who stays away from the bidding process and fails to comply with the express terms and conditions of the tender, cannot claim any right to match the lowest bid or exercise ROFR.

The High Court overlooked the fact that the tender process was not an empty formality and with the initiation of the same, third parties, who participated in the bidding process, were likely to be prejudiced by allowing the Contractor to match the lowest bid, or exercise ROFR, without participating in the bidding process despite the express stipulations in that behalf in the tender documents. The High Court committed the same error as committed by the Arbitral Tribunal in not examining the core issues for grant or non-grant of such relief to the Contractor, in conformity with the fundamental policy of Indian Law.

ANALYSIS

The SC has interpreted and held the importance of ROFR with respect to tender processes and has highlighted the prominence of participation as a mandatory requisite to exercise such options. The Claims concerning the said dispute qua NHAI were worth a value of approximately Rs.1700 crores (USD 255 million).

[1] Civil Appeal No. 3288 of 2018, dated 13.07.2018

[2] 2010 SCC Online Del 2687

[3] Arbitration and Conciliation Act, 1996.