Abstract

In this Blog Post, the author seeks to discern the reasons behind the various instances where the Adani Ports and Special Economic Zone was disqualified by several state-owned port authorities in the span of one year. The author examines the law of award of public contracts and the reasoning behind the usage and legality of Clause 2.8.8 of the tender process, which allows disqualification of an application by a bid if any other contract of the bidder has been terminated by a public entity in the past three years. Further, the author consolidates the various instances where Adani Ports have tried to prove the illegality of such disqualification in consonance with the Single Bench Judgment of the Andhra Pradesh High Court, which rejected the writ petition by Adani against disqualification by the Vishakhapatnam Port trust.

Background

The Adani Ports and Special Economic Zone [“APSEZ”] has been disqualified from participating in the bidding process on multiple occasions by several port authorities in the recent past. This began with the termination of the contract for running a coal handling terminal between a subsidiary of APSEZ, namely, the Adani Vizag Coal Terminal Pvt. Ltd. [“AVCTPL”] and the Vishakhapatnam Port Authority [“VPA”]. Tenders issued by state-owned ports set out that an applicant will be disqualified if a public entity has terminated any of the bidder’s contracts for breach of terms in the last three years. The immediate consequence of this termination was that the Visakhapatnam Port Authority, the Paradip Port Authority, and the Jawaharlal Nehru Port Authority disqualified APSEZ from participating in the bidding process for their tenders under this clause at different points in time. Let us understand the legal ramifications and reasons behind such an action.

The Facts behind the Termination of the Contract between AVCTPL and VPA

AVCTPL was awarded the bid by the VPA to handle imported steam/thermal coal only on the ports’ terminals. However, the coal terminal contract succumbed to governmental policy changes for promoting the use of domestic coal while significantly cutting down on imports.This policy change directly affected the availability of coal throughout India, which affected the volumes of cargo the terminal usually saw.

VPA issued a consultationnotice on 3.10.2020 to AVCTPL that it was in breach of the Minimum Guaranteed Cargo clause, which is a ground for termination of the contract. Adani disputed this notice on 8.10.2020, stating that the force majeure provision was in place. Simultaneously, they also sought mutual termination of the contract. Vishakhapatnam Port Trust [“VPT”] sent a consultation notice on 23.11.2020, and thereafter gave a notice of termination on 26.12.2020 such that the termination of the contract was to be effective from 23.04.2021.The dispute was then taken to an arbitral tribunal which awarded costs to be paid to AVCTPL by VPT to the extent of Rupees 155 Crores for handing over the assets of the terminal.

These facts shall help us further understand the relevance behind how the disqualification of APSEZ is given justification by the Port Authorities, and why the writ petition and appeal by Adani against such disqualification were rejected by the Andhra Pradesh High Court.

Tender Clause effectuating Blacklisting of APSEZ

APSEZ faced disqualification from the bidding process by the VPA on two main grounds. That is under clauses 2.2.8 and 2.7.2 of the tender conditions.

Firstly, clause 2.7.2 stipulated that if a material misrepresentation has been made by the bidder regarding its prequalification to enter the bid or has given any materially incorrect information, then the applicant shall be disqualified immediately.

Secondly, clause 2.2.8 of the tender conditions stipulates that no bidder must have been expelled from any project, nor must their contract be terminated by a public entity in the three years preceding the application for the bid. It also contains a proviso to the effect that the bidder must be given an opportunity to be heard by the public entity on a request for a waiver from disqualification.

VPA argues that APSEZ failed to disclose that the contract between AVCTPL and Vishakhapatnam Port trust had been terminated by the latter due to a breach of the minimum guaranteed cargo clause. Thus, not only was there a termination of the contract by a state-owned port but these facts were also concealed by APSEZ when applying for the bid. Further, it would be the Port Authorities’ prerogative to accept or reject the application by any bidder without assigning reasons under principles of Contract Law and as provided by clause 2.7.1 of the Tender Process.

APSEZ argued that since they were the ones to terminate the agreement, clause 2.2.8 did not apply, and that they had made a disclosure of the arbitration going on between the two parties. Further, the disqualification had been communicated to them improperly and only by employing a caveat. The reasons for the same were disclosed to them much later.

Vishakhapatnam Port Trust’s argument was accepted by the Single Judge Bench of the Andhra Pradesh High Court [“APHC”] inAdani Ports and Special Economic Zone v. Vishakhapatnam Port Trust. Anappeal by APSEZ to a division bench of the APHC was rejected while adjudicating that VPT must allow APSEZ to make a plea for waiver of disqualification as provided under Clause 2.2.8 hence referring the matter back to the Port authority to carry out.

Clauses 2.7.2, 2.2.8, and 2.7.1 have been reproduced hereunder.

