1993 (4) TMI 306 - SC - Law of Competition

Railway bogie manufacturers' lower price offers don't prove cartel formation without specific agreement evidence

UOI. Versus HINDUSTAN DEVELOPMENT CORPN.

The SC examined allegations of cartel formation by railway bogie manufacturers who offered lower prices of Rs. 67,000. The court held that mere offer of ... Notice inviting tender - economic policy of the Government in the matter of stopping monopolistic tendencies - principle of fixation of uniform price for the industry - Dual Pricing - Time to complete the supply - test of reasonableness - word 'Cartel' - scope of 'legitimate expectations' - Railway Board enters into contracts with the manufacturers for the supply of cast steel bogies - HELD THAT:- A mere offer of a lower price by itself does not manifest the requisite intent to gain monopoly and in the absence of a specific agreement by way of a concerted action suggesting conspiracy, the formation of a cartel among the producers who offered such lower price can not readily be inferred. In the instant case, the fact that two of the three big manufacturers entered into post-tender correspondence and also offered a lower price of ₹ 67,000 is not dispute. Though they did not place the necessary material in support of their offer as to how it is viable and workable, they, however, sought to contend before us that the price offered by them is not predatory and is only a reasonable price. By our earlier order dated 14th January, 1993 we directed the Tender Committee to examine the matter afresh regarding the reasonable price on the basis of the data that may be placed by these big manufacturers in support of their offer of ₹ 67,000. Therefore no conclusion can be reached definitely that offer of the price of ₹ 67,000 by itself was predatory and the manufacturers who offered such a price consequently formed a cartel. No doubt there was an apprehension that if such predatory price has to be accepted the smaller manufacturers will not be in a position to compete and may result in elimination of free competition. But there again the authorities reserved a right to reject such lower price. Under these circumstances though the attitude of these three big manufacturers gave rise to a suspicion that they formed a cartel but there is not enough of material to conclude that in fact there was such formation of a cartel. However, such an opinion entertained by the concerned authorities including the Minister was not malicious nor was actuated by any extraneous considerations. They entertained a reasonable suspicion based on the record and other surrounding circumstances and only acted in a bonafide manner in taking the stand that the three big manufacturers formed a cartel. The Rules prescribed by the Minister for Railways for entering into contracts lay down certain norms and contains guidelines. The rules provide for constitution of Tender Committee and the Procedure to be followed in the matter of inviting tenders. They also provide for negotiations but lays down that selection of contracts by negotiations is an exception rather than a rule and can be resorted to only under certain circumstances. Regarding splitting of tendered quantity in more than one form, we find some guidelines in Annexure 50. Now coming to the notice inviting tender in the instant case, we have already noted that the price quoted is subject to price variation clause and the Railways reserved a right to accept the lowest price or accept the whole or any part of the tender of portion of the quantity offered. The notice however, mentioned that the tenderer is at liberty to tender for the whole or any portion or to state in the tender that the rate quoted shall apply only if the entire quantity is taken from him. From these provisions it becomes clear that the tenderer can not expect that his entire tender should be accepted in respect of the quantity and that the Railways have a night to accept the tender as a whole or a part of it or portion of the quantity offered. It is not in dispute that in the past also there were many instances where the Railways as per the procedure followed, arrived at decisions in respect of both price and quantity for good and justifiable reasons. In the year 1991 the quantities of M/s H.D.C. and Bharatiya were in fact reduce from the allocations made by the Tender Committee which made its recommendations on the basis of certain data. It has to be noted that the Tender Committee is not a statutory authority and its proposals are recommendatory in nature and have to be considered in the distribution procedure culminating in the decision of the approving authority who as a matter of fact, also can take decisions in respect of price and allotment of quantities taking into consideration various other aspects from the point of view of public interest. Therefore it is evident that there is no legally fixed procedure regarding fixation of price and particularly regarding allotment giving scope to a legitimate expectation. However, with this facture background, we shall consider the contention regarding 'legitimate expectation'. Once the Minister produced evidence that her decision not to consult the staff before withdrawing the right to trade union membership was taken for reasons, of national security, that overrode any right to judicial review which the appellants had arising out of the denial of their legitimate expectation of consultation. The appeal would therefore be dismissed. The claim based on the principle of legitimate expectation can be sustained and the decision resulting in denial of such expectation can be questioned provided the same is found to be unfair, unreasonable, arbitrary and violative of principles of natural justice. vide Food Corporation of India's case [1992 (11) TMI 275 - SUPREME COURT]. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court include:(a) Whether the three major manufacturers-H.D.C., Mukand, and Bharatiya-formed a cartel by quoting identical prices in the tender for supply of cast steel bogies to the Railways, and whether the suspicion of cartel formation was justified and bona fide.(b) Whether the Railways' decision to fix dual pricing-offering a lower price to the three big manufacturers and a higher price to smaller manufacturers-was reasonable, bona fide, and not arbitrary or discriminatory.(c) Whether the allocation of quantities among manufacturers, especially the reduction of allotment to the three big manufacturers on the basis of alleged cartel formation, was justified or arbitrary.(d) Whether the Railways' rejection of post-tender correspondence offering lower prices by the big manufacturers and refusal to accept their lower price offers violated principles of fairness, natural justice, or legitimate expectation.(e) The scope and applicability of the doctrine of legitimate expectation in the context of government contracts and tender procedures, including whether the manufacturers had a legitimate expectation of treatment consistent with prior practice and policy.(f) The extent of judicial scrutiny permissible over government decisions relating to economic policy, tender acceptance, price fixation, and allocation of contracts, particularly in light of anti-monopoly and public interest considerations.2. ISSUE-WISE DETAILED ANALYSIS(a) Alleged Cartel Formation by Three Big ManufacturersLegal Framework and Precedents: The concept of a cartel is defined as an association or agreement among producers to control production, sales, and prices to obtain monopoly power, thereby restraining trade and competition. The Sherman Anti-Trust Act in the U.S. and similar competition laws prohibit such combinations. Price-fixing agreements are illegal per se, and mere identical pricing may raise suspicion but is not conclusive proof of cartel formation. The Court referred to authoritative definitions from legal dictionaries and American jurisprudence, including the need for evidence of an agreement or conspiracy to restrain trade.Court's Interpretation and Reasoning: The Court found that the identical price quoted by the three big manufacturers and their post-tender offer to reduce prices raised a reasonable suspicion of cartel formation but did not constitute conclusive proof. The authorities, including the Tender Committee, Financial Commissioner, and Minister, acted bona fide in entertaining this suspicion based on the record and circumstances. However, the Court held that there was insufficient material to definitively conclude that a cartel existed.Key Evidence and Findings: The identical tender price of Rs. 77,666 by the three manufacturers, the post-tender correspondence offering lower prices, and the Railways' internal notes expressing concern about monopolistic tendencies formed the basis of suspicion. Yet, no direct evidence of an agreement or conspiracy was produced.Application of Law to Facts: Mere identical pricing and voluntary price reduction offers do not amount to proof of cartel formation without evidence of concerted action or agreement. The Court emphasized the need for caution before labeling such conduct as cartelization.Treatment of Competing Arguments: The manufacturers argued that the identical pricing was coincidental or competitive and that their lower price offers were bona fide attempts to supply at reasonable rates. The Railways contended that the conduct indicated anti-competitive intent. The Court balanced these views and found the suspicion reasonable but not conclusively established.Conclusions: The suspicion of cartel formation was reasonable and bona fide but not proven. Therefore, punitive actions premised solely on cartel formation were unwarranted.(b) Dual Pricing and Price FixationLegal Framework and Precedents: Government contracts and tender processes must comply with Article 14 of the Constitution, prohibiting arbitrariness and discrimination. However, the Government has discretion in awarding contracts and may reject the lowest bid if it is not reasonable or realistic. Judicial review of economic policy decisions is limited, and courts defer to expert bodies unless decisions are arbitrary or mala fide. Precedents emphasize the need for reasonableness, public interest, and non-arbitrariness in administrative decisions.Court's Interpretation and Reasoning: The Court held that the Railways' fixation of Rs. 76,000 as a reasonable price for smaller manufacturers and Rs. 67,000 for the three big manufacturers (based on their commitment) was a bona fide policy decision aimed at preventing monopolistic dominance and protecting smaller firms. Dual pricing under these circumstances was not discriminatory but a rational measure to sustain competition and public interest.Key Evidence and Findings: The Tender Committee's price evaluation, the post-tender price reduction offers, the Railways' internal notes, and the Minister's orders showed a deliberate policy to balance price competitiveness with industrial health. The Court noted that the lower price offered by the big manufacturers was not accepted for all to avoid making smaller manufacturers unviable.Application of Law to Facts: The Government's discretion to fix different prices for different categories of manufacturers was exercised on reasonable grounds, supported by economic and public interest considerations. The Court rejected the High Court's direction to fix a uniform price of Rs. 67,000 for all manufacturers as unsustainable.Treatment of Competing Arguments: The manufacturers contended that dual pricing was discriminatory and punitive; the Railways maintained it was necessary to prevent monopoly and ensure healthy competition. The Court sided with the Railways' policy rationale.Conclusions: Dual pricing was reasonable, bona fide, and not arbitrary or discriminatory under the circumstances.