TMI Blog1986 (2) TMI 348X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of exceeding ₹ 600 crores outside India during the period of last nine years. The first Petitioner Company claims that it has been listed as one of the largest international construction companies by the Engineering News-Record Magazine of U.S.A. and has been placed at Sr. No. 42 in the list pertaining thereto. The only other Indian company, according to the first Petitioner Company, is Indian Railway Construction Company Limited which has been put at Sr. No. 47 by the aforesaid agency. It is claimed by the 1st Petitioner Company that for the year 1982, it effected highest turnover in civil construction works and has been recently prequalified for a project in Iraq of the value of ₹ 1000 crorcs. It has also undertaken works of large magnitude in Middle-East and North Africa. The equity and capital reserve of the first Petitioner Company for the relevant period of 1982-83 is in the vicinity of ₹ 100 crores. The first Petitioner Company has thus earned foreign exchange to the tune of ₹ 100 crores which is again the highest amongst all construction companies operating abroad and has been granted awards by the Government of India for earning such huge f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the dam construction. The eligibility criteria for the pre-qualification of the prospective bidders for the dam construction was, inter alia, that the applicant must be well established contractor with experience and capability in concrete dam and similar construction and must have placed 25000 cubic metres cement concrete per month and must have had in any one year during last five years turnover of the value of ₹ 400 million in construction. The information was to be furnished by the applicant in different proformas as appended to the pre-qualification information Form A required particulars of the organisational structure of the applicant. Form B pertained to the financial details of the applicant and these particular were to be given separately for each partner in case of a joint venture. Form C pertained to the particulars of joint venture. Form D related to the details of personnel resources. Form E related to the details of equipment of plant and machinery with the applicant. Form F related to the experience of the applicant while Form G was for furnishing additional information, if so desired, by the applicant. It should be noted at this stage that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a for huge construction projects costing over one million U.S. dollars in preference to the companies from most advanced countries like U.S.A., Canada, U. K ., France, Germany, Italy and Japan, and that it was strange that in their own country the Government is not prepared to give a chance to participate in bid for a project which is smaller in value than those for which the foreign Governments have pre-qualified the first Petitioner Company in the past. As there was no reply, another letter was addressed on July 31, 1984 to the Secretary to the Government of India in Finance Ministry enclosing a letter from the Engineering News-Record Magazine which is a world leading engineering industry magazine congratulating the first Petitioner Company on being amongst world largest international contractors. It is the grievance of the petitioners, that despite all these presentations, there was no respondent from either the State Government or the Government of India, and even the request for personal interview was turned down which prompted the Canadian High Commissioner to address a letter in that behalf on Aug. 17, 1984 to the Hon'ble Minister for Irrigation, Government of India to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners, urged the following contentions: 1. The impugned decision is arbitrary and, therefore, bad in law inasmuch as : (a) the authorities concerned have failed to apply their mind to the correct criteria to be adopted in deciding the question of pre-qualification; (b) they completely ignored the clear directions of the World Bank as to the approach, the method and the correct parameter to be applied in the matter of pre-qualification of joint venture consortia; Sr. No. Sr. No. of Name of applicant. Conclusion Applicant 7 7 13/29 CONTINENTAL CONSTRUCTION PITTS ENGG. J. V, (c) they have failed to appreciate in correct legal perspective the liabilities of coventurers in a joint venture group which was recognised as eligible entity to make an application for pre-qualification under the information and instructions to the applicants seeking pre-qualification; and (d) the concerned authorities have failed to call for the further necessary information notwithstanding their obligation to do so, if the particulars furnished in the various forms submitted by them were imprecise or raised some doubt as to the capability of the applicants to execute the project in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfaction of the Committee by clear assignment of responsibilities regarding the execution and financial arrangement in such a way that the parties to whom such responsibilities are assigned are capable in their individual capacity to discharge them, and particularly the lead firm has necessary skill and capacity to lead during the entire period of execution. The Committee was given liberty under the procedure so prescribed to ask for clarification and further related information from the applicants, check their resources and make inspection of the prospective tender work. This procedure was prescribed in part I of the procedure and rules of evaluation. Rules were prescribed in part II in order to implement this procedure. Rule 1A provided that no evaluation will be done if the application is non-responsive or if the applicant did not fulfil the twin criteria of its capacity of pouring 25000 