M/s A.B. Enterprises v. State of H.P. and others

the parties.

#4. As regards the execution of agreement, the same could not be executed as admittedly, respondent No.3 proceeded on leave on 01.04.2025 itself. As per petitioner, 3 ( 2025:HHC:21340 ) respondent No.3 orally directed it over the telephone to deploy five security personnel till he (respondent No.3) assumes the work and accordingly he complied with the request so made. Respondent No.3 ultimately returned after availing leave on

21.04.2025 and signed the agreement on that day, i.e.

21.04.2025.

#5. Respondent No.3 thereafter, on the same day i.e.

21.04.2025 wrote a letter to the petitioner to deploy the Security Guards and Supervisors at the earliest and mentioned names of such Guards and Supervisors, as per terms and conditions of the agreement. The petitioner immediately on 23.04.2025, submitted a list of 17 Security Guards including five already deployed and also submitted the list of two Supervisors.

#6. The petitioner on 23.04.2025 itself received a communication from respondent No.3, asking the petitioner to submit the antecedents, police verification and medical certificates of all the security personnel so that their joining could be accepted.

#7. The petitioner submitted all required documents on 25.04.2025 along-with a forwarding letter.

#8. The petitioner thereafter received a communication dated 28.04.2025 from respondent No.3, 4 ( 2025:HHC:21340 ) referring to the terms and conditions of the Notice Inviting Tender ( for short the ‘NIT’), calling upon the petitioner to deposit an amount of Rs.4,50,000/- as security money.

#9. The petitioner replied to the same on the same day i.e. 28.04.2025 stating therein that since respondent No.3 himself had called upon the petitioner to deposit only a sum of Rs.1,00,000/-, which had been deposited and even as per 5% condition, the security money would come Rs.2,25,000/- only. Anyhow, the petitioner still deposited the entire amount on 30.04.2025.

#10. Strangely enough, the petitioner thereafter received a letter on 30.04.2025 informing it that the tender in its favour had been cancelled and aggrieved thereby, the instant petition has been filed for the relief as quoted above.

#11. As observed above, the respondents while filing the reply have not disputed the factual matrix of the case, but would contend that since the petitioner had not complied with the terms of the tender conditions by deploying the Security Guards and Supervisors within the time frame and further had not deposited the amount in terms of tender within the stipulated period, therefore, the tender in its favour was cancelled. 5 ( 2025:HHC:21340 )

#12. We have heard learned counsel for the parties and have also gone through the records of the case carefully.

#13. At the outset, it needs to be observed that a formal agreement between the parties though had been prepared by the petitioner on 01.04.2025, but the same was signed by respondent No.3 on 21.04.2025, after he joined department, after availing the leave. Thus, the binding and concluded contract in terms of Article 299 of the Constitution of India between the parties came to be executed only on

21.04.2025.

#14. In this background, it shall be apt to re-produce the relevant extract of the order, whereby the tender dated

30.04.2025 was cancelled reads as under:- “As per Terms & Conditions of agreement held on 01/04/2025 between Health & Family Welfare Department Kinnaur and M/s A.B. Enterprises, Shimla, later was to provide 19 Security personnel (17 Security Guands 02 Supervisors) at the monthly cost / charge of Rs. 375000/-(Rupees Three Lakh & Seventy Five Thousand) only. As per above mentioned agreement, following conditions are to be met as under-

#1. M/s A.B. Enterprises, Shimla, was to provide 17 Security personals and 2 Supervisors within 15 days of signing of agreement as per work order vide letter No. No. 29/03/2025. HFW-KNR(Tender)2025-3471-44

