# M/s Baba Traders v. State of U.P. & Ors

- **Citation:** (2020) 2 ILRA 1843
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2019-09-27
- **Case number:** Writ C No. 30556 of 2019
- **Bench:** Pradeep Kumar Singh Baghel, Dr. Yogendra Kumar Srivastava
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/m-s-baba-traders-v-state-of-u-p-ors-45260
- **Pages:** 21

## Headnote

C.S.C., Sri K.R. Singh

Blacklisting-Petitioner-contractor- blacklisted
from allotment of contract of work by the
Gorakhpur Development Authority-with penalty
and for indefinite period-without issuing show
cause notice-illegal-W.P. allowed. (E-9)
CASES CITED-

## Text

_Characters 0–39,910 of 69,459. This is a partial read: ask again with offset=39910 for what follows._

2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1843
cases who wish to pursue further
higher
studies
in
the
respondent
University;

XII.
The
counsels
for
the
respondents shall provide certified copy of
this judgment to the Vice Chancellor,
Aligarh
Muslim
University,
Aligarh
(respondent no. 2 herein), the Secretary,
Ministry
of
Human
Resource
Development, Union of India, New Delhi
(respondent
no.5
herein)
and
the
Chairman, University Grants Commission,
New Delhi (respondent no. 6 herein), for
necessary compliances.

220. The writ petition is partly
allowed to the extent and manner indicated
above.
----------
(2020)02ILR A1843

ORIGINAL JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 27.09.2019

BEFORE
THE HON'BLE PRADEEP KUMAR SINGH
BAGHEL, J.
THE HON'BLE DR. YOGENDRA KUMAR
SRIVASTAVA, J.

Writ C No. 30556 of 2019

M/s Baba Traders ...Petitioner
Versus
State of U.P. & Ors. ...Respondents

Counsel for the Petitioner:
Sri B.K. Srivastava, Sri Dhiraj Srivastava

Counsel for the Respondents:
C.S.C., Sri K.R. Singh

Blacklisting-Petitioner-contractor- blacklisted
from allotment of contract of work by the
Gorakhpur Development Authority-with penalty
and for indefinite period-without issuing show
cause notice-illegal-W.P. allowed. (E-9)
CASES CITED-

1. M/s Erusian Equipment & Chemicals Ltd. Vs.
State of West Bengal & Anr.,(1975) 1 SCC 70

2. Raghunath Thakur Vs. State of Bihar &
Ors,(1989) 1 SCC 229

3. Mahabir Auto Stores & Ors. Vs. Indian
Oil Corporation & Ors, (1990) 3 SCC 752

4. Gronsons Pharmaceuticals (P) Ltd. &Anr. Vs.
State
of
Uttar
Pradesh
&Ors.,
AIR 2001 SC 3707

5. M/s Kulja Industries Limited Vs. Chief
General Manager, W.T. Project, BSNL & Ors.,
(2014) 14 SCC 731

6. M/s Southern Painters Vs. Fertilizers &
Chemicals Travancore Ltd. & Ans,1994 Supp
(2) SCC 699

7. Patel Engineering Ltd. Vs. Union of India,
(2012) 11 SCC 257

8. B.S.N. Joshi & Sons Ltd. Vs. Nair Coal
Services Ltd. & Ors, (2006) 11 SCC 548

9. Joseph Vilangandan Vs. The Executive
Engineer
(PWD),
Ernakulam
&
Ors,
(1978) 3 SCC 36

10. Radha Krishna Agarwal & Ors. Vs. State of
Bihar &Ors, (1977) 3 SCC 457

11. E.P. Royappa Vs. State of Tamil Nadu &
Anr,(1974) 4 SCC 3

12. Maneka Gandhi Vs. Union ofIndia & Anr,
(1978) 1 SCC 248

13. Ajay Hasia & Ors. Vs. Khalid Mujib
Sehravardi & Ors, (1981) 1 SCC 722

14. Ramana Dayaram Shetty Vs. International
Airport
Authority
of
India
&
Ors,
(1979) 3 SCC 489

15. Dwarkadas Marfatia and SonsVs. Board of
Trustees of the Port of Bombay, (1989) 3 SCC
293
1844 INDIAN LAW REPORTS ALLAHABAD SERIES
16. Gorkha Security Services Vs. Government
(NCT of Delhi) & Ors, (2014) 9 SCC 105'

