M/S Pandey Roadways vs Madhya Pradesh State Civil Supplies Corporation Limited And Others

Deepak Khot, J

The present petition has been filed under Article 226 of the Constitution of India seeking the following reliefs :-

i) To call for the records for the satisfaction of the Hon'ble Court.

ii) To quash the impugned orders in Annexures P/9, P/10 and P/11 by issuance of an appropriate writ and or order.

iii) To command the respondents 1 to 4 to allow the petitioner to execute its work of contract with all consequential benefits by issuance of an appropriate writ and or order.

iv) Any other relief/order which this Hon'ble Court may deem just and proper under the facts and circumstances of the case be granted in favour of the petitioner.

It is contended by learned counsel for the petitioner that by the impugned order dated 10.12.2014, the petitioner has been blacklisted for ten years and performance security has also been forfeited. It is submitted that before passing the aforesaid order, no show cause notice for blacklisting or forfeiture of performance guarantee and security was ever served on the petitioner. The petitioner has invited attention of this court towards the notice issued against the petitioner and also the agreement which was executed between the parties.

From perusal of the notice, it is found that certain misconduct and irregularities have been alleged against the petitioner for which notice dated 22.11.2014, annexure P/7, for cancellation of contract was served, however, the petitioner was not given any notice for forfeiture of earnest money as well as for blacklisting. The agreement which has been executed between the petitioner and the respondents contains a clause by which powers have been conferred with the authority to blacklist the Contractor and in case of blacklisting, forfeiture of the earnest money and security.

Counsel for the respondent has supported the impugned order and submitted that as the powers have been conferred with the authority, which has been exercised by them by giving due show cause to the petitioner and conducting an inquiry. It was found that there were certain irregularities and misconduct, which have been alleged against the petitioner and found to be proved against the petitioner, therefore, the order has been passed.

From perusal of the order and the material placed on record, it is found that the impugned order has been passed by blacklisting the petitioner for 10 years from participating in any of the contract of the respondent and also the amount of earnest money and performance guarantee has been forfeited.

From perusal of the notice, it is found that the notice was issued only for cancellation of the contract, therefore, there was no occasion for the petitioner to submit any reply in respect of blacklisting.

The Hon'ble Apex court in the case of Patel Engg. Ltd. v. Union of India, (2012) 11 SCC 257 has held as under :-

"13. The concept of "blacklisting" is explained by this Court in Erusian Equipment & Chemicals Ltd. v. State of W.B. [(1975) 1 SCC 70] as under: (SCC p. 75, para 20)

"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 nature of the authority of the State to blacklist the persons was considered by this Court in the abovementioned case [ "12. Under Article 298 of the Constitution the executive power of the Union and the State shall extend to the carrying on of any trade and to the acquisition, holding and disposal of property and the making of contracts for any purpose. 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 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." (Erusian Equipment case [(1975) 1 SCC 70] , SCC p. 74, para 12)] and took note of the constitutional provision (Article 298) [ "298. Power to carry on trade, etc.-The executive power of the Union and of each State shall extend to the carrying on of any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose:Provided that-(a) the said executive power of the Union shall, insofar as such trade or business or such purpose is not one with respect to which Parliament may make laws, be subject in each State to legislation by the State; and(b) the said executive power of each State shall, insofar as such trade or business or such purpose is not one with respect to which the State Legislature may make laws, be subject to legislation by Parliament."] , which authorises both the Union of India and the States to make contracts for any purpose and to carry on any trade or business. It also authorises the acquisition, holding and disposal of property. This Court also took note of the fact that the right to make a contract includes the right not to make a contract. By definition, the said right is inherent in every person capable of entering into a contract. However, such a right either to enter or not to enter into a contract with any person is subject to a constitutional obligation to obey the command of Article 14. Though nobody has any right to compel the State to enter into a contract, everybody has a right to be treated equally when the State seeks to establish contractual relationships [ "17. The Government is a Government of laws and not of men. It is true that neither the petitioner nor the respondent has any right to enter into a contract but they are entitled to equal treatment with others who offer tender or quotations for the purchase of the goods. This privilege arises because it is the Government which is trading with the public and the democratic form of Government demands equality and absence of arbitrariness and discrimination in such transactions. Hohfeld treats privileges as a form of liberty as opposed to a duty. The activities of the Government have a public element and, therefore, there should be fairness and equality. The State need not enter into any contract with any one but if it does so, it must do so fairly without discrimination and without unfair procedure. Reputation is a part of a person's character and personality. Blacklisting tarnishes one's reputation."(Erusian Equipment case [(1975) 1 SCC 70] , SCC p. 75, para 17)] . The effect of excluding a person from entering into a contractual relationship with the State would be to deprive such person to be treated equally with those, who are also engaged in similar activity.

