M/S Sarr Freights Corporation vs The General Manager Ap Region
2021 Latest Caselaw 2016 AP

             THE HON'BLE SRI JUSTICE A.V.SESHA SAI

                WRIT PETITION No. 8410 OF 2021

ORDER:

Heard Sri Avinash Desai, learned counsel for the

petitioner and Sri S.Vijaya Kumar, learned Senior Standing

Counsel, representing Sri Maheswara Rao Kunchem, learned

counsel for the respondent, apart from perusing the material

available on record.

2. Challenge in the present Writ Petition is to the

termination order vide Lr. No.S&S.16 (3)/2020-21/VIZAG-PB/

MMTC/Sales, dated 30.03.2021 passed by the respondent. By

way of the impugned termination order, the respondent herein

not only summarily terminated the contract for movement of

food grains but also debarred the petitioner for a period of five

years from participating in any future tenders of the

respondent-Corporation.

3. The respondent herein issued a Tender Notification

dated 02.12.2020 for multi-model contract for movement of food

grains from the designated depots of Visakhapatnam port to

Andaman and Nicobar islands. On the ground that the

petitioner herein failed to adhere to certain clauses of the

Tender Notification, the respondent herein resorted to the

impugned action. In the impugned order, the respondent

herein pointed out the following failures on the part of the

petitioner herein.

"(i) the time limit within which the security deposit amount has to be deposited (the said letter and cheque has been received today i.e. on 30.03.2021 at 16.49 PM whereas the last date for depositing of SD was 26.03.2021).

(ii) instrument of payment which should be through Electronic Clearing System (ECS)/ other electronic means only (Cheques are not acceptable).

(iii) in non-depositing of full amount of Security Deposit of Rs.66,60,000/- (Rupees Sixty Six Lakh and Sixty thousand only)."

4. It is contended by Sri Avinash Desai, learned

counsel for the petitioner that the impugned action on the part

of the respondent is a patent and palpable violation of the

principles of natural justice and the impugned order is liable to

be set aside on the said ground alone. In elaboration, it is

further contended by the learned counsel that without being

preceded by any show cause notice and opportunity of being

heard, the respondent herein passed the impugned termination

order. It is also the submission of the learned counsel that the

respondent grossly erred in resorting to the impugned action,

and in contravention of the Office Memorandum

No.DPE/7(4)/2017-Fin.(Part-I), dated 19.11.2020 and Circular

No.01/FIN/2021, dated 22.01.2021 of the respondent

Corporation, the respondent herein passed the impugned

termination order. It is further submitted by the learned

counsel that, on the technical aspect of failure to pay the

amount through electronic means, though the petitioner herein

handed over the cheques within time, the respondent herein

erred in passing the order of termination and black-listing the

petitioner. In support of his submissions and contentions, the

learned counsel for the petitioner takes support of the following

judgments.

(i) In Kulia Industries Limited v. Chief General

Manager, Western Telecom Project, Bharat Sanchar

Nigam Limited & others1;

(ii) In Vetindia Pharmaceuticals Limited v. State of UP

& another2;

(iii) In UMC Technologies Private Limited v. Food

Corporation of India & another3 and

5. Emphatically supporting the impugned termination

order, the learned Senior Standing Counsel, Sri S.Vijaya Kumar

strenuously contends that neither the grounds raised in the

writ affidavit and reply nor the contentions advanced by the

learned counsel for the petitioner, are sustainable and tenable.

While referring to the Tender Notification dated 02.12.2020, it is

submitted by the learned senior counsel that in view of clause 9

of the Notification, no notice is required to be issued to the

petitioner before termination. While referring to clause 10 of

the Notification, it is submitted by the learned senior counsel

that even assuming that the petitioner is entitled for the benefit

under the Memorandum dated 19.11.2020 and the Circular

dated 22.01.2021, the petitioner has to make the deposit

through Electronic Clearing System, but not by way of cheques.

(2014) 14 Supreme Court Cases 731

(2021) 1 Supreme Court Cases 804

(2021) 2 Supreme Court Cases 551

It is the further submission of the learned senior counsel that

clause 10 (b) of the Notification dated 02.12.2020 also

contemplated a condition for providing unconditional Bank

Guarantee issued by the State Bank of India or any of its

associate Banks/other Public Sector Banks in the format

prescribed in Annexure-I, but the petitioner failed to comply

with the said condition.

It is further contended by the learned senior counsel that

having regard to the non-compliance of the mandatory

requirements of clauses in the tender documents, the

respondent herein passed the questioned order and the same

cannot be faulted by any stretch of imagination, and the

petitioner herein is not entitled for any indulgence of this Court

under Article 226 of the Constitution of India.