17. B.C. Biyani Projects Pvt. Ltd. Vs. State of
M.P. & Ors, 2017 (3) AWC 2840 (SC)

18. Joint Anti -Fascist Refugee Com. Vs.
McGrath, (1951) 341 US 123

19. V. Punnen Thomas Vs. State of Kerala,
AIR 1969 Ker 81 (FB)

20. Joseph Vilangandan Vs. The Executive
Engineer(PWD), Ernakulam & Ors.,(1978) 3
SCC 36

21. M/s Southern Painters Vs. Fertilizers and
Travancore Ltd. & Anr, 1994 Supp (2) SCC 699

(Delivered by Hon'ble Dr. Yogendra
Kumar Srivastava, J.)

1. Heard Sri B.K. Srivastava, learned
Senior Counsel assisted by Sri Dhiraj
Srivastava,
learned
counsel
for
the
petitioner and Sri K.R. Singh, learned
counsel appearing for the second, third and
the fourth respondents.

2. The present petition seeks to
challenge the order dated 13.05.2019
passed by the third respondent/Vice
Chairman,
Gorakhpur
Development
Authority,
Gorakhpur
whereby
the
petitioner has been blacklisted for the
purposes of allotment of contract of work
by the Gorakhpur Development Authority
and a penalty of Rs.20 lacs has been
imposed. A further prayer is made for
disposal of a representation made in this
regard by the petitioner before the third
respondent.

3. The facts of the case, as per the
pleadings in the writ petition, in brief, are
that the petitioner is a contractor registered
with
the
Gorakhpur
Development
Authority engaged for the purposes of
construction work for the past several
years, and was directed by the respondent
authorities to complete the work of
construction of a culvert on a drain on
urgent basis. It has been averred that after
completion of the work some of the bricks
used temporarily for supporting the
concrete remained left over, and taking
that to be the basis the impugned order
dated 13.05.2019 has been passed by the
third respondent blacklisting the petitioner
permanently and imposing Rs.20 lacs as
penalty for the alleged use of old bricks in
the construction work.

4. With the consent of the parties the
writ petition is taken up for disposal as per
the Rules of the Court.

5. Contention of the learned Senior
Counsel appearing for the petitioner is that
the impugned order of blacklisting dated
13.05.2019 has been passed against the
petitioner without giving any show cause
notice and opportunity of hearing hence
the same is in gross violation of principles
of natural justice.

6. It has been pointed out that the
order of blacklisting which has been
passed is not for any specified period of
time and any such order having a
permanent effect is not sustainable. It is
also submitted that the impugned order
does not refer to any enquiry which could
be said to form basis of the order of
blacklisting and that the effect of the order
is not only stigmatic but it also has adverse
civil consequences and as such cannot be
legally sustained.

7. Sri K.R. Singh, learned counsel
appearing for the second, third and the
fourth respondents has not been able to
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1845
point out from the order impugned that the
same has been passed pursuant to any fact
finding enquiry or that the petitioner was
given
any
show
cause
notice
or
opportunity of hearing before passing of
the order of blacklisting. There is no
material on record to show that the
principles of natural justice were complied
with before passing of the order.

8. In order to appreciate the
contentions of the parties we may advert to
the
meaning
of
"blacklist"
and
"blacklisting" and in this regard reference
may be drawn to the enunciation of the
aforementioned
terms
in
the
legal
dictionaries.