It follows from the above judgment in Erusian Equipment case [(1975) 1 SCC 70] that the decision of the State or its instrumentalities not to deal with certain persons or class of persons on account of the undesirability of entering into the contractual relationship with such persons is called blacklisting. The State can decline to enter into a contractual relationship with a person or a class of persons for a legitimate purpose. The authority of the 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 the State is to act fairly and rationally without in any way being arbitrary-thereby such a decision can be taken for some legitimate purpose. What is the legitimate purpose that is sought to be achieved by the State in a given case can vary depending upon various factors.

The Hon'ble Apex Court in the case of Gorkha Security Services v. Govt. (NCT of Delhi), (2014) 9 SCC 105, has held as under :-

"16. It is a common case of the parties that the blacklisting has to be preceded by a show-cause notice. Law in this regard is firmly grounded and does not even demand much amplification. The necessity of compliance with the principles of natural justice by giving the opportunity to the person against whom action of blacklisting is sought to be taken has a valid and solid rationale behind it. With blacklisting, many civil and/or evil consequences follow. It is described as "civil death" of a person who is foisted with the order of blacklisting. Such an order is stigmatic in nature and debars such a person from participating in government tenders which means precluding him from the award of government contracts.

We are, therefore, of the opinion that it was incumbent on the part of the Department to state in the show-cause notice that the competent authority intended to impose such a penalty of blacklisting, so as to provide adequate and meaningful opportunity to the appellant to show cause against the same. However, we may also add that even if it is not mentioned specifically but from the reading of the show-cause notice, it can be clearly inferred that such an action was proposed, that would fulfil this requirement. In the present case, however, reading of the show-cause notice does not suggest that noticee could find out that such an action could also be taken. We say so for the reasons that are recorded hereinafter".

The Hon'ble Apex court in the case of UMC Technologies (P) Ltd. v. Food Corpn. of India, (2021) 2 SCC 551 has held as under :-

"15. In the present case as well, the appellant has submitted that serious prejudice has been caused to it due to the Corporation's order of blacklisting as several other government corporations have now terminated their contracts with the appellant and/or prevented the appellant from participating in future tenders even though the impugned blacklisting order was, in fact, limited to the Corporation's Madhya Pradesh regional office. This domino effect, which can effectively lead to the civil death of a person, shows that the consequences of blacklisting travel far beyond the dealings of the blacklisted person with one particular government corporation and in view thereof, this Court has consistently prescribed strict adherence to principles of natural justice whenever an entity is sought to be blacklisted.

***

This Court in Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] has described blacklisting as being equivalent to the civil death of a person because blacklisting is stigmatic in nature and debars a person from participating in government tenders thereby precluding him from the award of government contracts. It has been held thus : (SCC p. 115, para 16)

"16. It is a common case of the parties that the blacklisting has to be preceded by a show-cause notice. Law in this regard is firmly grounded and does not even demand much amplification. The necessity of compliance with the principles of natural justice by giving the opportunity to the person against whom action of blacklisting is sought to be taken has a valid and solid rationale behind it. With blacklisting, many civil and/or evil consequences follow. It is described as "civil death" of a person who is foisted with the order of blacklisting. Such an order is stigmatic in nature and debars such a person from participating in government tenders which means precluding him from the award of government contracts."

From bare perusal of the notice and the orders passed by the authorities, it is found that the order has been passed blacklisting the petitioner without due specific notice for blacklisting and accordingly, forfeiture of the earnest money and performance security has been done in terms of clause 9.4 of the contract. The only basis of forfeiture is blacklisting, which could not have been done without issuing specific show cause notice in that regard. Therefore, in absence of such show cause, notice, and applying the principles of the law laid down by the Hon'ble Apex Court in the case of Patel Engg. Ltd. (supra), Gorkha Security Services (supra) and UMC Technologies (P) Ltd. (supra), the impugned order dated 10.12.2014, annexure P/11, cannot be sustained in the eyes of law. Therefore the impugned order dated 10.12.2014, annexure P/11, is hereby quashed. Since the time period of blacklisting is already over, now there is no sense in directing for issuance of show cause notice for blacklisting, however, for forfeiture of earnest money, the respondents authorities are at liberty to issue specific notice to the petitioner and after due reply and an opportunity of hearing, detailed speaking order be passed.

With the aforesaid, the petition is disposed of.