(c) Allocation of Quantities Among ManufacturersLegal Framework and Precedents: Allocation of contract quantities is subject to administrative discretion but must be exercised fairly, reasonably, and not arbitrarily. The Government must follow objective criteria and avoid punitive measures not supported by evidence.Court's Interpretation and Reasoning: The Court held that the reduction of quota to the three big manufacturers on the basis of alleged cartel formation was unjustified since cartel formation was not established. The Minister's variations to the Tender Committee's recommendations were partly punitive and hence unsustainable. However, the allocation to smaller manufacturers, including BIFR companies and wagon builders, was based on relevant considerations such as capacity, past performance, and public interest in sustaining smaller units.Key Evidence and Findings: The Tender Committee's recommendations were based on assessed capacity, performance, and historical data. The Minister's changes were motivated by suspicion of cartel and desire to rehabilitate smaller firms. The Court emphasized that the Minister's discretion must be exercised on objective and justifiable grounds.Application of Law to Facts: The Court restored the allocation to the three big manufacturers as per the Tender Committee's recommendations and allowed the smaller manufacturers' allocations to stand, subject to future adjustments on objective criteria.Treatment of Competing Arguments: The big manufacturers challenged the punitive reduction; the Railways defended it as necessary to curb monopolistic tendencies. The Court balanced these views and found only the punitive reduction unjustified.Conclusions: Allocation must be based on objective criteria; punitive reduction without proof of cartel formation is unjustified.(d) Post-Tender Correspondence and Natural JusticeLegal Framework and Precedents: Tender conditions and procedures govern acceptance or rejection of offers. Post-tender negotiations are exceptions and must be handled with care. Principles of natural justice require fairness and opportunity to be heard when decisions adversely affect parties. However, the Government's discretion in contract awards is broad, subject to reasonableness and public interest.Court's Interpretation and Reasoning: The Railways' initial rejection of post-tender lower price offers was based on policy to prevent short-term gains at the cost of long-term competition. The Court found no arbitrariness or mala fide in this approach. However, the manufacturers had no absolute right to have their post-tender offers accepted. The Railways' decision to negotiate and accept a price of Rs. 67,000 was consistent with policy and fairness.Key Evidence and Findings: Tender conditions reserved the right to accept or reject any tender or part thereof. The Railways' internal notes and correspondence showed a reasoned approach. The Court noted that the manufacturers were given opportunity to place data supporting their price offers.Application of Law to Facts: The Railways acted within their discretion and in good faith. No violation of natural justice or legitimate expectation arose from rejection or modification of post-tender offers.Treatment of Competing Arguments: Manufacturers argued for acceptance of lower prices and fairness; Railways emphasized policy and public interest. The Court upheld Railways' discretion.Conclusions: No breach of natural justice or unfairness in handling post-tender offers.(e) Doctrine of Legitimate ExpectationLegal Framework and Precedents: Legitimate expectation arises from past practice, representations, or established procedures, creating an expectation of consistent treatment. It does not confer a substantive right but requires fairness and due process before changing established practices. Judicial review protects against arbitrary or unfair denial of such expectations but does not prevent policy changes in public interest. Leading authorities emphasize the limited scope of this doctrine and its procedural focus.Court's Interpretation and Reasoning: The Court acknowledged that the manufacturers had a legitimate expectation based on past tender practices and policies. However, the Railways' discretion to change policy for valid public interest reasons, including preventing monopolies and promoting healthy competition, was recognized. The Court held that the doctrine does not grant an absolute right to continuation of prior treatment, especially when overridden by overriding public interest. The Railways' decision was not arbitrary or mala fide and thus did not violate legitimate expectation principles.Key Evidence and Findings: Past tender practices showed flexibility in price fixation and allocation. The Railways' rules and tender conditions allowed discretion. The manufacturers were not denied opportunity to present data or make representations. The Court emphasized the need to balance legitimate expectation with public interest and policy considerations.Application of Law to Facts: The Railways' policy change and decision to fix dual pricing and adjust allocations were within the scope of lawful discretion and public interest. The manufacturers' legitimate expectation was not unlawfully defeated.Treatment of Competing Arguments: Manufacturers contended that the change was arbitrary and violated natural justice; Railways argued policy necessity and fairness. The Court sided with the latter.Conclusions: Legitimate expectation does not preclude reasonable policy changes; no violation found here.