9. The term "blacklist" has been
defined in Black's Law Dictionary1 in
the following manner:-

"To put the name of (a person)
on a list of those who are to be boycotted
or punished."

10. Wharton's Law Lexicon2 refers to
the term "blacklist" as follows:-

"The term given to any list of
persons with whom the person or body
compiling the list advises no one should have
dealings of the character indicated. Thus the
list of defaulters on the Stock Exchange is so
named, and various societies and individuals
also publish lists with a similar purpose."

11. The terms "blacklist" and
"blacklisting" have been described in
Advanced Law Lexicon by P. Ramanatha
Aiyar3 in the following manner:-

"Black list is a list of persons
or firms against whom its compiler
would warn the public, or some section
of the public; a list of persons
unworthy of credit, or with whom it is
not advisable to make contracts. Thus,
the official list of defaulters on the
Stock Exchange is a blacklist. To put a
man's name on such a blacklist without
lawful causes is actionable; and the
further publication of such a list will
be restrained by injunction. A list of
persons, firms companiesbycotted or
punished."

"Blacklisting is a part of the
paraphernalia of strike. It may be said
to represent the malignant hate and
revenge of the parties resorting to it. In
its purpose and effects it is closely
allied to a boycott. A "blacklist" is
defined to be a list of the persons
marked out for special avoidance,
antagonism, and enmity on the part of
those who prepare the list or those
among whom it is intended to circulate,
as where a trade union blacklists
workmen who refuse to conform to it
rules; but it is most usually resorted to
by combined employers, who exchange
lists of their employees who go on
strikes, with the agreement that none of
them will employ the workmen whose
names are on the lists, and comes
within the meaning of what is termed a
'conspiracy'.

List of companies, products or
people that are undesirable and to be
avoided. In the USA the term means
more specifically the denial of work to
certain people on the grounds of their
past beliefs or actions."

12. In the celebrated case of Quinn Vs.
Leathem4 which is a case on economic tort
and relates to the tort of "conspiracy to
injure", it was stated by Lord Lindley, as
follows:-
1846 INDIAN LAW REPORTS ALLAHABAD SERIES

"...Black
lists
are
real
instruments of coercion, as every man
whose name is on one soon discovers to
his cost,..."

13. The issue with regard to the
entitlement to a notice to be heard before
blacklisting came up in the case of M/s
Erusian Equipment & Chemicals Ltd.
Vs. State of West Bengal & Anr.5 and
referring to the powers of the State under
Article 298 of the Constitution of India6 to
carry on trade or business, it was held that
the exercise of such powers and functions
in trade by the State is subject to Part III of
the Constitution and the State while having
the right to trade has the duty to observe
equality and cannot choose to exclude
persons by discrimination. The relevant
observations made in the judgment are as
follows:-

"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.
When the State acts to the prejudice of a
person it has to be supported by legality.

13.
But
for
the
order
of
blacklisting, the petitioner would have
been entitled to participate in the purchase
of cinchona. Similarly the respondent in
the appeal would also have been entitled
but for the order of blacklisting to tender
competitive rates.

14. The State can enter into
contract with any person it chooses. No
person has a fundamental right to insist
that the Government must enter into a
contract with him. A citizen has a right to
earn livelihood and to pursue any trade. A
citizen has a right to claim equal treatment
to enter into a contract which may be
proper, necessary and essential to his
lawful calling.

15. The blacklisting order does
not pertain to any particular contract. The
blacklisting
order
involves
civil
consequences. It casts a slur. It creates a
barrier between the persons blacklisted
and the Government in the matter of
transactions.
The
blacklists
are
"instruments of coercion".

