Introduction

The Ramana Dayaram Shetty vs. International Airport Authority of India is a landmark case of the Supreme Court of India which impacted two separate, but related, aspects of public law. It clarified the test for determining whether the statutory corporation or the government owned body would come under the rubric of “State” under the Article 12 of the Constitution and that a public authority would be subject to the standards it had prescribed itself to observe in its dealings with the citizens of the State or not, and if it didn’t, its action would be arbitrary and against the Article 14 of the Constitution. The judgment issued by Justice P. N. Bhagwati, was issued in the context of a tender dispute about an award made at the international airport in Bombay.

Facts

The International Airport Authority of India (“the Authority”) invited tenders for running a second-class restaurant and two snack bars at the international airport, Bombay. The tender notice demanded bidding companies had a minimum of 5 years registered status as a second-class hotelier. The tenders for which supporting documents like income tax certificates, affidavit of immovable property and solvency certificates were not submitted were rejected. The fourth respondent had no registration as a second-class hotelier but he claimed that he had about 10 years’ experience in catering in reputed institutions. When the Authority was asked to substantiate this, it was willing to accept the tender from the fourth respondent even though the said eligibility condition was not fulfilled. The appellant Ramana Dayaram Shetty had not put up any tender and had filed a writ petition before the Bombay High Court challenging the same calling it arbitrary. The writ petition and appeal to a Division Bench was rejected and hence the appeal was filed before the Supreme Court.

Issues

1. Whether the International Airport Authority of India is “State” within the meaning of Article 12 of the Constitution.

2. Whether the acceptance of the fourth respondent’s tender, despite non-compliance with the  stated eligibility condition, was arbitrary and violative of Article 14.

Also Read – Kharak Singh v. State of U.P. (1962)

Judgment and Reasoning

In the first, the Court determined that the Authority was an instrumentality and agency of the Central Government, and thus came within the scope of Article 12. This was based on the degree of the Government’s control on the composition, finances and direction of the policy of the Authority, the power of supersession of the Government and the transfer to the Authority of functions, assets and liabilities of the Union Government under earlier statute. The Court did not confine itself to the corporate structure of such bodies, but gave a series of cumulative factors to consider in this regard, namely the amount of financial assistance received from the state, the proportion of the share capital owned by the state, the degree of control over the management and policy of these bodies by the state, the extent to which the bodies are given monopoly status, and the similarity of their functions to the governmental functions. This was reiterated as a six-factor test in Ajay Hasia v Khalid Mujib Sehravardi, (1981) 1 SCC 722.

Also Read – Randhir Singh v. Union of India (1982)

The Court determined that in the second question, a public body that sets a condition for contracting with citizens is not allowed to violate that condition at its own will and convenience. The requirement in the tender notice for 5 years’ experience as a registered second-class hotelier was not literally met by the fourth respondent, therefore refusing him on a more technical basis and accepting another bidder, was discriminatory and arbitrary, in violation of Article 14. But the Court rejected the claim of the appellant, deciding against setting aside the contract on the ground that the contract was highly arbitrary, the appellant had come to the Court after a lapse of time and the fourth respondent had invested a lot of money based on the contract.

Obiter Dicta

Beyond the ratio, Justice Bhagwati made several wider observations that were not strictly necessary to the decision but proved influential in later jurisprudence. He observed that the rule against arbitrary State action is not wholly dependent on Article 14, but is an independent principle evolved by the judiciary to check the arbitrary exercise of executive power, drawing on the American administrative law principle that an executive agency must be rigorously held to the standards by which it professes its actions to be judged. He further remarked that in a modern welfare State increasingly engaged in economic, industrial and commercial activity, the power of the executive to affect the lives of ordinary people was steadily expanding, and that this expansion carried with it a corresponding need for legal accountability. Bhagwati, J. also suggested, without deciding the point, that even a body which did not satisfy the strict test for being “State” under Article 12 might nonetheless owe some public law obligation to those it dealt with if it performed functions of a public character, since such a body would, in substance, be discharging a public duty. This last observation was obiter, as the Authority had already been held to be an instrumentality of the State on the facts before the Court, but it foreshadowed the subsequent judicial extension of public law accountability to bodies exercising public functions irrespective of the degree of governmental control over them.

Conclusion

R.D. Shetty’s legacy continues to be strong on two fronts: Administrative and constitutional law in India. It offered a practically convenient and factor-based approach to define the instrumentalities and agencies of the State under the definition in Article 12, which got worked out in later judgements like Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111. It also established the rule that the government must not arbitrarily violate its own standards in the conduct of public affairs, thus continuing the protection of the equality guaranteed by Article 14 in the typical commercial setting of tenders and contracts.

This article has been researched and prepared by Sachin Gupta, Legal Research Intern at LegalRath.

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