#2. As per clause 7 of bidding process, which is a part of agreement. A B Enterprises was to deposit 5% of annual contract value towards Performance Security by way of Bank Guarantee/FDR duly pledged in favour of 6 ( 2025:HHC:21340 ) the Chief Medical Officer Kinnaur at Reckong Peo drawn on any Nationalize Bank/Scheduled Bank and payable at Rockong Pro within 15 days. Whereas, only 5 Security Personals were provided on 01/04/2025 Whereas remairung 12. Security Personnel were deployed on 23/04/2025 after the lapse of 7 days of dead line. Whereas Security Supervisors were deployed on 26/04/2025 i.e. after the lapse of 11 days. Whereas Performance Security amounting to Rs. Rs 2,25,,000/-(Two Lakh Twenty Five Thousand) only has not been deposited till date even after lapse of 15 days. Keeping above facts in view, as per clause 28 of Other Terms and Conditions of E-Tender Document dated 29/01/2025 which is a part of agreement signed between Health & Family Welfare Deptt. and A.B. Enterprises on 01/04/2025, work order issued on 29/03/2025 vide letter No HFW-KNR(Tender) 2025- 3471-44 dated 29/03/2025 hereby cancelled.”

#15. It would be noticed that tender has been cancelled on two grounds (i) that the petitioner was to provide 17 Security personnel and 2 Supervisors within 15 days of signing of the agreement as per work order dated 20.03.2025, whereas, the Security Guards were deployed only on

23.04.2025 i.e. after a lapse of 7 days of dead line and the Security Supervisors were deployed on 26.04.2025 i.e. after a lapse of 11 days.

#16. The reasons assigned by respondent No.3 to say the least are fallacious and not tenable, given the fact that the agreement between the parties, admittedly, had been entered 7 ( 2025:HHC:21340 ) on 21.04.2025 and it was from the date of agreement, that period of 15 days was to be computed. Even respondent No.3 understood it in the same manner as is evident and otherwise clear from the contents of para 1 of letter supra that “M/s A.B. Enterprises, Shimla was to provide 17 Security personnel and 2 Supervisors within 15 days of signing of agreement.”

#17. As regards the reason assigned in ground (ii) for canceling the tender, the same is equally not tenable as the petitioner was never asked to deposit 5% of the annual contract value towards performance security by way of bank guarantee/FDR and even as per respondents themselves, this was to be drawn within 15 days of the signing of the agreement and has been duly furnished on 30.04.2025, well within the time of 15 days from the date of agreement, which admittedly, had been entered into on 21.04.2025.

