This case study examines the applicability of the objects and purpose of the Competition Act in the crucible of the Supreme Court of India's decision in the Swiss Challenge Method case. Swiss Challenge read more
This case study examines the applicability of the objects and purpose of
the Competition Act in the crucible of the Supreme Court of India's decision in
the Swiss Challenge Method case. Swiss Challenge Method is a distinct scheme
adopted in a few cases in India. Under this method, any person, firm,
association or private developer can approach the public authorities with an
innovative proposal for development of the Government lands.
The Competition Act, 2002
which received the assent of the President on 13th January, 2003 has been
enacted to prevent practices having adverse effect on competition, to promote
and sustain competition and to ensure freedom of trade. It would be interesting
to examine the applicability of the objects and purpose of this Act in the
crucible of the Supreme Court of India's decision in
the Swiss Challenge Method case.
"Swiss Challenge Method"
is a distinct scheme adopted in a few cases in India. Under this method, any
person, firm, association or private developer can approach the public
authorities with an innovative proposal for development of the Government
lands. The said proposal is scrutinized. If found to be technically and financially
viable, the proposal is accepted. The professed aim ostensibly was to
accelerate rapid growth in the housing sector by inducting private entrepreneur
through public-private partnership. In view of the resource crunch, the Maharashtra
Government decided to enter into joint venture agreements with private parties
for development of the government lands by invoking the Swiss Challenge Method.
Public tenders are then floated. The
person, who has voluntarily submitted a proposal for development of the
Government lands called the originator, comes to acquire the priority right to
the joint venture contract even if he is not the highest Tenderer. That is so
provided he agree to raise his bid to that of the highest Tenderer. In this manner,
the originator of the proposal is given the right of first refusal or right of first
choice to match the offer given by the highest Tenderer and bag the joint venture
contract even though he is not the highest bidder. On the other hand, if the
originator of the proposal declines the option, the contract is awarded to the
highest tendered whose bid is found to be most competitive. If the highest tendered
backs out, then the earnest money deposited by him stands forfeited. Arguably,
the policy is said to favor of public interest. The right of first refusal
contained in the Swiss Challenge Method is said to serve twin purposes.
Firstly, it boosts or encourages private participation in the development of
the government lands and secondly, the development contract is awarded at the
best competitive price ascertained from the bids received from the public
tender.
This method was at the center of controversy
of the case under discussion. Coming to the factual matrix of the actual case,
on 25th August, 2006, M/s. Ravi Developers submitted a proposal to the civil
authorities for development of certain land situated at Mira Road (District
Thane in Maharashtra). The land belonged to Maharashtra Housing and Area
Development Authority (in short MHADA), a body constituted by the State
Government. The potential available on the said land was 69,000 sq. mtrs. (Residential)
and 2,800 sq. mtrs. (Commercial). The originator offered to develop the said
lands at his own cost and give roughly one fourth area free of costs to MHADA.
Thereafter, a similar proposal was submitted
by M/s. Ravi Developers to the Chief Minister on 11th October, 2006. The Chief
Minister was also holding the portfolio of Housing at the time. The same day
the proposal was forwarded to the MHADA calling for a detailed report.
The proposal was accorded unusually
high priority by the officials. It was felt that the "Swiss Challenge
Method" was more desirable being totally transparent and open to public.
It was further stated that under the said method the originator of the proposal
gets a chance to develop the property by a democratic method provided he raises
his offer up to the bid made by the highest Tenderer.
On receiving approval from the
State Government, a public notice was issued inviting tenders for development
of the said lands. After holding pre-bid conference, the tenders received from different
parties were opened. The scrutiny of the tenders showed four persons to be
eligible Tenderers. The bid offered by the petitioner for development of the
lands was held to be the most competitive. This was so because the saleable
area offered to MHADA free of cost by the petitioner was double as compared to
the originator.
As per the notice about the Swiss Challenge
Method circulated by way of public notice, MHADA had called upon the originator
to exercise his right of first option. Within three days, he agreed to accept
the project on the terms offered by the highest Tenderer.
The highest Tenderer challenged the
denial of contract to him. He complained that the entire bidding process was devised
and designed with a mala fide intent to favor the originator. He claimed that
the authorities had adopted the Swiss Challenge Method only with a view to give
preferential treatment without any justification to the originator. It was further
contended that in awarding government contracts, the action of the authorities
ought to have been fair, transparent. It should have given level playing field
to all the eligible bidders. It should not be seen to be distributing largesse
to the favored persons.
The contract was challenged by
other bidders before the Bombay High Court on the ground that the recourse to
the Swiss Challenge method lacked transparency, level playing field, and
equality of opportunity, competitive bidding and fairness.
The right of first option given to the originator simply because he had approached
the Chief Minister had been unfair to the other participants. The contract
should have been awarded to the highest Tenderer. In the alternative, all the
four Tenderers should have been given an opportunity to raise their bids. The
contract should have been given to the bidder whose offer
was the highest.
It was also pointed out MHADA has been
established under a statute for the specific purpose of providing housing to
the lower and middle income group to mitigate acute shortage of housing. The joint
venture project entered into by MHADA with a favored private developer was
beyond the scope for which MHADA was established.
