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INTRODUCTION:
The act of blacklisting is often exercised by the Government or
public sector undertakings in India so as not to enter into a
contractual relationship with contractors due to various reasons,
some of them being a lapse in fulfilling a contract in the past,
negligence, willful abandonment, etc. It is important to note that
the right to blacklist is not derived from any statute, but is
inherent in the party allotting the contract. Therefore, there are
no statutory limitations on who can be blacklisted or why, and the
Government or the Public Sector Undertakings are free to decide who
to blacklist. However, Blacklisting has the effect of preventing a
person from the privilege and advantage of entering into a lawful
relationship with the Government for purposes of gain, thus, it
should be exercised with great caution. Various judgements have
been passed by several high courts and the Supreme Court of India
to lay down basic tenets which need to be followed while
blacklisting, and also to decide whether an act of blacklisting was
lawful or not.
CASE LAWS ON BLACKLISTING:
One of the earliest cases laying down the prerequisites to be
followed by the Government before blacklisting a person/contractor
is the decision of the Hon’ble Supreme Court in Erusian
Equipment & Chemicals Ltd. v. State of W.B. 1 ,
wherein the Hon’ble Supreme Court observed the following:
“12. …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.
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.“
Therefore, Erusian Equipment2 lay down the
requirement that the person who is being considered for
blacklisting by the government has to be given an opportunity to
represent and plead his case before he is blacklisted.
Another judgement given by the Hon’ble Supreme Court titled
Patel Engineering Limited vs. Union of India (UOI) and
Ors.3 after considering the judgement in
Erusian Equipment, observed the following:
“15. 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.”
Similarly, in Kulja Industries Limited vs. Chief Gen.
Manager W.T. Proj. BSNL and Ors.4 the Hon’ble
Supreme Court held that:
“17. That apart, the power to blacklist a contractor
whether the contract be for supply of material or equipment or for
the execution of any other work whatsoever is in our opinion
inherent in the party allotting the contract. There is no need for
any such power being specifically conferred by statute or reserved
by contractor. That is because “blacklisting” simply
signifies a business decision by which the party affected by the
breach decides not to enter into any contractual relationship with
the party committing the breach. Between two private parties the
right to take any such decision is absolute and untrammelled by any
constraints whatsoever. 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 precondition 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.”
“25. Suffice it to say that “debarment” is
recognised and often used as an effective method for disciplining
deviant suppliers/contractors who may have committed acts of
omission and commission or frauds including misrepresentations,
falsification of records and other breaches of the regulations
under which such contracts were allotted. What is notable is that
the “debarment” is never permanent and the period of
debarment would invariably depend upon the nature of the offence
committed by the erring contractor.”
Therefore, Patel Engineering Ltd. and Kulja
Industries have expanded upon the Erusian Equipment
case by clarifying that a decision to blacklist by the government
will have to follow the principles of natural justice as well as
the doctrine of proportionality. Kulja Industries
additionally also stated that debarment or blacklisting cannot be
permanent.
Even in the latest judgment passed on this issue in the matter
captioned as ‘UMC Technologies Private Limited vs. Food
Corporation of India and Ors. 5 the Hon’ble
Supreme Court held the following:
“19. In light of the above decisions, it is clear that
a prior show-cause notice granting a reasonable opportunity of
being heard is an essential element of all administrative
decision-making and particularly so in decisions pertaining to
blacklisting which entail grave consequences for the entity being
blacklisted. In these cases, furnishing of a valid
show-cause notice is critical and a failure to do so would be fatal
to any order of blacklisting pursuant
thereto.“
“21. Thus, from the above discussion, a clear legal
position emerges that for a show-cause notice to constitute the
valid basis of a blacklisting order, such notice must spell out
clearly, or its contents be such that it can be clearly inferred
therefrom, that there is intention on the part of the issuer of the
notice to blacklist the noticee. Such a clear notice is essential
for ensuring that the person against whom the penalty of
blacklisting is intended to be imposed, has an adequate, informed
and meaningful opportunity to show cause against his possible
blacklisting.”
CONCLUSION:
Therefore, analyzing the abovementioned landmark judgements, we
are given to understand that the Government can blacklist entities
as the right to do so is inherent in the party allotting the
contract, however, the Government by virtue of its position is
limited by certain tenets that it has to follow while blacklisting
any entity. The position that emerges is as follows:
- The party being blacklisted has to be given the right to be
heard and to plead its case before the Government can blacklist it
(audi alteram partem). - Any order to blacklist an entity has to be evaluated on a
touchstone of the doctrine of proportionality. - An entity cannot be permanently blacklisted.
- The Government has to issue a prior show-cause notice granting
a reasonable opportunity of being heard, which clearly mentions or
the contents clearly indicate that the entity failing to show
cause, may be blacklisted.
Salva casa
Stop procedura esecutiva
Therefore, the Government or any Public Sector Unit, before
blacklisting an entity, has to take the above points into
consideration, and once the basic requirements are satisfied, can
only issue an order of blacklisting then, otherwise the same would
be subject to judicial review on the grounds as mentioned
above.
Footnotes
1 (1975) 1 SCC 70
2 supra
3 (2012) 11 SCC 257
4 (2014) 14 SCC 731
5 (2021) 2 SCC 551
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