6. It is absolutely not in controversy that in response to

the Tender Notification dated 02.12.2020, the petitioner herein

participated in the tenders and emerged as successful bidder

and the petitioner was awarded the contract by way of

acceptance dated 04.03.2021. So far as the contention with

regard to violation of principles of natural justice urged by the

learned counsel for the petitioner, it is pleaded in the writ

affidavit that the impugned action has been resorted to, in

patent violation of the principles of natural justice. It is also

specifically stated in the reply affidavit that the respondent,

without giving an opportunity of hearing to the petitioner,

terminated the contract awarded to the petitioner in gross

violation of the principles of natural justice.

7. A perusal of the impugned termination order reveals,

in vivid and candid terms, that the same was not preceded by

any show cause notice and opportunity of being heard, to the

petitioner. In precise, the impugned termination order does

not refer to any such exercise undertaken by the respondent in

the direction of complying with the principles of natural justice.

By way of the impugned order, the respondent herein not only

terminated the contract but also debarred the petitioner for a

period of five years from participating in future contracts. In

this context, it would be appropriate to refer to the judgments

cited by the learned counsel for the petitioner.

(i) In Kulia Industries Limited v. Chief General Manager,

Western Telecom Project, Bharat Sanchar Nigam Limited & others

(1 supra), the Hon'ble Apex Court held as under (para 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 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."

ii) In Vetindia Pharmaceuticals Limited v. State of UP &

another, the Hon'ble Apex Court held thus: (paras 8 to 11).

8. There is no dispute that the injection was not supplied to the respondents by the appellant. Yet the show cause notice dated 21.10.2008 referred to further action in terms of the Tender for supplying misbranded medicine to the appellant. Furthermore, the show cause notice did not state that action by blacklisting was to be taken, or was under contemplation. It only mentioned appropriate action in accordance with the rules of the Tender. The fact that the terms of the tender may have provided for blacklisting is irrelevant in the facts of the case. In absence of any supply by the appellant, the order of blacklisting dated 08.09.2009 invoking clauses 8.12 and 8.23 of the Tender is a fundamental flaw, vitiating the impugned order on the face of it reflecting non application of mind to the issues involved. Even after the appellant brought this fact to the attention of the respondents, they refused to pay any heed to it. Further, it specifies no duration for the same.

9. M/s. Erusian Equipment & Chemicals Ltd. vs. State of West Bengal and another, (1975) 1 SCC 70, held that there could not be arbitrary blacklisting and that too in violation of the principles of natural justice. In Joseph Vilangandan vs. The Executive Engineer, (PWD),

Ernakulam and others, (1978) 3 SCC 36, this Court was considering a show cause notice as follows:

"17. ...."You are therefore requested to show cause ... why the work may not be arranged otherwise at your risk and loss, through other agencies after debarring you as a defaulter...." The crucial words are those that have been underlined (herein in italics). They take their colour from the context. Construed along with the links of the sentence which precede and succeed them, the words "debarring you as a defaulter", could be understood as conveying no more than that an action with reference to the contract in question, only, was under contemplation. There are no words in the notice which could give a clear intimation to the addressee that it was proposed to debar him from taking any contract, whatever, in future under the Department...."

10. The question whether a show cause notice prior to blacklisting mandates express communication why blacklisting be not ordered or was in contemplation of the authorities, this Court in Gorkha Security Services (supra) held as follows:

"27. 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 notice could find out that such an action could also be taken. We say so for the reasons that are recorded hereinafter.

28. In the instant case, no doubt the show cause notice dated 622013 was served upon the appellant. Relevant portion thereof has already been extracted above (see para 5). This show cause notice is conspicuously silent about the blacklisting action. On the contrary, after stating in detail the nature of alleged defaults and breaches of the agreement committed by the appellant the notice specifically mentions that because of the said defaults the appellant was "as such liable to be levied the cost accordingly". It further says "why the action as mentioned above may not be taken against the firm, besides other action as deemed fit by the competent authority". It follows from the above that main action which the respondents wanted to take was to levy the cost. No doubt, the notice further mentions that the competent authority could take other actions as deemed fit. However, that may not fulfil the requirement of putting the defaulter to the notice that action of blacklisting was also in the mind of the competent authority. Mere existence of Clause 27 in the agreement entered into between the parties, would not suffice the aforesaid mandatory requirement by vaguely mentioning other "actions as deemed fit". As already pointed out above insofar as penalty of blacklisting and forfeiture of earnest money/security deposit is concerned it can be imposed only, "if so warranted". Therefore, without any specific stipulation in this behalf, the respondent could not have imposed the penalty of blacklisting.