Relying upon the decision of the
Apex Court in the case of Sterling Computers Ltd. v. M&N Publications Ltd.,
it was urged that the public authority or the State Government cannot have
unfettered discretion and the doctrine of executive necessity had limited
application in such cases. The Wednesbury Principle of
fairness in administrative decisions was shown to apply in the matters of awarding
government contracts by invitation of public tenders. Therefore awarding the
contract to the originator without any justification was liable to be quashed
and set aside.
The above arguments were countered
by the State Government. It was asserted that the policy of the Government to
enter into joint venture Public Private Partnership was purely in public interest.
It was intended to accelerate the rapid growth of the housing sector. The resource
crunch had left little option but to adopt Public Private Partnership (PPP) for
development in housing sector. There were adequate checks and balances provided
in the said scheme. The originator of the proposal was required to develop the
lands on the terms offered by the highest Tenderer. Consequently, the same
avoided scope of any loss to the exchequer. If the originator had declined to
accept the project then the highest Tenderer would have been called upon to
execute the contract, failing which the earnest money deposit was liable to be
forfeited. This methodology had ensured that the tenders submitted were realistic
and competitive. The originator of the proposal had conceptualized the entire project.
Thereby, precious time and money of the public authorities were saved in that
behalf. Therefore, Swiss Challenge Method introduced by the Government could
not be said to be unjust, illegal or contrary to law.
The Respondents further highlighted
that the Swiss Challenge Method had been introduced with the approval of the
government. Therefore, the public tender in question was issued with due authority.
The originator had been awarded the contract on the terms offered by the highest
Tenderer. Had he declined, then the contract would have been awarded to the
highest Tenderer. To conclude, there was complete transparency and no prejudice
had been caused to any one due to adoption of the novel scheme.
The High Court held the invocation
of the Swiss Challenge Method in the instant case to be "wholly unfair, unreasonable,
arbitrary, illegal and contrary to law". It quashed the contract awarded
to the originator.
The matter was then taken up to the
Supreme Court in appeal. Finally, it came to be decided by the judgment dated,
11th May, 2009.
The Court pointed out that in the
matter of inviting tenders and awarding Government contracts, public interest
is of paramount consideration. Undoubtedly, the Courts can intervene in policy
matters by applying the doctrine of proportionality, where the policy decision
is found to be arbitrary or discriminatory. The policy can also be upturned
where it was seen to be contrary to public interest for valid and good reasons
or held to be unreasonable.
In the matters of awarding
Government contracts, the doctrine of "level playing field" plays an
important role. Article 14 of the Constitution would apply in contractual
matters also. If the policy decision of the Government in a contractual matter
was found to suffer from the vice of fairness or reasonableness, then such an
act or decision would be unconstitutional.
Swiss Challenge Method introduced by the Government could not be
said to be unjust, illegal or contrary to law
The State Government had
consistently held that it had not suffered any loss by awarding the contract to
the originator. Such a view had failed to impress the High Court on many
counts. Firstly, there was every possibility that many genuine Tenderers may
not have participated in the tender activity with their competitive bid. Their
reservation could have been on account of the preferential treatment sought to
be given to the originator in the public tender. Secondly, the highest Tenderer
was willing to raise his bid further. However, he was not permitted and only
the originator was allowed to enhance his bid. The Government had thus suffered
financially by invoking the Swiss Challenge Method.
The Supreme Court ruled that the originator
was not conferred any preferential treatment by the State. Actually, he had
submitted an innovative proposal for development of the government land. His plan
which was found to be technically and financially viable. Earlier, the High Court
had recorded that actually his proposal did not contain any innovative development
plan for utilization of the government lands. He had only quantified the
balance potential available in respect of the said lands. Moreover, he had
expressed his willingness to develop the said lands at his own cost by offering
certain constructed area in the form of units for allotment to MHADA free of costs.
Consequently, conferring preferential treatment to the originator on the ground
that he had quantified the balance potential available on the said lands amounted
to treating the equals unequally which is not permissible in law.
The Supreme Court brushed aside the
High Court finding that granting
preferential treatment to the originator merely because he had approached the Chief
Minister would be opposed to rule of law. In the eyes of the High Court, it
cannot be said that the persons approaching the governmental authorities form a
distinct class so as to avail preferential treatment.
The Supreme Court held that in
adopting the impugned method proper public notice had been issued. All the
intending developers had offered their bid. The originator of proposal had been
given an opportunity to match the highest bid amount. After fulfilling all the
formalities, the contract was accepted in favor of the originator. Therefore,
the Government of Maharashtra had, in no way, suffered any financial loss or sidelined
the other developer's in awarding contract in favor of Ravi Development.
Where the policy decision of the Government
is to award contract for
development of the government lands on the basis of the free saleable area made
available to the administration, then, every Tenderer would have to be given a fair
opportunity to bag the contract by offering a most competitive bid and in such a
case, conferring preferential treatment to any particular Tenderer would be
wholly unfair, unreasonable, discriminatory and violate of Article 14 of the
Constitution.