16. In passing an order of
blacklisting the Government department
acts under what is described as a
standardised code. This is a code for
internal
instruction. The
Government
departments make regular purchases. They
maintain list of approved suppliers after
taking into account the financial standard
of the firm, their capacity and their past
performance. The removal from the list is
made for various reasons. The grounds on
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1847
which blacklisting may be ordered are if
the proprietor of the firm is convicted by
court of law or security considerations to
warrant or if there is strong justification
for believing that the proprietor or
employee of the firm has been guilty of
malpractices such as bribery, corruption,
fraud, or if the firm continuously refuses to
return Government dues or if the firm
employs a Government servant, dismissed
or removed on account of corruption in a
position
where
he
could
corrupt
Government servants. The petitioner was
blacklisted on the ground of justification
for believing that the firm has been guilty
of
malpractices
such
as
bribery,
corruption, fraud. The petitioners were
blacklisted on the ground that there were
proceedings
pending
against
the
petitioners
for
alleged
violation
of
provisions under the Foreign Exchange
Regulations Act.

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.

18. Exclusion of a member of
the public from dealing with a State in
sales transactions has the effect of
preventing him from purchasing and doing
a
lawful
trade
in
the
goods
in
discriminating against him in favour of
other people. The State can impose
reasonable conditions regarding rejection
and acceptance of bids or qualifications of
bidders. Just as exclusion of the lowest
tender will be arbitrary, similarly exclusion
of a person who offers the highest price
from participating at a public auction
would also have the same aspect of
arbitrariness.

19. Where the State is dealing
with individuals in transactions of sales
and purchase of goods, the two important
factors are that an individual is entitled to
trade with the Government and an
individual is entitled to a fair and equal
treatment with others. A duty to act fairly
can be interpreted as meaning a duty to
observe certain aspects of rules of natural
justice. A body may be under a duty to
give fair consideration to the facts and to
consider the representations but not to
disclose to those persons details of
information in its possession. Sometimes
duty to act fairly can also be sustained
without providing opportunity for an oral
hearing. It will depend upon the nature of
the
interest
to
be
affected,
the
circumstances in which a power is
exercised and the nature of sanctions
involved therein.

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
1848 INDIAN LAW REPORTS ALLAHABAD SERIES
person concerned should be given an
opportunity to represent his case before he
is put on the blacklist."

14. The aforementioned proposition
that no order of blacklisting could be
passed without affording opportunity of
hearing to the affected party was reiterated
in the case of Raghunath Thakur Vs.
State of Bihar & Ors.7 wherein it was
stated as follows:-

"4. Indisputably, no notice had
been given to the appellant of the proposal
of blacklisting the appellant. It was
contended
on
behalf
of
the
State
Government that there was no requirement
in the rule of giving any prior notice
before blacklisting any person. Insofar as
the contention that there is no requirement
specifically of giving any notice is
concerned, the respondent is right. 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
realised that blacklisting 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..."

15. The exercise of the executive
power of the State or its instrumentalities
in entering into a contract with private
parties flowing from Article 298 of the
Constitution including the power to enter
or not into a contract came up for
consideration in the case of Mahabir Auto
Stores
&
Ors.
Vs.
Indian
Oil
Corporation & Ors.8 and it was held that
the decision of the State or any of its
instrumentalities to enter or not into a
contract being an administrative action the
same would be open to a challenge on the
ground of violation of Article 14 of the
Constitution and would also be subject to
the
power
of
judicial
review. The
observations made in the judgment are as
follows:-