• Clause 2.7.2

“In case it is found during the evaluation or at any time before signing of the Concession Agreement or after its execution and during the period of subsistence thereof, including the concession thereby granted by the Authority, that one or more of the prequalification conditions have not been met by the Applicant, or the Applicant has made material misrepresentation or has given any materially incorrect or false information, the Applicant shall be disqualified forthwith if not yet appointed as the Concessionaire either by issue of the LOA or entering into of the Concession Agreement, and if the Applicant/SPV has already been issued the LOA or has entered into the Concession Agreement, as the case may be, the same shall, notwithstanding anything to the contrary contained therein or in this RFQ, be liable to be terminated, by a communication in writing by the Authority to the Applicant, without the Authority being liable in any manner whatsoever to the Applicant and without prejudice to any other right or remedy which the Authority may have under this RFQ, the Bidding Documents, the Concession Agreement under applicable law.”

• Clause 2.2.8

“An Applicant including any Consortium Member or Associate should, in the last 3 (three) years, have neither failed to perform on any contract, as evidenced by imposition of a penalty by an arbitral or judicial authority or a judicial pronouncement or arbitration award against the Applicant, Consortium Member or Associate, as the case may be, nor has been expelled from any project or contract by any public entity nor have had any contract terminated by any public entity for breach by such Applicant, Consortium Member or Associate.

Provided, however, that where an Applicant claims that its disqualification arising on account of any cause or event specified in this Clause 2.2.8 is such that it does not reflect (a) any malfeasance on its part in relation such cause or event; (b) any willful default or patent breach of the material terms of the relevant contract; (c) any fraud, deceit or misrepresentation in relation to such contract; or (d) any rescinding or abandoning of such contract, it may make a representation to this effect to the Authority for seeking a waiver from the disqualification hereunder and the Authority may, in its sole discretion and for reasons to be recorded in writing, grant such waiver if it is satisfied with the grounds of such representation and is further satisfied that such waiver is not in any manner likely to cause a material adverse impact on the Bidding Process or on the implementation of the Project.” 

• Clause 2.7.1

“Notwithstanding anything contained in this RFQ, the Authority reserves the right to accept or reject any Application and to annul the Bidding Process and reject all Applications/ Bids, at any time without any liability or any obligation for such acceptance, rejection or annulment, and without assigning any reasons therefor. In the event that the Authority rejects or annuls all the Bids, it may, in its discretion. invite all eligible Bidders to submit fresh Bids hereunder…”

Legality of the Tender Conditions

In the case of the Writ Petition filed in Adani Ports and Special Economic Zone v. Vishakhapatnam Port Trust the legality of Clauses 2.2.8 and 2.7.1 was put to test while also considering whether a Constitutional Court could interfere and adjudicate upon the decision of a State-owned entity.

1. Right to choose your contractual partner versus the right to trade and carry on an occupation

The principle of freedom to contract plays an important role when understanding clause 2.7.1. The concept of freedom of contract has two meanings; first is the freedom of a party to enter into a contract on whatever terms it may consider advantageous to its interests or to choose not to, and second, that there should be no liability without consent being embodied in a valid contract [1]. The most basic principles of contract law explain that a tender is an invitation to offer and not an offer itself. The party submitting the bid is the one who makes the offer, which is then open for the party who released the tender to either accept or reject. The decision to accept an offer undergoes several layers of negotiations and due-diligence to ensure a breach-free completion of a contract. As explained in APSEZ v. VPT, the decision for choosing its contractual partner by a party is governed by the principle of commercial prudence. However, the process must be within legal barriers, unbiased and uphold the public interest.

The right to practise a profession of one’s choice and carry on any trade, occupation and business is guaranteed underArticle 19(1)(g) of the Indian Constitution. When pitted against the right of a State-owned entity to choose its contractual partner, it is interesting to consider whether APSEZ’s rights were breached by the institution of disqualification clauses within the tender process. The freedom under Article 19(1)(g) confers a vast right to conduct a business of one’s own choice without breaching the law. It, however, does not guarantee that the business will flourish and that the Government will award one a contract.

Hence the right to choose your contractual partner stands in this scenario.

2. Right to adopt clauses which perpetuate blanket bans

Clause 2.2.8 has caused APSEZ to lose out on several contracts with multiple port authorities. It may seem on first blush to be an unbridled power; however, as per the law, State action must be reasoned and only otherwise would it be arbitrary. Clause 2.2.8 provides clear boundaries for allowing disqualification of a bidder from the tender process. These specify that if a bidder has had any contract terminated by a public entity, it would be disqualified from the tender process.  It further also provides a carveout for both parties to waive the clause. The track record of the bidder, its associate members, etc., is a matter of great importance, particularly for such long-term contracts with huge investments and consequently enormous consequences for the delay, etc. Thus, a State-owned entity may be wary of whom it wishes to contract with and keep safeguards for the same.

