M/S PATEL ENGINNERING LTD. Vs UNION OF INDIA
Bench: ALTAMAS KABIR,J. CHELAMESWAR
Case number: SLP(C) No.-023059-023059 / 2011
Diary number: 25348 / 2011
Advocates: E. C. AGRAWALA Vs
M. V. KINI & ASSOCIATES
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Non Reportable
IN THE SUPREME COUR OF INDIA
CIVIL APPELLATE JURISDICTION
SPECIAL LEAVE PETITION (C) NO.23059 OF 2011
M/s. Patel Engineering Limited ….Petitioner
Versus
Union of India & Anr. ….Respondents
J U D G M E N T
Chelameswar, J.
The National Highways Authority of India (R-2) had
decided to undertake development and operation / maintenance of
“six laning of Dhankuni – Kharagpur Section of NH-6” in the States
of West Bengal and Orissa under NHDP Phase-V “on design, build,
finance, operate and transfer” (DBFOT) “toll basis project through
public private partnership”. For the said purpose, R-2 decided to
invite offers for selecting a private entity to which the project could
be entrusted on the basis of a long term “Concession Agreement”.
2. An elaborate bidding process was devised by R-2, the
full details of which are not necessary for the present purpose. Bids
were invited on the basis of the “lowest financial grant required by
a bidder for implementation of the project”, or in the alternative “a
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bidder may, instead of seeking a grant, offer to pay a premium in
the form of revenue share and / or upfront payment, as the case
may be,” to R-2 for award of the concession.
3. The petitioner, a company, was one of the 14 persons,
who submitted bids. Petitioner quoted a premium of Rs.190.53
crores per year and was declared the highest bidder. By a letter
dated 17-01-2011, R-2 informed the petitioner that its bid had been
accepted and the petitioner was called upon to confirm its
acceptance within 7 days [as required under Clause 3.3.5 of the
Request for Proposal (RPF), volume 1]. By a letter dated
24-01-2011 the petitioner company expressed its inability to
confirm its acceptance on the ground that its bid was found not
commercially viable on a second look. The petitioner stated in the
said letter that minutes of the pre-bid meeting, which included
several amendment / queries, were published on website of NHAI
on 07-01-2011 and the bid had to be submitted within three days
thereafter, i.e., on 10-01-2011, thereby leaving insufficient time to
consider and assess impact of the clarifications published by R-2 on
its website on 07-01-2011.
4. R-2 issued a show-cause notice on 24-02-2011 calling
upon the petitioner to explain as to why action debarring
(blacklisting) the company for a period of 5 years from
participating or bidding for future projects to be undertaken by R-2
should not be taken. On 01-03-2011, the petitioner replied to the
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show cause notice. Two months later, R-2 through its letter dated
20-05-2011 communicated the order that barred the petitioner
from prequalification, participating or bidding for future projects to
be undertaken by R-2 for a period of one year from the date of
issue of the letter.
5. It appears that R-2, eventually, awarded the contract to
M/s. Ashok Buildcon Limited, which quoted a premium of Rs.120.06
crores, which, obviously, was significantly lower than what was
offered by the petitioner. On 28-05-2011, the petitioner made a
representation to the Ministry for Road, Transport and Highways
seeking, in substance, the intervention of the Ministry and
annulment of the decision of R-2 to debar the petitioner. As there
was no response from the Ministry, the petitioner approached the
High Court of Delhi through a writ petition under Article 226 of the
Constitution with a prayer to quash the abovementioned order of
R-2 dated 20-05-2011. A Division Bench of the High Court upheld
the order passed by R-2 and dismissed the petition and held as
follows:
“the respondent No.2 was well within its rights to take appropriate action against the petitioner, and taking into consideration the enormity of the loss, we are of the considered view that respondent No.2 has dealt with the petitioner rather lightly.”
Hence, the S.L.P.
6. The learned counsel for the petitioner Mr. Mukul
Rohatgi, argued that the decision of the 2nd respondent to blacklist
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the petitioner from participating, for a period of one year, in the
future projects of the 2nd respondent is without any authority of law.
The learned counsel argued that, no doubt, according to (Clause
2.20.6 of) the bid document, the 2nd respondent is entitled to forfeit
and appropriate the bid security as damages in the various
contingencies specified under Clause 2.20.7, but the power to
blacklist a bidder and prohibit from participating in any future
tender process is available only in those cases where the bidder is
guilty of “Fraud and Corrupt Practices”. Refusal to enter into a
contract can never be classified as an act of fraud or a corrupt
practice warranting the blacklisting of such defaulting bidder. The
learned counsel conceded that such a refusal by the bidder would
render him liable for payment of damages in terms of Clause 2 of
the bid document. He further submitted that, as a matter of fact,
bid security amount deposited by the petitioner to the tune of
Rs.13.97 crores has, in fact, been forfeited by the 2nd respondent
and the petitioner did not raise any dispute regarding the legality of
such forfeiture.
