Managing Conflicts of Interest in Procurement Processes
Introduction : Conflict of Interest in procurement processes occurs when an individual who is handling decisions related to procurement and while doing so has personal, financial, or professional interests that could unethically influence choice of suppliers, contract negotiations, or purchasing outcomes. Such conflicts can arise when employees have secret or personal or fiscal relationships with suppliers, or heads of the companies or greed related to personal incentives.
Managing such conflicts related to interests in process is an essential component of ethical governance. Organizations need to establish policies and control bonds to mitigate, spot and disclose such conflicts in order to protect its integrity and maintain fair supplier competition. Companies with strong governance often require their employees to sign upon conflict of interest disclosure (if any) and establish a broader government area with distribution of powers and segregation of duties amongst the employees.
Mapping the Risk [Common Conflict Scenarios]
Biasness towards family and friends
One of the most regular occurrences are of employees recommending their relatives or close friends as vendors while selecting vendors, without disclosing their relationship to their company or the committee. The vendor may also offer competitive prices and satisfy the technical requirements or help them, and it may also get difficult to ensure impartiality due to undisclosed relationships. A personal relationship alone does not indicate wrong doing, what does is the concealment of fact and how it can influence the approval process or its evaluation. Onus is upon the company to ensure fair procedure and whether all the vendors were treated equally.
Financial interests in suppliers
Holding shares or having any other financial interests in the company bidding for tender may affect decisions of the procurement offices. If the officer participates in evaluating or approving the supplier, the decision might be influenced by their personal financial position.
The risk is doubled up if the officer has access to confidential information or can influence the selection criteria by manipulating technical details. Disclosure and independent review can help spot the conflict before it affects the process.
Gifts, hospitality and other benefits
Vendors may lure procurement officers by offering gifts, vouchers, treats or travel expenses or any such leisure arrangements. Such offerings can create expectations of biasness or favorable treatment towards them, even when no such promise has been made .
The legal implications depend on the nature of the benefit, the recipient, the applicable rules and the surrounding circumstances. A gift does not necessarily hint towards a criminal offence. Nevertheless the recipient has authority over vendor selection or contract approvals.
Former employment and professional relationships
Another reason for conflicts may also arise when an employee responsible for procurement has previously worked for the supplier or maintains personal or professional relationships with the individuals representing the bidding company. The employee may hold confidential information or feel a heartfelt obligation towards the former employer of disclosing insider details or hacks to grab the bid.
A previous relationship does not automatically disqualify an individual from participating in procurement .The organization should investigate whether there is a genuine risk and whether disclosure of any such relationship could influence the procurement and if there is a need to impose restrictions on access to confidential information.
Consultants, subcontractors and confidential information
Tender related specifications could also be leaked by the consultant appointed to prepare tender specifications, they may also advise a company to participate in the bid. Similarly, an employee may reveal confidential bid details with a known vendor.
This can create situations of well planned bids and can also offer extra advantage. Organizations should therefore examine possible conflicts before appointing consultants and control access to sensitive information and document the reasons for important procurement decisions.
Legal Framework Governing Procurement in India
2.1 Companies Act, 2013
Section 166 [Duties of directors]
Section 166 opens the general duties of directors towards the company. These include acting in good faith, exercising reasonable care and unbiased judgment, avoiding conflicts of interest, and not gaining undue advantage for themselves or his known.
If a director influences procurement to benefit a business in which they have a fiduciary or personal interest, potentially risking the company, Section 166 may be relevant there. However, directors preference may not indicate undue influence or biases and should be examined before alleging any such influence.
Section 184 [Disclosure of interest by directors]
Section 184 requires directors to disclose their interests in specified companies, firms and other associations. Under subsection (2), a director who is directly or indirectly interested in certain contracts must disclose that interest to the Board and, subject to applicable exceptions and modifications, refrain from participating in the relevant meeting.
Section 188 [Related-party transactions]
Section 188 regulates specified contracts and arrangements between a company and its related parties. It is necessary for the board to consent to all the transactions involving the supply of goods, property, leasing, services, agency arrangements and appointments to offices or places of profit.