"12. 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 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 Radha
Krishna Agarwal v. State of Bihar (1977) 3
SCC 457. It appears to us, at the outset,
that in the facts and circumstances of the
case, the respondent company IOC is an
organ of the State or an instrumentality of
the State as contemplated under Article 12
of the Constitution. The State acts in its
executive power under Article 298 of the
Constitution in entering or not entering in
contracts with individual parties. Article
14 of the Constitution would be applicable
to those exercises of power. Therefore, the
action of State organ under Article 14 can
be checked. See Radha Krishna Agarwal v.
State of Bihar at p. 462, but Article 14 of
the Constitution cannot and has not been
construed as a charter for judicial review
of State action after the contract has been
entered into, to call upon the State to
account for its actions in its manifold
activities by stating reasons for such
actions. In a situation of this nature certain
activities of the respondent company
which constituted State under Article 12 of
the Constitution may be in certain
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1849
circumstances subject to Article 14 of the
Constitution in entering or not entering
into contracts and must be reasonable and
taken only upon lawful and relevant
consideration; it depends upon facts and
circumstances of a particular transaction
whether hearing is necessary and reasons
have to be stated. 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 semimonopoly 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. In this
connection reference may be made to E.P.
Royappa v. State of Tamil Nadu (1974) 4
SCC 3, Maneka Gandhi v. Union of India
(1978) 1 SCC 248, Ajay Hasia v. Khalid
Mujib Sehravardi (1981) 1 SCC 722, R.D.
Shetty v. International Airport Authority of
India (1979) 3 SCC 489 and also
Dwarkadas Marfatia and Sons v. Board of
Trustees of the Port of Bombay (1989) 3
SCC 293. 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.

x x x x x

18. ...we are of the opinion that
decision of the State/public authority
under Article 298 of the Constitution, is an
administrative
decision
and
can
be
impeached on the ground that the decision
is arbitrary or violative of Article 14 of the
Constitution of India on any of the
grounds available in public law field. It
appears to us that in respect of corporation
like IOC when without informing the
parties concerned, as in the case of the
appellant-firm herein on alleged change of
policy and on that basis action to seek to
bring to an end to course of transaction
over 18 years involving large amounts of
money is not fair action, especially in view
of the monopolistic nature of the power of
the respondent in this field. Therefore, it is
necessary to reiterate that even in the field
of public law, the relevant persons
concerned or to be affected, should be
taken into confidence. Whether and in
what circumstances that confidence should
be taken into consideration cannot be laid
down on any strait-jacket basis. It depends
on the nature of the right involved and
nature of the power sought to be exercised
in a particular situation. It is true that there
is discrimination between power and right
but
whether
the
State
or
the
instrumentality of a State has the right to
function in public field or private field is a
matter which, in our opinion, depends
upon the facts and circumstances of the
situation, but such exercise of power
1850 INDIAN LAW REPORTS ALLAHABAD SERIES
cannot be dealt with by the State or the
instrumentality of the State without
informing and taking into confidence, the
party whose rights and powers are affected
or sought to be affected, into confidence.
In such situations most often people feel
aggrieved by exclusion of knowledge if
not taken into confidence."

16. The requirement of grant of
opportunity
to
show
cause
before
blacklisting was restated in the case of
Gronsons Pharmaceuticals (P) Ltd. &
Anr. Vs. State of Uttar Pradesh & Ors.9
and it was held that since the order
blacklisting of an approved contractor
results in civil consequences, the principle
of audi alteram partem is required to be
observed.

17. The power to blacklist a
contractor was held to be inherent in the
party allotting the contract and the
freedom to contract or not to contract was
held to be unqualified in the case of
private parties; however when the party is
State, the decision to blacklist would be
open judicial review on touchstone of
proportionality and the principles of
natural justice. The relevant observations
made in this regard in the case of M/s
Kulja Industries Limited Vs. Chief
General Manager, W.T. Project, BSNL
& Ors.10 are as under:-

"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."

18. The aforementioned judgment
has taken note of the fact that the principle
of audi alteram partem has been held to be
applicable to the process that may
eventually culminate in the blacklisting of
a contractor in the earlier judgments in
M/s Southern Painters Vs. Fertilizers &
Chemicals Travancore Ltd. & Anr.11,
Patel Engineering Ltd. Vs. Union of
India12, B.S.N. Joshi & Sons Ltd. Vs.
Nair Coal Services Ltd. & Ors.13,
Joseph Vilangandan Vs. The Executive
Engineer (PWD), Ernakulam & Ors.14.