cubic metre cement concrete per month, and having effected turnover of ₹ 40 crores in value of the construction work in any one of the last five years. Rule 4A which indicates as to what is the role of the lead firm should be set out in extenso. It reads: 4A. If the applicant is a jo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Soni v. Union of India AIR 1981 S 431). The administrative authority must act in good faith, must have regard to all relevant considerations and must not be swayed by irrelevant considerations, and must not act arbitrarily or capriciously. Nor where a judgment must be made that certain facts exist can a discretion be validly exercised on the basis of an erroneous assumption about these facts. These several principles have been conveniently grouped in two main categories; failure to exercise a discretion, and excess or abuse of discretionary power (See: C.I.T. Bombay v. Mahindra and Mahindra Ltd. AIR 1984 SC 1182). The expression 'arbitrary and capricious' is sometimes used as a synonym for 'unreasonable' and in one case this has been transmuted into 'frivolous or vexatious' and 'capricious and vexatious'. But the meaning of all such expressions is necessarily the same, since the true question must always be whether the statutory power has been exceeded. Unreasonableness is a generalised rubric covering not only sheer absurdity or caprice, but also illegitimate motives and purposes a wide category of errors commonly described as 'irrelevant consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint venture agreement which is said to have been effected on August 3, 1983 and produced at Annexure C/1 to the petition and a copy of which was not furnished to the authorities, clearly established that what the parties intended to enter into was a technical collaboration agreement by which the first petitioner were designated as a sponsor company and assigned the responsibility for executing the works and providing of capital, finance, equipment, man-power and management in that behalf, while the second petitioner were to act merely as a technical collaborator of the first petitioner with respect to the works by providing initial technical know how and operational-know how in respect of the works. In this connection, our attention has been invited particularly to clauses 3, 4, 5, 6, 7, 10 and 13 of the said agreement. It should also be noted at this stage that the application for pre-qualification for dam construction was forwarded to the State Government under the cover of transmittal letter of Aug. 18, 1983 by the petitioners. It is, therefore, clear that before this application was made, the joint pre-qualification agreement for dam construction was also entered into on Jul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or supplies and materials. 4. That Continental alone shall be liable to provide to the Employer all performance and other bonds or guarantees which may be required under the terms of the contract or otherwise. All profit or loss accruing or arising from the execution of the Works shall belong solely to Continental. 5. That all monies on account of the Works as and when received shall be deposited to the credit of the Sponsor in an account or accounts to be opened in its name with the State Bank of India and/or any other banks as the Sponsor may decide. Cheques may be drawn on such account or accounts by signature or signatures of such persons as may be designated by the Sponsor. The Sponsor will be responsible for arranging loans, overdrafts, and/or other banking facilities with the State Bank of India and/or other banks for and in connection with the execution of the Works. 6. That Pitts will act as technical collaborator of Continental with respect to the Works and it will provide confidential 'initial technical know-how' consisting of all information in respect of data, documentation, drawings, designs and specifications relating to construction of concret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equal to 1% (one per cent) of the face value of the contract which will mean the original gross value of the contract for the construction of the Works as originally awarded and will exclude any changes to original gross value on account of escalation or on account of any deletions or extras or changes in quantities. The said lump sum shall be payable to Pitts in the following instalments:- Continental shall pay to Pitts 1.5% (one and one half per cent) of gross month y billings as submitted by the Sponsor to the Employer until the total of such monthly, payments to Pitts shall add up to I% (one per cent) of the gross value of the contract as originally awarded. 13. (b) That in addition to the lump sum payment for initial technical know-how and in consideration of 'operational technical know-how 'and other services to be provided by Pitts in terms hereof, the Sponsor shall pay to Pitts, subject to Indian tax, a fee equal to 1% (one per cent) of the face value of the contract, which will mean the original gross value of the contract, as originally awarded and will exclude any change's to original gross value on account of escalation or on account of any deletions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or bear the loss and that the 2nd petitioner are required to furnish the initial and operational technical know-how in consideration of the fees agreed between them, none-the-less the petitioners agreed and undertook that qua the State Government they would seek pre-qualification, submit tender for and to perform the works if the tender is accepted, as joint venture. The learned Advocate for the petitioners submitted that the petitioners have not been refused pre-qualification on the ground that they were not joint venture in reality and, therefore, not entitled to seek pre-qualification accordingly. We do see a great force