The Supreme Court took notice of
the situation that Swiss Challenge Method is adopted in Chile, Costa Rica, Guam
(U.S. Territory), Indonesia, Korea, Philippines, South Africa, Sri Lanka, Taiwan
(China), Virginia (U.S.) and also in India by Andhra Pradesh, Rajasthan, Madhya
Pradesh, Chhattisgarh, Gujarat Uttaranchal, Punjab States and Cochin Port authorities.
The above information by way of an assertion shows that Swiss Challenge Method
is already in prevalence in various States in India as well as overseas.
However, the Supreme Court did not take care to find if there is any information
about the experiment being a success in those countries and whether it is still
being favored.
The Supreme Court proceeded to underline
that the decision to apply
Swiss Challenge Method clearly fell within the realm of executive discretion and
in this case the discretion was exercised after due application of mind. According
to the Court, the State of Maharashtra, after due deliberations and study of
the methodologies which were
prevailing in the country for dealing with suo
motu development proposals had decided to apply Swiss Challenge method to the
proposal of the originator, This method had been applied by the State Government
only on a pilot basis, The scheme was transparent in as much as all the parties
were well aware of the "right of first refusal" accorded to the "originator
of proposal". As per the method, which was known to all the parties, the
originator of the proposal must in consideration of his originator of his
vision and his initiative is entitled
to the benefit of matching the highest bid submitted. The said method was beneficial
to the government which did not lose any revenue as it had still got the highest
possible value. The Supreme Court accepted the plea that in view of financial
crunch and availability of undeveloped lands, National and State Housing
policies provide for the encouragement of private participation The State
Government was also well within its rights to try out on pilot basis a
methodology recognized
internationally as well as in India. Under such circumstances, the order of the
High Court was held to be unjustified where it struck out the Swiss Challenge Method
without allowing the State Government to exercise its executive discretion on a
pilot basis. According to the Supreme Court, it was not possible to reject the
claim of State of Maharashtra and MR.ADA. The shortage of land and increasing
cost in housing sector had led to the Central and State Governments to resort
to public private joint ventures. In the said category, Swiss Challenge Method
was the most acceptable and a democratic method as compared to other options.
In the concluding part of its
judgment, the Supreme Court decided that the pilot project or the initiative taken
by the Government of Maharashtra along with MHADA to encourage Public Private Participation
was in accordance with the need of the time as well as a laudable effort. Strangely,
in the same breath, the Court declared that to make it an effective approach
Swiss Challenge Method or any other encouraging concept should be duly publicized
first. "The effort of Public Private Participation can only be possible
when private entities are aware of such scheme." It is difficult to
imagine what was the cause for such an observation? If the scheme was actually
well formulated, transparent and fairly executed then what led the highest
Court to make this comment.
The Court went on to state, also in
the scheme of availing a new system thorough rules and regulations are needed
to be followed otherwise unfairness , arbitrariness or ambiguity may creep in.
In order to avoid such ill- effects, the State Government is suggested to
consider the following aspects:
(1) The State/ Authority shall publish in advance the nature
of Swiss Challenge Method and particulars;
(2) Publish the nature of projects
that can come under such method;
(3) Mention/notify the authorities
to be approached with respect to the
project plans;
(4) Mention/notify the various fields
of the projects that can be
considered under the method;
(5) Set rules regarding time limits
on the approval of the project and
respective bidding;
(6) The rules are to be followed
after a project has been approved by the respective authorities to be considered
under the method.
(7) All persons interested in such developmental
activities should be given equal and sufficient opportunity to participate in
such venture and there should be healthy inter
se competition amongst such developers. These suggestions are not exhaustive
and the State is free to incorporate any other clauses for transparency and
proper execution
of the scheme. The State Government is suggested to frame
regulations/instructions on the above lines and take necessary
steps thereafter in future.
Surely, there could not have been
any occasion for the Apex Court to make these observations, if all was well
with the award of contract. It was outside and beyond the call of the Supreme
Court to delve into the domain of executive policy. On the other hand, the remarks
about a
need for "health inter se competition, "incorporate
transparency" and "proper execution" raise doubts about the Apex
Court's care for adherence to best practices related to the competition regime
in this case. The judgment is silent whether the award of contract was examined
to determine if it showed abuse of dominance.
The Competition Act, 2002 prohibits
anti-competition agreements and abuse of dominant position by enterprises. It
also prohibits any agreement which causes or is likely to cause, appreciable
adverse effect on competition in markets in India. Any such agreement is void.
The
decision has raised a number of interesting questions. To illustrate,
whether the Court had taken into consideration the import of competition law?
Whether any scheme though lacking any innovation can still be considered for
Swiss Challenge Method? Whether the countries like Chile, Costa Rica etc. which
have recognized the Swiss Method also practice the competition regime?
The High Court had opined that the
Government of Maharashtra had been put to financial loss. However, based on the
same documents the Supreme Court recorded an opposite finding! It is hoped that
numerous queries emanating from the Swiss Challenge case would find answer at a
future data specially, from the stand point of competition law.
Copyright © Nilendra Kumar
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