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NOTE ON BLACKLISTING OF A PARTY FROM THE TENDER PROCESS

TERMINATION OF CONTRACT DOES NOT IMPLY BLACKLISTING

In the recent judgement of AIS vs. FCI (2019 SCC OnLine Del 8422), where the Appellant had

been backlisted due to a breach of contract, the Hon’ble Delhi High Court held that:

“15. That apart, Clause 42 deals only with termination of a contract; and debarment must
necessarily be conceived-of as a separate and distinct matter. There is nothing to suggest
that debarment is intended to be an automatic consequence or necessary sequitur to the
termination of a contract, whatever be the reason for termination. Debarment cannot be a
necessary concomitant of every termination.

16. To be clear, while termination is a mode of ending an existing contractual relationship;

debarment or blacklisting is a mode of preemptively disqualifying a party from future
contractual relationships. These are two separate and distinct matters and cannot be rolled
into one. Each must have its own rationale, grounds and procedures, including putting the
affected party to specific notice as regards the specific proposed action, even more so when
the party proposing the action is a State entity.

21. In fact we must remind ourselves of the consistent line of judicial opinion of the
Supreme Court in the matter of blacklisting of entities by government agencies in relation
to contracts, where the Supreme Court not only mandates the requirement of a show-cause
notice but goes further to say that there is a requirement of hearing before a person is
placed on a blacklist. This mandate arises from a convergence of two aspects: firstly, that
blacklisting visits a person with a “civil consequence” inasmuch as it casts a slur, attaches
a stigma and creates a barrier between the blacklisted person and State entities in matters
of commercial transactions; and secondly, that the fundamentals of fair play require that
a person should be afforded an opportunity to represent his case before being put on a
blacklist at the hands of a State entity.”

WHEN CAN A PARTY BE BLACKLISTED?

In the case of Costal Marine vs. IOC, (2019 SCC OnLine Del 6542), the Hon’ble Delhi High Court

laid down the threshold which needs to be satisfied while blacklisting a company. The Court held

that:

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“38. There are two facets to the challenge that require consideration. First of all, whether
the allegations made against the petitioner warrant a punitive measure of this nature; and
secondly, whether the quantum of punishment imposed is proportionate to the alleged
misconduct.

39. Before proceeding further, it would be necessary to observe that insofar as the breach
of contract is concerned, the parties have their remedies in law. An order debarring a party
from entering into any contracts in future is not pivoted on a disagreement relating to
contractual obligations but on a premise that it is undesirable to enter into a contract with
such an entity. As observed by the Supreme Court in Kulja Industries Ltd. (supra), such
measures are also used to discipline an errant contractor.
40. Plainly, a contested allegation of breach of a contract simpliciter does not invite the
punitive measure of blacklisting. This is not to say that an order of blacklisting cannot be
founded on the conduct of a party who is found to be in breach of a contract. Obviously,
the presumption is that a person who has failed and neglected to perform his contractual
obligations is unworthy of being considered for any contractual arrangements in future.
The principal consideration for imposing the punitive measure is whether such a party is
unworthy of being engaged for performing a contract. There may be cases where the
conduct of the party is found so wanton and callous that it not only amounts to that party
breaching his contractual obligations but may also lead to the conclusion that it is not
desirable to enter into any contract with the said party. However, there may be cases where
a party is unable to perform a contract or is disabled from doing so, for unforeseen reasons,
which may be beyond the control of that party. There may be cases where despite the party
making all bona fide attempts to fulfil its contractual obligations is unable to do so for
reasons that he cannot be held responsible for. In certain cases, there may be a serious
controversy, whether the party has, in fact, breached the contract. Clearly, in such cases,
non-performance of a contract would not indicate that the party is unworthy of being
awarded contracts in future.
…
42. Plainly, if a contractor is to be visited with the punitive measure of blacklisting on
account of an allegation that he has committed a breach of a contract, the nature of his
conduct must be so deviant or aberrant so as to warrant such a punitive measure. A mere
allegation of breach of contractual obligations that is disputed, per se, does not invite any
such punitive action.”

