RAMANA DAYARAM SHETTY v. THE INTERNATIONAL AIRPORT AUTHORITY OF INDIA AND ORS.

Citation: [1979] 3 S.C.R. 1014; 1979 INSC 104

Court: Supreme Court of India

Bench: P.N. BHAGWATI , V.D. TULZAPURKAR, R.S. PATHAK

Judgment date: 1979-05-04

Case summary

1979 INSC 104. Supreme Court of India judgment dated 1979-05-04. RAMANA DAYARAM SHETTY v. THE INTERNATIONAL AIRPORT AUTHORITY OF INDIA AND ORS. Read the...

Judgment text

1016 SUPREME COURT REPORTS [1979] 3 S. C. R. RAMANA DAYARAM SHETTY v. 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. Administrative law-Statutory- body-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. I) 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 resta·1irants 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 II • 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 B·H] (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 • 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, incre~ing 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 enc~unter ,with State power~holders. 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 differen~e whether the exercise of the power involves affectation of some right or denial of some privilege. [1031 F-H] (b) To·day 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 relationships- to Government are of many 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 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-irra-ticnal, 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 d~termining 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 G· 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 11· must be in conformity with so111e principlt! which meets the test of reason and relevance. (1041 HJ 9'-409 SCI /79 Rajastha11 Electricity Board v. Mohan Lal [1967] 3 S. C. R. 377, aod Sukhdev v. Bhagatram [1975) 3 S. C. R. 619 at 658 followed. --f-< . • Praga Tools Corporation v. C. A. lnianuel [1969] 3 S. C. R. 773, lfeavy Engineering Mazdoor Union v. State of Bil1ar [1969] 3 S. C. R. 995, S. L. Aggarwal 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 con- • iiderations. 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. Trilochan Mishra v. State of Orissa & ors. [1971 3 S. C. R. 153, State of Orissa v. Harinarayan Jaiswal & ors. [1972[ 2 S. C. R. 36, Raiasthan Eltctricity Board v. Mohan Lal [1967] 3 S. C. R. 377, Fraga Tools Corporation 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 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. l 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 aris-ing out of Misc. Petition No. 1582/77. Ashnk H. Desai, Y. S. Chitale, Jai Chinai, P. G. Gokhale and II 8. R. Agarwal for the Appellant. G. B. Pai, 0. C. Mathur and D. N. Mishra for Respondent No. 1. 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 para-meters 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 com-mitted 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 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 here-by 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 1iatest 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 • 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, Central 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 represen-tative 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, affidav·its 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 re- ]) puted 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 experi·2nce 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 more- • over, 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 I 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 R 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 'D 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 ap-pliances, icecrea1n cabinets, espresso coffee machines, crockery, cut-lery 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-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 R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, I. ) 1023 the acceptance of the tender. K. S.

Irani obtained an ad-interim injunc- ·' tion 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 occupa-tion.

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 F' 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 Bo~bay 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 R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J. ) 1025 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 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 particul~r! 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 R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J. ) I 027 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 B. • 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 int~nded 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 inappli-caple.

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 G. 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 person running a registered ! Ind grade hotel as a registered Und grade hotelier.

This meaning is quite reasonable and does not do any vio-lence 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 can- • teens 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 ff 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 R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, l. ) I 029 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 contract 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 C' 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 in-firmity. 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- R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, /. ) 10 31 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 re-quirements 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 2 A. S. Ahluwalia v. Punjab( ) 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· s~ted 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. To-day 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 Milthew, J. , in his article on "The Welfare State, Rule of Law and Natural Justice" in "Democracy, Equality and Free-dom," "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 busi-nesses 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 R. D. SHETTY v.

AIRPORT AUTHORITY (Bhagwati, J. ) 1033 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 confin-ling/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. stimulat-ing 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 Gov- -·· • ernment 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 pe~sons 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 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 8 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, spe~king 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 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 multi- I plied with the advent of the welfare State, it began to be increas- • ingly 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. administr~tive . 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 func- -·· tions.

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 [1979] 3 S. C. R. 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 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 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 instru1nentali~y 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 com-pletely 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 all- R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J. ) I 037 inclusive or exhaustive test which would adequately answ~r 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 X' 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 Sukh- 1 dev v.

Bhagatram ( ). 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 2 Co. ( ) 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 conception of State action where public functions are being per-p formed. Vide Arthur S.

Miller : "The ConstitutiolUll Law of the Security State" ( 10 Stanford Law Review 620 at 664). It was 3 pointed out by Douglas, J. , in Evans v. Newton( ) 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. R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J. ) I 039 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 con-ducted 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 pr~cisely what was pointed out by Mathew, J.

, in Sukhdev v. Bhagat~wi (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 con~iction 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 statu- • • tory 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 1 States in Evans v. Newton (supra) and Smith v. Allwight. ( ') 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 betwe~n 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 supp

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