33. When we apply the ratio of the aforesaid judgment to the facts of the present case, it becomes difficult to accept the argument of the learned Additional Solicitor General. In the first instance, we may point out that no such case was set up by the respondents that by omitting to state the proposed action of blacklisting the appellant in the show cause notice, has not caused any prejudice to the appellant. Moreover, had the action of blacklisting being specifically proposed in the show cause notice, the appellant could have mentioned as to why

such extreme penalty is not justified. It could have come out with extenuating circumstances defending such an action even if the defaults were there and the Department was not satisfied with the explanation qua the defaults. It could have even pleaded with the Department not to blacklist the appellant or do it for a lesser period in case the Department still wanted to blacklist the appellant. Therefore, it is not at all acceptable that non-mentioning of proposed blacklisting in the show cause notice has not caused any prejudice to the appellant. This apart, the extreme nature of such a harsh penalty like blacklisting with severe consequences, would itself amount to causing prejudice to the appellant."

11. If the respondents had expressed their mind in the show cause notice to blacklist, the appellant could have filed an appropriate response to the same. The insistence of the respondents to support the impugned order by reference to the terms of the tender cannot cure the illegality in absence of the appellant being a successful tenderer and supplier. We therefore hold that the order of blacklisting dated 08.09.2009 stands vitiated from the very inception on more than one ground and merits interference."

(iii) In UMC Technologies Private Limited v. Food

Corporation of India & another (3 supra), the Apex Court held as

under (paras 13 to 15 & 19)

"13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. The basic principle of natural justice is that before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and

the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously. An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent. This Court in Nasir Ahmad v. Assistant Custodian General, Evacuee Property, Lucknow and Anr., has held that it is essential for the notice to specify the particular grounds on the basis of which an action is proposed to be taken so as to enable the noticee to answer the case against him. If these conditions are not satisfied, the person cannot be said to have been granted any reasonable opportunity of being heard.

14. Specifically, in the context of blacklisting of a person or an entity by the state or a state corporation, the requirement of a valid, particularized and unambiguous show cause notice is particularly crucial due to the severe consequences of blacklisting and the stigmatization that accrues to the person/entity being blacklisted. Here, it may be gainful to describe the concept of blacklisting and the graveness of the consequences occasioned by it. Blacklisting has the effect of denying a person or an entity the privileged opportunity of entering into government contracts. This privilege arises because it is the State who is the counterparty in government contracts and as such, every eligible person is to be afforded an equal opportunity to participate in such contracts, without arbitrariness and discrimination. Not only does blacklisting takes away this privilege, it also tarnishes the blacklisted person's reputation and brings the person's character into question. Blacklisting also has long-lasting civil consequences for the future business prospects of the blacklisted person.

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 11 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.

xxx

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."

8. It is a settled and well established principle of law

that any action, which has civil consequences, must necessarily

be preceded by a notice and opportunity of being heard, to the

persons likely to be affected by such action. In the instant case,

as observed supra, the respondents did neither issue any show

cause notice, pointing out the alleged failures on the part of the

petitioner, nor afford an opportunity of being heard to the

petitioner herein. In fact, on this ground and having regard to

the ratio laid down in the above referred judgments, the

impugned order is liable to be set aside.

9. With regard to the alleged non-adherence to the

conditions of the Tender Notification and the submissions of the

learned counsel to the said effect, including the submission that

the same are purely technical in nature, this Court is of the

opinion that as this Court is inclined to set aside the impugned

order on the ground of violation of principles of natural justice,

the said aspects can be brought to the notice of the respondent

herein.

10. For the aforesaid reasons, the Writ Petition is

allowed on the ground of violation of principles of natural

justice, setting aside the impugned order of termination vide Lr.

No.S&S.16 (3)/2020-21/VIZAG-PB/MMTC/Sales, dated

30.03.2021 passed by the respondent, and the matter is

remanded to the respondent herein for passing appropriate

orders afresh after giving show cause notice, indicating the

alleged lapses on the part of the petitioner, and after receiving

explanation/objections, if any, from the petitioner and providing

an opportunity of being heard to the petitioner. Having regard

to the nature of controversy, within a period of one week from

today, show cause notice shall be given to the petitioner in the

abovesaid manner; three weeks' time shall be given to the

petitioner thereafter to submit explanation/objections, if any, in

writing, and thereafter, necessary orders shall be passed by the

respondent as expeditiously as possible, preferably within a

period of one week from the date of submission of such

explanation/objections, after giving opportunity of hearing to

the petitioner herein.

There shall be no order as to costs of the Writ Petition.

Miscellaneous petitions, if any, pending in this Writ

Petition, shall stand closed.

_____________ A.V.SESHA SAI, J 17.6.2021 DRK/Siva

THE HON'BLE SRI JUSTICE A.V.SESHA SAI

WRIT PETITION No. 8410 OF 2021

17.6.2021

DRK/Siva