STATE MUST BE REASONABLE AND FAIR IN THEIR CONDUCT

14. The landmark decision in Erusian Equipment and Chemicals Ltd. vs. State of West Bengal

1975 (1) SCC 70, reiterated that before any executive decision maker proposes a drastic adverse

action, such as a debarring or blacklisting order, it is necessary that an opportunity of hearing and

representation against the proposed action is to be given to the party likely to be affected. The

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Hon’ble Supreme Court declared that blacklisting has the effect of preventing a person from

entering into a lawful relationship with the Government for purposes of gains, and that the

Authority passing any such order was required to give a fair hearing before passing an order

blacklisting a certain entity. The Court held as under:

“12. The State can carry on executive function by making a law or without making a law.
The exercise of such powers and functions in trade by the State is subject to Part III of the
Constitution. Article 14 speaks of equality before the law and equal protection of the laws.
Equality of opportunity should apply to matters of public contracts. The State has the right
to trade. The State has there (sic) the duty to observe equality. An ordinary individual can
choose not to deal with any person. The Government cannot choose to exclude persons by
discrimination. The order of blacklisting has the effect of depriving a person of equality of
opportunity in the matter of public contract. A person who is on the approved list is unable
to enter into advantageous relations with the Government because of the order of
blacklisting. A person who has been dealing with the Government in the matter of sale and
purchase of materials has a legitimate interest or expectation. When the State acts to the
prejudice of a person it has to be supported by legality.

…..

20. Blacklisting has the effect of preventing a person from the privilege and advantage of
entering into lawful relationship with the Government for purposes of gains. The fact that
a disability is created by the order of blacklisting indicates that the relevant authority is to
have an objective satisfaction. Fundamentals of fair play require that the person concerned
should be given an opportunity to represent his case before he is put on the blacklist.”

Furthermore, in Patel Engineering Ltd. v. Union of India (2012) 11 SCC 257, the Hon’ble

Supreme Court after referring to judgment in Erusian Equipment (supra), held that:

“15. … The authority of State to blacklist a person is a necessary concomitant to the

executive power of the State to carry on the trade or the business and making of contracts
for any purpose, etc. There need not be any statutory grant of such power. The only legal
limitation upon the exercise of such an authority is that State is to act fairly and rationally
without in any way being arbitrary – thereby such a decision can be taken for some
legitimate purpose.”

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THE TENDER CONDITIONS MUST BE CONSTRUED STRICTLY

The Hon’ble Supreme Court in the case of Caretel vs. HPCL (2019 14 SCC 81), while deliberating

on the issue of the appellant being blacklisted only after being presented with a show cause notice

held that:

“24. Blacklisting has very serious consequences. A show cause notice may result in
blacklisting or may not result in blacklisting. The mere show cause notice being issued, to
visit such a severe consequence on a bidder, may be difficult to sustain.

25. The case of the appellant is further fortified by even the language used in the show
cause notice. The show cause notice itself, in the last paragraph, calls upon the appellant
to show cause as to why suitable action for blacklisting “should not be initiated.” Pursuant
to the response of the appellant, the next stage would have been the initiation of the
blacklisting process, if the explanation was not found satisfactory. The term used in the
blacklisting clause 20(i), on the other hand, talks about a situation where blacklisting has
already been initiated. Plain English words used must be given their ordinary grammatical
meaning.”

THE STATE MUST BE PROPORTIONAL IN THEIR PUNISHMENT

In addition to the judgements of Kulja Industrices (supra) and Coastal Marine (supra) the Hon’ble

Jharkhand High Court in the case3 of Natioanal Orinters vs. State of Jharkhand (2012 2 JCR

603 (Jhr.)), while discussing of the appellant being blacklisted for the late supply of books held

that:

“12. Therefore, on the face of it, it appears that petitioner is sought to be debarred from
taking part in the tender process merely on a ground which has no proportionality with the
wrong committed by the writ petitioner. There cannot be action absolutely in disproportion
to the act. There must be determination of gravity of wrong.”