#18. In view of the aforesaid discussion, it can clearly be held that the action of the respondents is arbitrary and has not been carried out in ‘good faith’:- “The meaning of the term "good faith can be gathered from the following Law Lexicons: Roland Burrows: Words and Phrases Judicially denned. Good faith requires not, indeed logical infallibility but due care and attention. "Good faith", therefore, means absence of knowledge that a preference was intended. 8 ( 2025:HHC:21340 ) Funk & Wagnalls. (New Standard Dictionary of the English Language (1953). Good faith 'the observance of, or the intention to observe, honesty and fair dealing; absence of intention to deceive. Stroud's Judicial Dictionary, 3rd edition (1953). In good faith "Bankruptcy Act, 1883, would seem to mean innocent of the knowledge, and of the means of knowledge, that there is an adverse bankruptcy. A thing is to be deemed to be done in good faith, within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not. That section is obviously founded on the distinction pointed out in Jones v. Gordon (1877) L.R. 2 App. Cas. 616, by Lord Blackburn, between the case of a person who was honestly blundering and careless', and the case of a person who has acted not honestly, that is, not necessarily with the intention to defraud, but not with an honest belief that the transaction was a valid one, and that he was dealing with a good bill. Sale of Goods Act, 1893: A thing is done "in good faith" when it is in fact done honestly, whether it be done negligently or not. Ballentine: Law Dictionary (U.S.A.) A statutory definition of the term is, an honest intention to abstain from taking any unconscientious advantage of another, even through the forms and technicalities of law, together with an absence of all information or belief of facts which would render the transaction unconscientious. As applied to the holder of a forged cheque, to establish good faith there must not only be an absence of knowledge of any invalidity, but an absence of circumstances which would put an ordinarily prudent man upon inquiry. As an element tending to rebut malice in libel and slander, good faith requires proper consideration for the character and reputation of the person whose character is likely to be injuriously affected by the publication. There must be absence, not only of all improper motives, but of negligence. 9 ( 2025:HHC:21340 ) Good faith in adverse possession. In the law of adverse possession, whether general or statute the term means free from a design to defraud those who appear to have a better title than the claimant's. His possession must be free from stealth. Good faith in stock issue. In the valuation of property for which stock in a corporation is issued, " good faith" consists in the belief that a prudent and sensible man would hold in the ordinary conduct of his own business affairs. The Law Lexicon of British India by P. Ramanatha Iyer (M.L.J.). "Good Faith" denned. Act XLV of 1860, Section 52; Act IX of 1908, Section 2(7); Act X of 1897, Section 3(20); Bengal Act I of 1899, Section 3(17); Bombay Act I of 1904, Section 3(20). Burma Act I of 1898, Section 2(25) Ε.Β. & A. Act I of 1909, Section 5(21); Madras Act I of 1891, Section 3(11); Punjab ActI of 1898, Section 2(22); U.P. Act 1 of 1904, Section 4 (17). Good Faith. Honesty, absence of fraud, collusion or deceit. Nothing is said to be done or believed in good faith which is done or believed Without due care and attention. (Penal Code, Section 52). A thing shall be deemed to be done in "good faith" where it is in fact done honestly, whether it is done negligently or not. Act X of 1897 (General Claues) Section 3(20); Eng Bill of Exchange Act, 1892, Section 90. Nothing shall be deemed to be done in good faith which is not done with due care and attention. Act IX of 1908. (Limitation) section a (7). Under the definition of the term in the Limitation Act" nothing shall be deemed to be done in good faith which is not done with due care and attention ". This is a stricter definition than the one adopted in Section 3(20) of the General Clauses Act, 1897, under which "a thing shall be deemed to be done in" good faith" Where it is in fact done honestly; whether it is done negligently or not". 13 I.C. 260. See also 1 Bom. 296 (Good faith and notice). The words "good faith" have no technical legal signification, but are to be taken in their ordinary acceptation, and mean 10 ( 2025:HHC:21340 ) simply, honestly in belief, purpose, or conduct.. Of. Butcher v. Stead (1875) L.R. 7 H.L. 839; In re Avery(1887) L.R. 36 Ch.D. 307 Ex parte Watson L.R. (1888) 21 Q..B.D. 301.”

#19. Further, the respondents have clearly remiss in not considering that the public tenders are a cornerstone of governmental procurement processes, ensuring transparency, competition, and fairness in the allocation of public resources. It emanates from the Doctrine of Public Trust which lays down that all natural resources and public use amenities & structures are intended for the benefit and enjoyment of the public. The State is not the absolute owner of such resources and rather owns it in trust and as such it cannot utilize these resources as it pleases.

#20. In this background, it shall be apposite to refer to the judgment of the three Judge Bench of the Hon’ble Supreme Court in Subodh Kumar Singh Rathore vs. Chief Executive Officer and others, AIR 2024 Supreme Court 3784: AIR Online 2024 SC 493, wherein, while dealing with such contention as contained in para 124, which reads as under:- “124. Public tenders are a cornerstone of governmental procurement processes, ensuring transparency, competition, and fairness in the allocation of public resources. It emanates from the Doctrine of Public Trust which lays down that all natural resources and public 11 ( 2025:HHC:21340 ) use amenities & structures are intended for the benefit and enjoyment of the public. The State is not the absolute owner of such resources and rather owns it in trust and as such it cannot utilize these resources as it pleases. As a trustee of the public resources, the State owes i) a duty to ensure that community resources are put to fair and proper use that ensures to the benefit of the public as- well as ii) an obligation to not indulge in any favouritism or discrimination with these resources. The State with whatever free play it has in its joints decides to award a contract, to hold up the matter or to interfere with the same should be accompanied by a careful consideration of the harm to public interest.”

