Maj Gen Nilendra
THE SUPREME COURT ON SWISS CHALLENGE CASE
Maj Gen Nilendra Kumar 12 Sep 2023

THE SUPREME COURT ON SWISS CHALLENGE CASE


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[1] 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[2] in the Swiss Challenge Method case.

 "Swiss Challenge Method[3]" 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[4]. 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.[5], 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[6] 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


[1] Act No 12 of 2003

[2] Ravi Development v. Shree Krishna Prathisthan MANU/SC/0994/2009: (2009) 7 SCC 462

[3] According to Wikipedia, the free encyclopedia, a "Swiss Challenge" is a form of public 172 procurement in some (usually lesser developed) jurisdictions which requires a public authority (usually an agency of government) which has received an unsolicited bid for a public project (usually a port, road or railway) or services to be provided to Government, to publish the bid and invite third parties to match or exceed it. It 1s an offer made by the original proponent to the Government ensuring his process to be best by his initiative (as a
result of his own innovative approach) or on the demand of the Government to perform certain task.

[4] High Court of Bombay W.P. (L) No. 2714 of 2007 with PIL No. 72 of 2007

[5] MANU/SC/0439/1993: 1993 (1) sec 445

[6] Wednesbury Principle relates to an English case law which set down the standard of unreasonableness of public body decisions which render them liable to be quashed on judicial review. To have the right to intervene, the court would have to form the conclusion that:
• The authority taking the decision took into account factors that ought not to have been taken into account, or
• The authority failed to take in account factors that ought to have been taken into
account, or
• The decision was so unreasonable that no reasonable authority would ever consider imposing it.

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