Importantly, a vendor is not necessarily a related party simply because an employee knows the vendor, recommends them or has worked with them. The statutory definition of a related party and the applicable transaction requirement must be examined before alleging any such biasness.
General Financial Rules, 2017
The General Financial Rules (GFR), 2017 provides for a framework listing financial accountability and public procurement by Central Government entities. Rule 175 is relevant in this situation because it establishes the Code of Integrity for Public Procurement (CIPP). The Department of Expenditure publishes the rules and procurement manuals for goods, works, consultancy services and non-consultancy services.
Constitutional Principles
Article 14 of the Constitution promises equality before the law and equal protection. In government procurement, it mandates the public authorities to make decisions that are not unfair, irrational and are free from arbitrariness. Unjust favoritism or selection or discriminatory tender conditions or decisions influenced by biasness may attract judicial review. In Tata Cellular v. Union of India (1994), the Supreme Court explained the principles governing judicial review of government contract decisions.
Indian Contract Act, 1872
The Indian Contract Act, 1872 governs agency relationships and the duties between principals and agents. Sections 182 and 211–216 are relevant in understanding an agent’s rights and duties and possible conflicts of interest. Section 215 specifically addresses an agent dealing on their own account without the principal’s informed consent, while Section 216 concerns benefits obtained by an agent through such dealings. These provisions may be applicable in situations when an agent has undisclosed personal vendettas in the transaction. However, an employee’s association does not hint towards a breach.
Judicial Approach to Procurement Fairness
Tata Cellular v. Union of India, (1994) 6 SCC 651
Facts: The Department of Telecommunications (DoT), Government of India had invited tenders for granting licenses to operate cellular mobile telephone services in four cities (Delhi, Mumbai, Kolkata, and Chennai). Several unsuccessful bidders challenged the tender selection process, alleging arbitrariness, procedural violations, and flawed scoring matrices.
Holding: The Supreme Court held that while government contracts and tender processes are subject to judicial review, the court's role is to review the process and not the merits of the decision. The Court held that courts must maintain judicial restraint and should not act as an appellate authority over technical or commercial assessments unless the action suffers from the three Is, illegality, irrationality and impropriety.
Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517
Facts: Bids were invited by the Water Resources Department of Odisha for canal construction works. In it disputes arose regarding the rejection of the lowest tenderer's bid due to an alleged forged term deposit passbook submitted as earnest money, leading to the award of the contract to the next eligible bidder (Jagdish Mandal). An unsuccessful rival challenged the award under writ jurisdiction.
Legal Issue: When can a High Court interfere u/Art 226 of the Indian Constitution in commercial disputes between competitors, and what constitutes a vitiated decision-making process?
Holding: The Supreme Court alerted against regular judicial interference in contractual matters. It held that power under Article 226 should be exercised only if the decision-making process is influenced by mala fides, arbitrariness, or favoritism.
Conclusion
To nullify the chances of conflict of interest in public procurement it requires more than a declaration form at the start of an evaluation. It requires a proper systemic approach and precise policies, structural controls, regular disclosure, active oversight, and a culture in which transparency is appreciated and where non-disclosure invites serious consequences.
Author: Shubham Bohra in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney
Endnotes
The Constitution of India, art. 14.
General Financial Rules, 2017, r. 175, Finance Ministry, Department of Expenditure, Government of India.
Prevention of Corruption Act, 1988, ss. 7, 7A, 8, 9, 11 and 13.
Indian Contract Act, 1872, ss. 182, 211–216.
Companies Act, 2013, ss. 2(76), 166, 184, 188 and 189.
Tata Cellular v. Union of India, (1994) 6 SCC 651.
Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517.
I.P. Massey and Avtar Singh, Administrative Law + Company Law (Eastern Book Company, edition and year to be verified).
Ministry of Finance, Department of Expenditure, Government of India, General Financial Rules, 2017, available at: https://doe.gov.in/en/orders-circulars/31.
India Code, The Prevention of Corruption Act, 1988, available at: https://www.indiacode.nic.in/handle/123456789/12894.
India Code, The Indian Contract Act, 1872, available at: https://www.indiacode.nic.in/handle/123456789/12845.
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