#21. Furthermore, the respondents have been totally oblivious to the principles of transparency and fairness embedded in public tender processes which are essential to prevent corruption and misuse of public resources of public offices. It shall be apt to reproduce the observations made by the Hon’ble Supreme Court in the aforesaid judgment in para 125, which reads as under:- “125. Public tenders are designed to provide a level playing field for all potential bidders, fostering an environment where competition thrives, and the best value is obtained for public funds. The integrity of this process ensures that public projects and services are delivered efficiently and effectively, benefiting society at large. The principles of transparency and fairness embedded in public tender processes also help to prevent corruption and misuse of public resources. In 12 ( 2025:HHC:21340 ) this regard we may refer to the observations made by this Court in Nagar Nigam v. Al. Farheem Meat Exporters Pvt. Ltd. reported in (2006) 13 SCC 382, which reads as under: - “16. The law is well settled that contracts by the State, its corporations, instrumentalities and agencies normally granted through public auction/public tender by inviting tenders from eligible persons and the notification of the public auction or inviting tenders should be advertised in well-known dailies having wide circulation in the locality with all relevant details such as date, time and place of auction, subject- matter of auction, technical specifications, estimated cost, earnest money deposit, etc. The award of government contracts through public auction/public tender ensure transparency in the public procurement, to maximise economy and efficiency in government procurement, to promote healthy competition among the tenderers, to provide for fair and equitable treatment of all tenderers, and to eliminate irregularities, interference and corrupt practices by the authorities concerned. This is required by Article 14 of the Constitution.” (Emphasis supplied)”

#22. Furthermore, the respondents have betrayed ignorance to the fact that the sanctity of public tenders lies in their role in upholding the principles of equal opportunity and fairness. Once a contract has come into existence through a valid tendering process, its termination must adhere strictly to the terms of the contract, with the executive powers to be 13 ( 2025:HHC:21340 ) exercised only in exceptional cases by the public authorities and that too in loathe. This note of caution was expressed by the Hon’ble Supreme Court in para 126 of judgment in Subodh Kumar’s case (supra), which reads as under:- “126. The sanctity of public tenders lies in their role in upholding the principles of equal opportunity and fairness. Once a contract has come into existence through a valid tendering process, its termination must adhere strictly to the terms of the contract, with the executive powers to be exercised only in exceptional cases by the public authorities and that too in loathe. The courts are duty bound to zealously protect the sanctity of any tender that has been duly conducted and concluded by ensuring that the larger public interest of upholding bindingness of contracts are not sidelined by a capricious or arbitrary exercise of power by the State. It is the duty of the courts to interfere in contractual matters that have fallen prey to an arbitrary action of the authorities in the guise of technical faults, policy change or public interest etc.”

#23. In addition to the above, respondent No.3 has turned a blind eye to the fact that the sanctity of contract is a fundamental principle that underpins the stability and predictability of legal and commercial relationships. When public authorities enter into contracts, they create legitimate expectations that the State will honour its obligations. Arbitrary or unreasonable terminations undermine these 14 ( 2025:HHC:21340 ) expectations and erode the trust of private players from the public procurement processes and tenders. Once a contract is entered, there is a legitimate expectation, that the obligations arising from the contract will be honoured and that the rights arising from it will not be arbitrarily divested except for a breach or non-compliance of the terms agreed thereunder. It shall be apt to reproduce the observations made in para 127 of the judgment in Subodh Kumar’s case (supra), which reads as under:- “127. The sanctity of contracts is a fundamental principle that underpins the stability and predictability of legal and commercial relationships. When public authorities enter into contracts, they create legitimate expectations that the State will honour its obligations. Arbitrary or unreasonable terminations undermine these expectations and erode the trust of private players from the public procurement processes and tenders. Once a contract is entered, there is a legitimate expectation, that the obligations arising from the contract will be honoured and that the rights arising from it will not be arbitrarily divested except for a breach or non- compliance of the terms agreed thereunder. In this regard we may make a reference to the decision of this Court in Sivanandan C.T. vs. High Court of Kerala reported in (2024) 3 SCC 799 wherein it was held that a promise made by a public authority will give rise to a legitimate expectation it will adhere assurances. The relevant portion reads as under: - 15 ( 2025:HHC:21340 ) “18. The basis of the doctrine of legitimate expectation in public law is founded on the principles of fairness and non-arbitrariness in Government dealings with individuals. It recognises that a public authority's promise or past conduct will give rise to a legitimate expectation. The doctrine is premised on the notion that public authorities, while performing their public duties, ought to honour their promises or past practices. The legitimacy of an expectation can be inferred if it is rooted in law, custom, or established procedure xxx xxx xxx