(f) Judicial Review of Government Economic Policy and Tender DecisionsLegal Framework and Precedents: Courts recognize the broad discretion of the Government in economic and contract matters. Judicial interference is limited to cases of arbitrariness, mala fide, or violation of constitutional principles. The doctrine of 'play in the joints' allows flexibility in complex economic decisions. Precedents emphasize deference to expert bodies and policy makers.Court's Interpretation and Reasoning: The Court reiterated that the Railways' decisions on price fixation, tender acceptance, and quantity allocation are policy decisions within the Government's domain. Unless shown to be arbitrary, discriminatory, or mala fide, such decisions are not subject to judicial interference. The Railways' policy to prevent monopolistic tendencies and protect smaller manufacturers was a rational and reasonable exercise of discretion.Key Evidence and Findings: The Court relied on detailed records of the tender process, internal notes, and policy considerations. It noted the Government's duty to act in public interest and promote social and economic justice.Application of Law to Facts: The Railways' actions were consistent with constitutional mandates and policy objectives. The Court declined to substitute its judgment for that of the Government.Treatment of Competing Arguments: Petitioners sought strict adherence to tender rules and uniform pricing; the Government emphasized policy and public interest. The Court favored the Government's reasoned approach.Conclusions: Judicial review is limited; the Government's economic policy decisions in this case were lawful and reasonable.3. SIGNIFICANT HOLDINGS'There is no enough of material to conclude that M/s. H.D.C., Mukand and Bhartiya formed a cartel. However, there was scope for entertaining suspicion by the Tender Committee that they formed a cartel since all the three of them quoted identical price and the opinion entertained by the concerned authorities including the Minister that the three big manufacturers formed a cartel was not per se malicious or was actuated by any extraneous considerations and the authorities acted in a bonafide manner in taking the stand that the three big manufacturers formed a cartel.''The direction of the High Court that the supply of bogie should be at Rs. 67,000 by every manufacturer cannot be sustained and that a fresh consideration of a reasonable price is called for. The Tender Committee shall reconsider the question of fixation of reasonable price. While doing so it shall consider the offer of Rs. 67,000 made by M/s H.D.C. and Mukand alongwith the data that would be given by them in support of their offer and the percentage of profits available to all the manufacturers and other relevant aspects and then fix a reasonable price at which the manufacturers would be able to supply.''Dual pricing under certain circumstances may be reasonable and the stand of the railways to adopt dual pricing under the circumstances is bonafide and not malafide. M/s H.D.C., Mukand and Bharatiya must be deemed to be in a position to supply at the rate of Rs. 67,000 per bogie and thus they form a distinct category. The smaller manufacturers belong to a different category and if a different price is fixed for them it is not discriminatory.''If the price that to be fixed by the Tender Committee as directed by us happens to be more than Rs. 67,000 than that would be applicable to the smaller manufacturers only and not to M/s H.D.C., Mukand and Bharatiya who on their own commitment have to supply at the rate of Rs. 67,000.''The three big manufacturers M/s H.D.C., Mukand and Bharatiya should be allotted the quantities as per the recommendations of the Tender Committee. However, the quantities finally allotted by the competent authority to the smaller manufacturers need not be disturbed and the railway authorities may make necessary adjustments next year in the matter of allocation of quantities to them taking into consideration the allotments given to them this year.''The Government cannot act arbitrarily and without reason and if it does, its action would be liable to be invalidated. If the Government awards a contract or leases out or otherwise deals with its property or grants any other largess, it would be liable to be tested for its validity on the touch-stone of reasonableness and public interest and if it fails to satisfy either test, it would be unconstitutional and invalid.''The doctrine of legitimate expectation gets assimilated in the rule of law and operates in our legal system in this manner and to this extent. The mere reasonable or legitimate expectation of a citizen, in such a situation, may not by itself be a distinct enforceable right; but failure to consider and give due weight to it may render the decision arbitrary and this is how the requirement of due consideration of a legitimate expectation forms part of the principle of non-arbitrariness, a necessary concomitant of the rule of law.''Legitimate expectation does not unlock the gate which shuts the court out of review on the merits. The notion of legitimate expectation was introduced at a time when the courts were developing the common law to suit modern conditions and were sweeping away the unnecessary archaisms of the prerogative writs, but it should not be used to subvert the principled justification for curial intervention in the exercise of administrative power.''The Railways particularly the Financial Commissioner as well as the Minister and initially the Tender Committee formed an opinion that these three big manufacturers formed a cartel and also quoted an unworkable predatory price at the post-tender stage. therefore from the point of view of preventing monopoly in the public interest the decision in question was then in a bonafide manner. However, on a factual basis we held that the alleged formation of a cartel was only in the realm of suspicion and in that view the decision was modified.''Dual pricing would not be bad in the circumstances mentioned above and the Railways' stand to adopt dual pricing under the circumstances is bonafide and not malafide.''The Government's policy to prohibit concentration of economic power and to control monopolies so that ownership and control of material resources are distributed to subserve the common good and to ensure reduction in concentration of wealth and economic power is in public interest and is a valid policy.'