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PRINCIPLES OF NATURAL JUSTICE MUST BE FOLLOWED IN THE PROCESS OF BLACKLISTING

The Hon’ble Supreme Court in the landmark case of Kulja Industries vs. Western (2014 14 SCC

731), while discussing the principles of natural justice being followed when a party is blacklisted,

that they must be given a right to a fair hearing stated that:

” 17. ….. the freedom to contract or not to contract is unqualified in the case of private
parties. But any such decision is subject to judicial review when the same is taken by the
State or any of its instrumentalities. This implies that any such decision will be open to
scrutiny not only on the touchstone of the principles of natural justice but also on the
doctrine of proportionality. A fair hearing to the party being blacklisted thus becomes an
essential pre-condition for a proper exercise of the power and a valid order of blacklisting
made pursuant thereto. The order itself being reasonable, fair and proportionate to the
gravity of the offence is similarly examinable by a writ Court.

18. …. It is also well settled that even though the right of the writ petitioner is in the nature
of a contractual right, the manner, the method and the motive behind the decision of the
authority whether or not to enter into a contract is subject to judicial review on the
touchstone of fairness, relevance, natural justice, non-discrimination, equality and
proportionality. All these considerations that go to determine whether the action is
sustainable in law have been sanctified by judicial pronouncements of this Court and are
of seminal importance in a system that is committed to the rule of law.”

The Hon’ble Delhi High Court in the case of Bonn nutrients vs Union of India (2016 231 DLT

729 DB), the Court while discussing the blacklisting the Appellant due there being a breach in the

standards set by the contract held that:

“16. A catena of decisions have held that the respondents are obliged to follow the
principles of natural justice.”

The Hon’ble Supreme Court in the case of M/s Mahabir Auto Stores & Ors. v. Indian Oil

Corporation Ltd., (1990) 3 SCC 752 held that:

“11. It is well settled that every action of the State or an instrumentality of the State in
exercise of its executive power, must be informed by reason. In appropriate cases, actions

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uninformed by reason may be questioned as arbitrary in proceedings under Article 226 or

Article 32 of the Constitution. Reliance in this connection may be placed on the
observations of this Court in Miss Radha Krishna Agarwal and Ors. v. State of Bihar and
Ors., [1977] 3 SCR 249 …... In case any right conferred on the citizens which is sought to
be interfered, such action is subject to Article 14 of the Constitution and must be
reasonable and can be taken only upon lawful and relevant grounds of public interest.
Where there is arbitrariness in State action of this type of entering or not entering into
contracts, Article 14 springs up and judicial review strikes such an action down. Every
action of the State executive authority must be subject to rule of law and must be informed
by reason. So, whatever be the activity of the public authority, in such monopoly or semi-
monopoly dealings, it should meet the test of Article 14 of the Constitution. If a
Governmental action even in the matters of entering or not entering into contracts, fails to
satisfy the test of reasonableness, the same would be unreasonable……. It appears to us
that rule of reason and rule against arbitrariness and discrimination, rules of fair play and
natural justice are part of the rule of law applicable in situation or action by State
instrumentality in dealing with citizens in a situation like the present one. Even though the
rights of the citizens are in the nature of contractual rights, the manner, the method and
motive of a decision of entering or not entering into a contract, are subject to judicial
review on the touchstone of relevance and reasonableness, fair play, natural justice,
equality and non-discrimination in the type of the transactions and nature of the dealing
as in the present case.”