#45. The underlying basis for the application of the doctrine of legitimate expectation has expanded and evolved to include the principles of good administration. Since citizens repose their trust in the State, the actions and policies of the State give rise to legitimate expectations that the State will adhere to its assurance or past practice by acting in a consistent, transparent, and predictable manner. The principles of good administration require that the decisions of public authorities must withstand the test of consistency, transparency, and predictability to avoid being regarded as arbitrary and therefore violative of Article 14.” (Emphasis supplied)”

#24. Lastly and more importantly, respondent No.3 has failed to consider that cancellation of tender deprives a person of his very valuable rights and is a very drastic step, often due to significant investments having already been made by the parties involved during the subsistence of the contract. 16 ( 2025:HHC:21340 ) Rather a word of caution has been sounded by the Hon’ble Supreme Court in Subodh Kumar’s case (supra), whereby they have cautioned the public authorities to be circumspect in disturbing or wriggling out of its contractual obligations through means beyond the terms of the contract in exercise of their executive powers. It shall be apt to reproduce the observations as contained in paras 128 and 129 of the judgment which read as under:- “128. Cancellation of a contract deprives a person of his very valuable rights and is a very drastic step, often due to significant investments having already been made by the parties involved during the subsistence of the contract. Failure on the part of the courts to zealously protect the binding nature of a lawful and valid tender, would erode public contracts and tenders. Arbitrary terminations contract create uncertainty and unpredictability, thereby discouraging public participation in the tendering process. When private parties perceive that their contractual rights can be easily trampled by the State, they would be dissuaded from participating in public procurement processes which may have a negative impact on such other public-private partnership ventures and ultimately it is the public who would have to bear the brunt thereby frustrating the very object of public interest.

#129. We caution the public authorities to be circumspect in disturbing or wriggling out of its contractual obligations through means beyond the terms of the contract in exercise of their executive powers. We do not say for a moment that the State has no power to alter or cancel a 17 ( 2025:HHC:21340 ) contract that it has entered into. However, if the State deems it necessary to alter or cancel a contract on the ground of public interest or change in policy then such considerations must be bona-fide and should be earnestly reflected in the decision-making process and also in the final decision itself. We say so because otherwise, it would have a very chilling effect as participating and winning a tender would tend to be viewed as a situation worse than losing one at the threshold.”

#25. Besides the above, the action of the respondents is liable to be set aside as the cancellation order has been passed in utter disregard and violation of the principles of natural justice. Moreover, the respondents after accepting the deployment of Guards and the Supervisors and after accepting the amount unconditionally had clearly waived off their right to cancel the tender.

#26. In view of the aforesaid reasons and discussion, we find merit in the instant petition and the same is allowed. Accordingly, the impugned communication dated 30.04.2025, whereby tender awarded in favour of the petitioner has been cancelled is quashed and set aside and the petitioner is permitted to continue as per agreement for a period of two years from the date of tender has been granted to the petitioner i.e. 21.04.2025. 18 ( 2025:HHC:21340 )

#27. The petition is disposed of in above terms, so also the pending application(s), if any. ( Tarlok Singh Chauhan ) Judge July 04, 2025 ( Sushil Kukreja ) (naveen) Judge