Fundamentally different: legal issues spin off from fighter bases tussle

A forward airfield that also serves as an Indian fighter base. Italian company, Selex, had stalled the modernisation of 30 airfields by going to court against the contract

by Ajai Shukla

Business Standard, 1st June 10

For the last seven months, an Italian company, Selex Sistemi Integrati, had blocked a crucial aspect of India’s defence readiness in Indian courts, until an irate Supreme Court threw out a Selex petition on 24th May. Since November 09, the upgrading of 30 operationally vital military airfields had been effectively suspended by India’s Ministry of Defence (MoD) after Selex filed a writ petition in the Delhi High Court challenged the MoD’s award of that contract to a consortium led by Tata Power’s Strategic Electronics Division (SED).

Selex pleaded that, in awarding the Modernisation of Airfield Infrastructure (MAFI) contract to the Tatas, the MoD had erred since the Tata consortium had neither the experience, nor the technical capability, to execute such a contract. Selex also alleged that the Tatas had squeaked ahead in close bidding (the Tata bid: Rs 1094 crores, or US $234 million; the Selex bid: Rs 1141 crores, or US $244 million) by leaving out expenses like transfer of technology within country.

In rejecting Selex’s petition, a two-judge Supreme Court bench acidly wondered whether an Italian court would have heard an Indian company on a matter so vital. The bench noted, “This court is not a Robin Hood… do you want us to stop the modernisation of the airfields?”

Selex has effectively lost its case, and perhaps a great deal more in future business since the MoD will not easily forgive the slur of being labelled incompetent. But Selex’s ill-advised foray into the Indian judicial system has spun off what will be a landmark judicial exercise: a careful legal examination of the rights of foreign companies in Indian tenders. At stake here is an issue that will reverberate beyond national security: can a foreign companies allege a violation of its fundamental rights in contesting the award of an Indian contract?

This issue, which will now be examined by a bench of the Delhi High Court, rests on three articles of the Constitution of India. The first, Article 226, under which Selex went to court, empowers the High Court to consider writ petitions from those who believe their rights, including fundamental rights, have been violated. The second, Article 14, provides equality before the law to all people within the territory of India. And the third, Article 19, provides citizens of India (Note: not foreign nationals) a number of freedoms, such as those of movement; speech, assembly, formation of unions, etc. Article 19(1)(g), which has been critical in this case, allows citizens of India “to practise any profession, or to carry on any occupation, trade or business.”

Selex pleaded to the Delhi High Court for the award of the contract, initially invoked all three articles before backing off from Article 19(1)(g). It approached the Delhi High Court under Article 226, claiming its right to equality under Article 14, read in conjunction with Article 19(1)(g). Now, what will be examined afresh by a Delhi High Court bench, is whether a foreign company, without Indian shareholders, can claim constitutional protection under Article 14 without it being read through the window of Article 19(1)(g).

Recognising the importance of clarity on this issue, the two-judge Delhi High Court bench that referred this question to a higher bench noted, “Almost all large tenders today are being challenged in writ proceedings before the Court and are coming up for judicial scrutiny. It is thus necessary to settle the legal issue in question. The question which thus arises for consideration is whether in the matter of scrutiny and award of tender, the fairness of procedure under Article 14 of the Constitution of India can be examined de hors the rights under Article 19(1)(g) of the Constitution of India to carry on the business and trade at the behest of a foreign company invoking the jurisdiction under Article 226 of the Constitution of India, especially keeping in view the fact that the issue of fairness in treatment and absence of arbitrariness when involved on the basis of Article 14 in tender matters is relatable to the doctrine that the State has to be fair in distribution of State largesse to its citizens.”

If the High Court bench rules that protection under Article 14 necessarily flows through the guarantees of Article 19, this will effectively deny foreign companies a remedy under the Constitution of India, i.e. the writ petition route, to challenge the award of contracts. Left with only the time consuming recourse of a civil legal challenge, foreign disruptions to the contracting process will be minimised.

Besides the fine legal issues that have emerged from this confrontation, the national security dimensions of defence contracting merit a comment. It says as much about globalisation as about Indian defence procurement rules that a foreign company, which has built most of China’s airfield network, and which has continuing interests in China and Pakistan, can challenge in court the MoD’s right to award a crucial airfield turnkey project to an Indian company.

Indian corporates entering defence production are sinking tens of crores of their own money, largely unsupported by government, into creating indigenous capabilities. If the MoD is serious about indigenisation, it must create the legal and regulatory framework required for supporting Indian companies with security sensitive projects, even when their bids are marginally more expensive than those of foreign bidders.