in this contention urged on behalf of the petitioners but, in our opinion, over and above this fact, with respect to the learned Advocate General, what is not borne in mind while advancing this short contention about the parties not being on ad idem So form a joint venture is that the material portions which are relevant for purposes of deciding as to whether they intended to form a joint venture are lost sight of. The recital clause in the joint pre-qualification agreement as well as Article of the said agreement clearly establish the agreement between the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts qua the employer. The approach and method could not have been conditioned by emphasising and proceeding on the basis of the internal relationship between the joint venture co-sharers. What is the legal concept of the joint venture, particularly in context of construction contracts, has been summed up by this Court in Asia Foundation Construction Ltd.'s case (AIR 1986 Guj 185) (supra). The Division Bench, speaking through one of us (B. K. Mehta, J.), observed as under in Asia Foundation Construction Ltd.'s case (supra) : The legal concept of the joint venture is very well recognised, and we do not think that the authorities in these High Powered Committee can be oblivious of this recognised legal concept. If they are, they have completely misdirected themselves. The common law did not recognise the relationship of co-adventures but with the passage of time, the judicial decisions recognised what is known as 'joint adventure' of two or more persons undertaking to combine their property or labour in conduct of particular line of trade or a general business, for joint profits. The Courts do not treat a joint adventure as identical with a partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The legal systems in general have not kept pace with the growing economic means of joint venture groups and there is no special legal form for this type of co-operation which has come to stay in construction industry. However, in Australia and Germany, joint venture groups as also unincorporated civil law partnership are subjected to law of partnership. In United States also the law of partnership is applied to joint venture consortia. It is only in France that a special legal form has been created in this behalf. The joint venture groups have got, inter alia, the characteristics of joint organisation, joint action through cooperation of all members, or all individual persons acting on the instructions of the members, and joint liability for condition of services to third parties, and the relation between the partners inter se to be governed according to the joint venture group agreements. The economic importance of joint venture consortia on the one hand, and absence of specific legal provisions on the other has raised a host of problems of interpretation in individual cases since a wide variety of model contracts and preprinted contract forms are adopted to suit the needs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... University., Vienna in International Business Lawyer , March 1985, a monthly published by a Section of Business Law of International Bar Association, London). 14. It should not be lost sight of that internal agreements between the members of a joint venture group are not generally effective vis-a-vis the third parties, and they merely constitute the basis for mutual services and entitlements within the joint venture group. The members of joint venture are jointly and severally liable for performance of the construction work jointly undertaken irrespective of the internal division of work. If a member of a joint venture group does not fulfil his commitments, the other members thereof are under obligation to provide the missing services to the customer. If the customer enters into a contract with a joint venture group, it increases the liability of the members of the joint venture for due performance of the construction work. As noted above, when a contract is concluded with a joint venture group, all members are made jointly and severally liable, even if only one is capable of rendering the services in question. The justification for such liability is the possibility of bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation required in columns 1 to 5, if applicable. In any case this High powered Committee not only failed to appreciate in correct legal perspective the concept of joint venture consortia or group, inter alia, in the matter of their financial liabilities inter se or vis-a-vis the third parties, but also lost sight of the fact that the particulars in regard to the financial participation are to be furnished in column 5 of form C only, if applicable, with the result that the 'impugned decision has been vitiated as being contrary to reason and, therefore, bad in law. 16. The second ground which has been specified in the results of the scrutiny for refusing the pre-qualification does not disclose as to what precisely weighed with the authorities in reaching the impugned decision. It appears though it has not been clearly stated in the reasons that the division of responsibilities as specified against column 3 of Form C did not commend to the Government since the first petitioner M/s Continental have assumed almost the entire responsibility for the execution and management of the work though they had on so far built large concrete dams while the role of the 2nd petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which existed between the Afcon's case and the present case. In submission of the learned Advocate General, the basic document of the joint venture agreement in Afcon's case prescribed, inter alia, that upon the award of the contract for the project by the employer to the joint venture' the parties had agreed to execute complete and maintain