A PARTY MUST BE GIVEN A FAIR OPPORTUNITY TO BE HEARD

In the case of Daffodils vs. State of Uttar Pradesh (2019 17 SCALE 758), the issue revolved

around the Appellant being blocked from participating in tenders because of the Appellant being

involved in criminal proceedings. The Hon’ble Supreme Court, while holding that every party

must be given the basic right of a fair opportunity to present their case, stated that:

“15. In the present case, even if one assumes that Surender Chaudhary, the Accused in the
pending criminal case was involved and had sought to indulge in objectionable activities,
that ipso facto could not have resulted in unilateral action of the kind which the State
resorted to-against Daffodils, which was never granted any opportunity of hearing or a
chance to represent against the impugned order. If there is one constant lodestar that lights
the judicial horizon in this country, it is this: that no one can be inflicted with an adverse
order, without being afforded a minimum opportunity of hearing, and prior intimation of
such a move. This principle is too well entrenched in the legal ethos of this country to be
ignored, as the state did, in this case.”

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The Hon’ble Supreme Court further explicated this in the case of Grosens Pharma vs. State of

Uttar Pradesh (2001 8 SCC 604), holding that:

“2. … It is true that an order blacklisting an approved contractor results in civil

consequences and in such a situation in the absence of statutory rules, the only requirement
of law while passing such an order was to observe the principle of audi alteram partem,
which is one of the fact of the principles of natural justice. The contention that it was
incumbent upon the respondent to have supplied the material on the basis of which the
charges against the appellant were based was not the requirement of principle of audi
alteram partem. It was sufficient requirement of law that an opportunity of show cause was
given to the Appellant before it was blacklisted. It is not disputed that in the present case,
the appellant was given an opportunity to show cause and he did reply to the show cause
which was duly considered by the State Government. We are, therefore, of the view that
the procedure adopted by the respondent while blacklisting the appellant was inconformity
with the principles of natural justice.”

Further, the Hon’ble Supreme Court in Raghunath Mathur vs. State of Bihar 1989 1 SCC 229,

held that:

“4. … But it is an implied principle of the rule of law that any order having civil
consequence should be passed only after following the principles of natural justice. It has
to be realized that black-listing any person in respect of business ventures has civil
consequence for the future business of the person concerned in any event. Even if the rules
do not express so, it is an elementary principle of natural justice that parties affected by
any order should have right of being heard and making representations against the
order..”

A PARTY MUST BE GIVEN A SHOW-CAUSE NOTICE WHEN BLACKLISTED

The Hon’ble Supreme Court while discussing the importance of a party being given a show-cause

notice in the process of being blacklisted from government tenders, held it to be a requirement in

the case of Gorkha Securities vs. Govt of NCT (2014 SCC Online SC 599), The Hon’ble Court

held that:

“21. The Central issue, however, pertains to the requirement of stating the action which is
proposed to be taken. The fundamental purpose behind the serving of Show Cause Notice
is to make the notice understand the precise case set up against him which he has to meet.
This would require the statement of imputations detailing out the alleged breaches and

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defaults he has committed, so that he gets an opportunity to rebut the same. Another
requirement, according to us, is the nature of action which is proposed to be taken for such
a breach. That should also be stated so that the notice is able to point out that proposed
action is not warranted in the given case, even if the defaults/ breaches complained of are
not satisfactorily explained. When it comes to blacklisting, this requirement becomes all
the more imperative, having regard to the fact that it is harshest possible action.

22. The High Court has simply stated that the purpose of show cause notice is primarily to
enable the notice to meet the grounds on which the action is proposed against him. No
doubt, the High Court is justified to this extent. However, it is equally important to mention
as to what would be the consequence if the notice does not satisfactorily meet the grounds
on which an action is proposed. To put it otherwise, we are of the opinion that in order to
fulfil the requirements of principles of natural justice, a show cause notice should meet the
following two requirements viz:

i) The material/ grounds to be stated on which according to the Department

necessitates an action;

ii) Particular penalty/action which is proposed to be taken. It is this second

requirement which the High Court has failed to omit.

we may hasten to add that even if it is not specifically mentioned in the show cause notice
but it can be clearly and safely be discerned from the reading thereof, that would be
sufficient to meet this requirement.”