19. It was held that even though the
right of the petitioner may be 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 the powers of
judicial review on the touchstone of
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1851
fairness, relevance, natural justice, nondiscrimination,
equality
and
proportionality. In this regard reference
was made to earlier decisions in Radha
Krishna Agarwal & Ors. Vs. State of
Bihar & Ors.15, E.P. Royappa Vs. State
of Tamil Nadu & Anr.16, Maneka
Gandhi Vs. Union of India & Anr.17,
Ajay Hasia & Ors. Vs. Khalid Mujib
Sehravardi
&
Ors.18,
Ramana
Dayaram
Shetty
Vs.
International
Airport Authority of India & Ors.19
and Dwarkadas Marfatia and Sons Vs.
Board of Trustees of the Port of
Bombay20.

20. The legal position governing
blacklisting in USA and UK was also
considered and it was noticed that in USA
the term "debarring" is used by the statutes
and
the
courts
and
comprehensive
guidelines have been issued in this regard.
It was also taken note of that though
"debarment" is recognised as an effective
tool for disciplining deviant contractors
but the debarment is never permanent. The
observations made in the judgment in this
respect are as follows:-

"21.
The
legal
position
governing blacklisting of suppliers in USA
and UK is no different. In USA instead of
using the expression "blacklisting" the
term "debarring" is used by the statutes
and the courts. The Federal Government
considers "suspension and debarment" as a
powerful tool for protecting taxpayer
resources and maintaining integrity of the
processes
for
federal
acquisitions.
Comprehensive guidelines are, therefore,
issued by the government for protecting
public interest from those contractors and
recipients who are non-responsible, lack
business integrity or engage in dishonest
or illegal conduct or are otherwise unable
to perform satisfactorily. These guidelines
prescribe the following among other
grounds for debarment:

(a)
Conviction
of
or
civil
judgment for.--

(1) Commission of fraud or a
criminal offense in connection with
obtaining,
attempting
to
obtain,
or
performing a public or private agreement
or transaction;

(2) Violation of Federal or State
antitrust
statutes,
including
those
proscribing
price
fixing
between
competitors,
allocation
of
customers
between competitors, and bid rigging;

(3)
Commission
of
embezzlement, theft, forgery, bribery,
falsification or destruction of records,
making false statements, tax evasion,
receiving stolen property, making false
claims, or obstruction of justice; or (4)
Commission
of
any
other
offense
indicating a lack of business integrity or
business
honesty
that
seriously
and
directly affects your present responsibility;

(b) Violation of the terms of a
public agreement or transaction so serious
as to affect the integrity of an agency
program, such as.--

(1) A wilful failure to perform
in accordance with the terms of one or
more
public
agreements
or
transactions;

(2) A history of failure to
perform
or
of
unsatisfactory
performance of one or more public
agreements or transactions; or

(3) A wilful violation of a
statutory or regulatory provision or
requirement applicable to a public
agreement or transaction;

(c) x x x x x

(d) Any other cause of so
serious or compelling a nature that it
affects your present responsibility.
1852 INDIAN LAW REPORTS ALLAHABAD SERIES

22. The guidelines also stipulate
the factors that may influence the
debarring official's decision which include
the following:

a) The actual or potential harm
or impact that results or may result from
the wrongdoing.

b) The frequency of incidents
and/or duration of the wrongdoing.

c) Whether there is a pattern or
prior history of wrongdoing.

d) Whether contractor has been
excluded or disqualified by an agency of
the Federal Government or have not been
allowed to participate in State or local
contracts or assistance agreements on a
basis of conduct similar to one or more of
the causes for debarment specified in this
part.

(e) Whether and to what extent
did the contractor plan, initiate or carry out
the wrongdoing.

(f) Whether the contractor has
accepted responsibility for the wrongdoing
and recognized the seriousness of the
misconduct.

(g) Whether the contractor has
paid or agreed to pay all criminal, civil and
administrative liabilities for the improper
activity, including any investigative or
administrative costs incurred by the
government, and have made or agreed to
make full restitution.