3. Can the Court interfere in administrative decisions?

The leading case on the law of award of public contracts which lays down the guiding principles isTata Cellular v. Union of India. It lays down that the terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. Further, the court does not have the expertise to correct administrative decisions. The Government must have freedom of contract. In other words, fair play in the joints is a necessary concomitant for an administrative body functioning in an administrative sphere or quasi-administrative sphere.However, the decision must not only be tested by the application of the Wednesbury principle of reasonableness (including its other facts pointed out above) but must be free, arbitrariness not affected by bias or actuated by mala fides.

Further in Uflex Ltd. v. The Government of Tamil Nadu and Ors. the Court held that “The judicial review of such contractual matters has its own limitations. It is in this context of judicial review of administrative actions that this Court has opined that it is intended to prevent arbitrariness, irrationality, unreasonableness, bias and mala fide. The purpose is to check whether the choice of decision is made lawfully and not to check whether the choice of decision is sound. To that extent, principles of equity and natural justice have to stay at a distance.”

Thus, a Court cannot foray into the depth of administrative actions and decisions. Judicial restraint is of great pertinence in these matters.

Similar Litigations filed against other Port Trusts

A petition was filed by APSEZ in the Odisha High Court after disqualification from the bidding process by the Paradip Port Trust. There the Court wished to follow the decision given by the division bench of the APHC in the matter of APSEZ v. VPT. Further, the Jawaharlal Nehru Port Trust was also taken to the High Court of Bombay by APSEZ following its disqualification from a tender process to privatise the port authority’s container handling facility.Bombay High Court imposed Rupees Five Lakhs as costs to APSEZ for bringing an unmeritorious case. A plea was filed by APSEZ in the Supreme Court before a vacation bench of Justices Oka and MM Sundresh. Adani has claimed that these disqualifications are illegal. It will be seen whether the Supreme Court provides relief for APSEZ. The law, as it currently stands in cases related to tenders, stipulates restraint in judicial interference, such that a Court may only intervene in case of glaring illegality or breach of a constitutional right.

Industrial Ramifications

Aside from a legal standpoint, the author wishes to showcase the industrial ramifications that APSEZ is currently facing. APSEZ is currently India’s largest commercial port operator accounting for nearly one-fourth of the cargo movement in the country. APSEZ’s industrial credentials to run ports have been showcased by its business expansion over time. However, its Indian operations have been hampered prima facie on account of major policy changes by the Indian Government, which led to lower volumes of coal being turned around as cargo, which in turn led to a breach of contract with the Vishakhapatnam Port Trust.

Mr Ramesh Singhal, CEO at i-Maritime Consultancy Pvt. Ltd., believes that “APSEZ is a port business machine which is better than any other port company in India and has done better than any international port firms operating in India. Out of the 100 odd berths operated by it in some 12 ports/ terminals across India, if one berth does not work out and that too for no fault of its business acumen, a bar on participating in other tenders is not warranted.”

Mr. Singhal is of the opinion that the existing policy, which restricts a handler to operate only one commodity for 30 years, is very narrow and that a developer must be given a choice to choose alternative cargo.

Further, an indirect blacklisting policy might have negative repercussions in terms of investment in the ports sector, restrict competition, and the bid may not go to the developer best suited for the task.

Concluding Comments

APSEZ has faced severe trouble with multiple port trusts in India due to disqualification from various tender processes, and its troubles are not yet over. Most port authorities have also declined to waive the disqualification clause 2.8.8 from their tenders. Thus, the failsafe mechanism built in for the protection of the bidders is not working in APSEZ’s scenario. It has reached the last stop as it has knocked on the doors of the Supreme Court. It will need to showcase an urgent need for the Court to consider its position and examine the legality of clause 2.8.8, which allows disqualification based on the previous expulsion by a public entity.

Disclaimer

The author’s opinions are personal and do not represent the opinions of any organizations she is affiliated with. The author reserves her right to depart from these views in light of changed circumstances.

About the Author 

Ms. Ketayun H. Mistry is an Associate at Shardul Amarchand Mangaldas & Co..

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya 

Senior Editor: Aribba Siddique 

Associate Editor: Kshitij Pandey

Junior Editor: Nupur Barman

Preferred Method of Citation  

Ketayun H. Mistry, “The Curious Case of Blacklisting of Adani Ports and Special Economic Zone: Legality and Industrial Ramifications” (IJPIEL, 17 August 2022) 

<https://ijpiel.com/index.php/2022/08/18/the-curious-case-of-blacklisting-of-adani-ports-and-special-economic-zone-legality-and-industrial-ramifications/>

Endnotes

[1] Anson’s Law of Contract, 30th Edn., pg.4.