The Hon’ble Supreme Court in the case Orxy Fisheries vs. Union of India (2010 13 SCC 427)

further went on to explain the importance and significance of a show-cause notice and held that:

“24. It is well settled that a quasi-judicial authority, while acting in exercise of its statutory
power must act fairly and must act with an open mind while initiating a show cause
proceeding. A show cause proceeding is meant to give the person proceeded against a
reasonable opportunity of making his objection against the proposed charges indicated in
the notice.
….

28. It is no doubt true that at the stage of show cause, the person proceeded against must
be told the charges against him so that he can take his defence and prove his innocence. It
is obvious that at that stage the authority issuing the charge- sheet, cannot, instead of
telling him the charges, confront him with definite conclusions of his alleged guilt. If that
is done, as has been done in this instant case, the entire proceeding initiated by the show
cause notice gets vitiated by unfairness and bias and the subsequent proceeding become
an idle ceremony.

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29. Justice is rooted in confidence and justice is the goal of a quasi-judicial proceeding
also. If the functioning of a quasi- judicial authority has to inspire confidence in the minds
of those subjected to its jurisdiction, such authority must act with utmost fairness. Its
fairness is obviously to be manifested by the language in which charges are couched and
conveyed to the person proceeded against.

…..

31. It is of course true that the show cause notice cannot be read hyper-technically and it
is well settled that it is to be read reasonably. But one thing is clear that while reading a
show-cause notice the person who is subject to it must get an impression that he will get
an effective opportunity to rebut the allegations contained in the show cause notice and
prove his innocence. If on a reasonable reading of a show-cause notice a person of
ordinary prudence gets the feeling that his reply to the show cause notice will be an empty
ceremony and he will merely knock his head against the impenetrable wall of prejudged
opinion, such a show cause notice does not commence a fair procedure especially when it
is issued in a quasi- judicial proceeding under a statutory regulation which promises to
give the person proceeded against a reasonable opportunity of defence.

32. Therefore, while issuing a show-cause notice, the authorities must take care to
manifestly keep an open mind as they are to act fairly in adjudging the guilt or otherwise
of the person proceeded against and specially when he has the power to take a punitive
step against the person after giving him a show cause notice.

33. The principle that justice must not only be done but it must eminently appear to be done
as well is equally applicable to quasi judicial proceeding if such a proceeding has to
inspire confidence in the mind of those who are subject to it.”

A PARTY MUST BE GIVEN A REASONED ORDER WHEN BACKLISTED

In the case of Mekastar Trading Corporations vs Union of India (06 (2003) DLT 573), the

Hon’ble Delhi Court while highlighting the importance of a reasoned order stated that:

“21. … What is essential is that the order must be a speaking order and must state the
elements which had led to the decision and tell its own story and one is able to infer as to
why the order was made. De Smith, Woolf and Jowell point out that the reasons must "meet
the substance of the principle arguments that the tribunal was required to consider. In
short, the reasons must show that the decision maker successfully came to grips with the
main contention advanced by the parties, and must tell the parties in broad terms why they
lost, or as the case may be one". Reasons are links between materials on which certain
conclusions are based and the actual conclusion drawn. They would disclose how the mind
is applied to the subject matter; whether done relevantly or rationally. Therefore, it would

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be sufficient if reasons indicate application of mind is discernible and mental process

leading from the dispute to its solution is found in the order.“

This was reiterated by the Hon’ble Delhi High Court in Prakash Atlanta vs. NHAI (ILR 2010

Delhi 38), wherein it was held that the order backlisting the party must be a reasoned as follows:

“34. In the considered view of this Court, the impugned order does not satisfy the
requirement of the principles of natural justice i.e. of furnishing reasons for the
conclusions.”

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