the works jointly in accordance with the conditions of the contract, and they further undertook that they would jointly and severally assume the responsibilities to the employer. What weighed, according to the learned Advocate General with the Court in Afcon's case (AIR 1986 Guj 185) was that the authorities overlooked this basic agreement between the parties in Afcon's case and the failure to consider this relevant material coupled with the mis-apprehension as to the correct legal position as to the joint venture consortia prompted the Court to rule that the decision of the State Government not to pre-qualify the Afcon's joint venture was unreasonable and, therefore, bad in law. The Court also borne in mind that if any particulars furnished in the proformas with the application for seeking pre-qualification were at va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal perspective of the joint venture concepts in construction contracts. In the present case, the authorities decided the entire question of pre-qualification so far as the petitioners were concerned apparently on the basis of the particulars supplied in Form C . The learned Counsel appearing on behalf of the petitioners was, .therefore, perfectly justified in urging that the Standing Committee as well as the Advisory Committee and for that matter the State Government have failed to apply their ,mind to the correct criteria to be adopted in deciding the question of pre-qualification in case of joint venture consortia applicants. The authorities lost sight of the legal perspective of the liabilities of the co-venturers vis-a-vis the employer and they proceeded on the basis of the internal division of the responsibilities between the co-venturers inter se. As pointed out above, this internal agreements are not effective visa-vis the third parties and they operate amongst the members inter se and all the co-venturers are jointly and severally liable for performance of the construction works jointly undertaken irrespective of the, internal division of the works, and if one member o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate clearly whether they would be jointly and severally responsible for the execution of the works. In so far as the authorities failed to call for this clarification from the joint venture group, which they were expected not only in pursuance of the suggestion made be the World Bank authorities in the aforesaid telex message but also under their own procedure, we must hold that the authorities acted in a manner which hardly can be said to be reasonable with the result that the impugned decision is vitiated as being unreasonable and arbitrary. The contention of the learned Advocate General that the authorities could not be said to have acted in an unreasonable manner since they relied on the information supplied in Form C is, in our opinion, too spacious a contention which we cannot accept. The authorities were expected to seek further information under their own procedure, where-required. The World Bank suggested to the authorities that the joint venture groups having capable partners should be pre-qualified, if they indicate their liability to be joint and several for execution of the works and on review, if any doubt existed in the mind of the authorities as to the capabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was otherwise than as a joint venture consortia. No doubt,' in the joint venture agreement of August 3, 1983, and particularly in light of the paragraphs which we have extracted above, there is a division of the responsibilities between the first and the 2nd petitioners. But none-the-less his agreement of Aug. 3, 1983 also re-iterates that the understanding between the petitioners was to seek pre-qualification and to bid for the works as joint venture group. The contention of the learned Advocate General that this subsequent agreement of Aug. 3, 1983 indicates that there was merely a technical collaboration agreement between the parties and not an arrangement in the real nature of joint venture agreement, though appears to be attractive, is, with respect, not well-founded for the obvious reason as indicated by us above that this may at the most amount to inter se division of the liabilities which will not be effective vis- -vis the Government. If the petitioners were seeking pre-qualification as joint venture group which indeed they were, since it is nobody's case that they were doing it as group of firms, the authorities were obliged to consider the application in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor ignoring the legal perspective of joint venture consortia which was an eligible entity for seeking pre-qualification and to bid for the works, they had gone beyond the original eligible criteria prescribed by them. 3. Indicate the responsibility of the firm leading the joint venture and responsibility of other joint venture partners. Continental Construction Limited is leading the joint venture. They will have overall responsibility for mobilization, construction planning, execution and management of the project, whereas Pitts Engineering Construction of Canada will be technical collaborator in the joint venture and will have responsibility of providing specialised technical know-how, selection of equipment, operational technical know-how after commencement of works, development of equipment and ultimately ensuring that the scheduled quantities of concreting and other items of work are achieved per day. They will also be responsible to provide, if so requested by Continental, key engineering personnel for specialised skills in the project. 18. The learned Advocate General emphasised that the World Bank authorities have given their no-objection to the recomme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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