(h)
Whether
contractor
has
cooperated fully with the government
agencies during the investigation and any
court or administrative action.

(i) Whether the wrongdoing was
pervasive
within
the
contractor's
organization.

(j) The kind of positions held by
the
individuals
involved
in
the
wrongdoing.

(k) Whether the contractor has
taken appropriate corrective action or
remedial measures, such as establishing
ethics training and implementing programs
to prevent recurrence.

(l) Whether the contractor fully
investigated
the
circumstances
surrounding the cause for debarment and,
if so, made the result of the investigation
available to the debarring official."

23. As regards the period for
which the order of debarment will remain
effective, the guidelines state that the same
would depend upon the seriousness of the
case leading to such debarment.

24. Similarly in England, Wales
and Northern Ireland, there are statutory
provisions that make operators ineligible
on several grounds including fraud,
fraudulent
trading
or
conspiracy
to
defraud, bribery etc.

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."

21. In Patel Engineering Ltd. Vs.
Union of India8, referring to the authority
of the State and its instrumentalities to
enter into contracts in view of the power
conferred under Article 298 of the
Constitution it was taken note of that the
right to make a contract includes the right
to not to make a contract; however, such
right including the right to blacklist which
could be exercised by the State is subject
to the constitutional obligation to obey the
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1853
command of Article 14. The observations
made in the judgment in this regard are
being extracted below:-

"13.
The
concept
of
"blacklisting" is explained by this Court in
Erusian Equipment & Chemicals Limited
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."

14. The nature of the authority of
State to blacklist persons was considered
by this Court in the abovementioned case
and took note of the constitutional
provision (Article 298), 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 State to enter into
a contract, everybody has a right to be
treated equally when State seeks to
establish contractual relationships. The
effect of excluding a person from entering
into a contractual relationship with State
would be to deprive such person to be
treated equally with those, who are also
engaged in similar activity.

15. It follows from the judgment
in Erusian Equipment case that the
decision of State or its instrumentalities
not to deal with certain persons or class of
persons on account of the undesirability of
entering into contractual relationship with
such persons is called blacklisting. State
can decline to enter into a contractual
relationship with a person or a class of
persons for a legitimate purpose. 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. What is
the legitimate purpose that is sought to be
achieved by the State in a given case can
vary depending upon various factors."

22. The applicability of the principle
of audi alteram partem and the necessity
of issuance of a show cause notice before
passing of an order of blacklisting and the
prejudice caused for the reason of failure
of giving notice was reiterated in Gorkha
Security Services Vs. Government (NCT
of Delhi) & Ors.21, and it was stated as
follows:-

"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
1854 INDIAN LAW REPORTS ALLAHABAD SERIES
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.

17. Way back in the year 1975,
this Court in Erusian Equipment &
Chemicals Ltd. v. State of W.B. [(1975) 1
SCC 70], highlighted the necessity of
giving an opportunity to such a person by
serving a show cause notice thereby giving
him opportunity to meet the allegations
which were in the mind of the authority
contemplating blacklisting of such a
person...

x x x x x

20. ...there is no dispute about
the requirement of serving show-cause
notice. We may also hasten to add that
once the show-cause notice is given and
opportunity to reply to the show-cause
notice is afforded, it is not even necessary
to give an oral hearing. The High Court
has rightly repudiated the appellant's
attempt in finding foul with the impugned
order on this ground. Such a contention
was
specifically
repelled
in
Patel
Engineering (supra).

Contents of show-sause notice

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 noticee
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
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 noticee 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 black listing,
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 noticee 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
noticee 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.

x x x x x

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
2 All. M/s Baba Traders Vs. State of U.P. & Ors.
1855
mentioned specifically but from the
reading of the show cause notice, it can be
clearly inferred that such an action was
proposed,
that
would
fulfill
this
requirement...

x x x x x

29.