Read Time: 16 minutes

Synopsis

The Supreme Court has said 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, as a mere allegation of breach of contractual obligations without anything more, per se, does not invite any such punitive action.   

A bench of Justices J B Pardiwala and R Mahadevan emphasised there have to be strong, independent and overwhelming materials to resort to this power given the drastic consequences that an order of blacklisting has on a contractor. 

"The power to blacklist cannot be resorted to when the grounds for the same are only breach or violation of a term or condition of a particular contract and when legal redress is available to both parties. Else, for every breach or violation, though there are legal modes of redress and which compensate the party, it would resort to blacklisting and at times by abandoning or scuttling the pending legal proceedings," the bench said.

The court underscored that the authority should determine whether it is a genuine case to blacklist a contractor or visit him with any other penalty like forfeiture of EMD, recovery of damages etc. 

"We say so because once an order of blacklisting is passed the same would put an end to the business of the person concerned. It is a drastic step. Once the final order blacklisting the Contractor is passed then the Contractor is left with no other option but to go to the High Court invoking writ jurisdiction under Article 226 of the Constitution and challenge the same," the bench said.  

The court was dealing with a plea by M/s Techno Prints against a show cause notice issued by Chhattisgarh Textbook Corporation as to why it should not be blacklisted for a period of three years and the EMD (earnest money deposit) of Rs 5,00,000 be forfeited due to its default in fulfilling its terms of contract.

The appellant was assigned a contract of printing books by the corporation. This contract was entered into sometime in 2020. Unfortunately, from mid 2020, the entire country was in the grip of Covid-19 pandemic. The appellant accepted that the obligation in terms of the contract could not be discharged due to circumstances beyond its control. 

Considering the plea against dismissal of writ petition by the high court's single and division bench, the bench cited Kulja Industries Limited Vs Chief General Manager Western Telecom Project BSNL & Ors (2014) in which the apex court said the authority would have to show that the supplier: a. Habitually failed to supply the equipment in time; b. The equipment supplied by the supplier did not perform satisfactorily or were not of a particular standard; or c. Failed to honour the bid without sufficient grounds.  

The bench also pointed out the top court in The Blue Dreamz Advertising Pvt Ltd & Anr Vs Kolkata Municipal Corp & Ors (2024), held in case there exists a genuine dispute between the parties based on the terms of the contract, blacklisting as a penalty cannot be imposed. The penalty of blacklisting may only be imposed when it is necessary to safeguard the public interest from irresponsible or dishonest contractors, and the corporation being a statutory body, has a higher threshold to satisfy before passing such a blacklisting order and therefore, the measures undertaken by it should be reasonable.   

"What is important for us to say is that when there are guiding principles explained by this court as to when and in what circumstances a blacklisting order can be passed then, in our opinion such principles should also be borne in mind by the Authority at the time of issuing a show cause notice. We say so because in the facts of a given case like the one on hand, on the face of which it could be said that there was no good reason for the Authority to issue a show cause notice calling upon the contractor why he should not be blacklisted. Why ask the contractor to face the proceedings when applying these principles, the issue of show cause notice would be an empty formality," the bench said.

Therefore, the court said, the authority is expected to be very careful before issuing a show cause notice. It is expected to understand the facts well and try to ascertain what sort of violation is said to have been committed by the contractor. 

The court emphasised there is always an inherent power in the authority to blacklist a contractor but possessing such inherent power and exercising such power are two different situations and connotations. There may be a power but there should be reasonable ground to exercise such power. To put it by way of an illustration, the police has the power to arrest but it is not necessary that in all cases arrest must be effected. The police should know whether at all arrest is necessary, it said.   

The bench also cited Erusian Equipment & Chemicals Ltd Vs State of W B (1975), which stated an order of blacklisting casts a slur on the party being blacklisted and is stigmatic. 

The court also considered the fact that while participating in a tender, the bidder is required to furnish a statement undertaking that it has not been blacklisted by any institution so far and, if that is not the case, provide information of such blacklisting. This serves as a record of the bidder's previous experience which gives the purchaser a fair picture of the bidder and the conduct expected from it. 

"Therefore, while the debarment itself may not be permanent and may only remain effective for a limited, pre-determined period, its negative effect continues to plague the business of the debarred entity for a long period of time. As a result, it is viewed as a punishment so grave, that it must follow in the wake of an action that is equally grave," the bench said. 

In the present case, the court said asking the appellant to file his reply to the show cause notice and then await the final order which may perhaps go against him, leaving him with no option but to challenge the same before the jurisdictional high court will be nothing but an empty formality. 

"Even otherwise, issuing of show cause notice if not always then at least most of the times is just an empty formality because at the very point of time the show cause notice is issued the Authority has made up its mind to ultimately pass the final order blacklisting the Contractor," the court said. 

The endeavour should be to curtail the litigation and not to overburden the high courts with litigations of the present type more particularly when the law by and large is very well settled and there is no further scope of any debate, the court added.  

In other words, the bench explained, the show cause notice in most of the cases is issued with a pre-determined mind. It has got to be issued because this court has said that without giving an opportunity of hearing there cannot be any order of blacklisting. To meet with this just a formality is completed by the authority of issuing a show cause notice, the court said.       

The bench finally quashed the show cause notice calling upon the appellant as to why it should not be blacklisted but allowed the corporation to forfeit the EMD of Rs 5,00,000. 

Case Title: M/s Techno Prints Vs Chhattisgarh Textbook Corporation & Anr