7. The learned counsel also submitted that assuming for
the sake of arguments that it is legally permissible to blacklist the
petitioner on the ground that it declined to enter into a valid
contract after it had been declared as the successful bidder by the
2nd respondent, such a decision is required to be taken only after
complete compliance with the requirements of the principles of audi
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alteram partem and the petitioner should have been given an oral
hearing before the impugned decision was taken.
8. Lastly, the learned counsel submitted that the
punishment of blacklisting (for a period of one year) is
disproportionate to the wrong committed by the petitioner as it
would have the effect of not only debarring the petitioner to deal
with the 2nd respondent for a period of one year, (which is almost
over as on today) but the stigma would remain and have a very
adverse effect on the business prospects of the petitioner.
9. On the other hand, the learned counsel for the
respondent argued that the respondent is entirely justified in
blacklisting the petitioner in view of the huge loss caused by the
petitioner, which is estimated at Rs. 3077 crores over a period of 25
years to the 2nd respondent, an instrumentality of the State. The
learned counsel heavily relied upon the conclusion of the High Court
that the petitioner has “no one else to blame, but itself”.
10. The 2nd respondent though a statutory body, the
authority of the 2nd respondent to blacklist the petitioner is not
based on any express statutory provision.
11. The concept of Blacklisting is explained by this Court in
M/s. Erusian Equipment & Chemicals Limited v. Union of India and
others, (1975) 1 SCC 70, as under:
“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.”
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The nature of the authority of State to blacklist persons was
considered by this Court in the abovementioned case1 and took note
of the constitutional provision (Article 298)2, 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 relationships3. The effect of 1 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.” 2 Article 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, in so far 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, in so far 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.
3 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
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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.
12. It follows from the above Judgment 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.
13. In the case on hand, the bid document stipulated
various conditions, which seek to regulate the relationship between
the 2nd respondent and the bidders, such as the petitioner herein.
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.
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Relevant in the context are Clauses 2 and 4 of the bid document.
Clause 2.2 and the various sub-clauses thereunder deal with the bid
security; the method and the manner of providing such bid security;
and, by whom it should ultimately be appropriated. It stipulates
that a bidder would require to deposit a bid security of Rs.14-00
crores either by way of demand draft or in the form of bank
guarantee acceptable to the 2nd respondent in a format contained at
Appendix-II of the bid document. It is further stipulated that a
bidder, by submitting a bid, “shall be deemed to have acknowledged
and confirmed” that the 2nd respondent will “suffer loss and damage
on account of withdrawal” of the bid or “for any other default by the
bidder during the period of bid validity”. It also stipulates that
under the various contingencies specified thereunder the 2nd
respondent would be entitled to forfeit and appropriate the bid
security amount “as mutually agreed genuine pre-estimated
compensation and damages payable to the 2nd respondent”. Such a
right to forfeit and appropriate is sought to be “without prejudice to
any other right or remedy that may be available to the authority
hereunder or otherwise”. There are five contingencies specified
under Clause 2 in which a bid security would be forfeited and
appropriated by the 2nd respondent. Relevant for our present
purpose are only two:
“b) If a Bidder engages in a corrupt practice, fraudulent practice, coercive practice, undesirable practice or restrictive practice as specified in Clause 4 of this RPF;”
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d) In the case of Selected Bidder, if it fails within the specified time limit-
(i) to sign and return the duplicate copy of LOA;
(ii) to sign the Concession Agreement; or
(iii) to furnish the Performance Security within the period prescribed therefor in the Concession Agreement;”
14. The other stipulation under the bid document, which is
relevant for our present purpose, is Clause 4, which deals with
“Fraud and Corrupt Practices”, which requires the bidders, its
employees, agents, etc., to observe the highest standard of ethics
during the bidding process and during the subsistence of
Concession Agreement, etc. The Clause purports to declare the
right of the 2nd respondent either to decline to enter into a
contractual relationship with a bidder or terminate the agreement
entered into with a successful bidder, if the 2nd respondent comes to
the conclusion that either the bidder or his agent, etc., committed
any; (i) corrupt; (ii) fraudulent; (iii) undesirable; or (iv) restrictive
practice (collectively we call them ‘unacceptable practices’). It also
enables the 2nd respondent to forfeit and appropriate the Bid
Security or Performance Security, as the case may be, towards
damages. It is further stipulated in Clause 4.2 that whenever it is
found that bidder or his agent, etc., indulged in any one of the
abovementioned unacceptable practice;
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“such Bidder or Concessionaire shall not be eligible to participate in any tender or RFP issued by the Authority during a period of 2(two) years from the date such Bidder or Concessionaire, as the case may be, is found by the Authority to have directly or indirectly or through an agent, engaged or indulged in any corrupt practice, fraudulent practice, coercive practice, undesirable practice or restrictive practices, as the case may be.”
(Emphasis supplied)
15. The various expressions “corrupt practice”, “fraudulent
practice”, etc., mentioned above are specifically defined under
Clause 4.3.
16. These two Clauses become relevant in the context of
the second submission made by the learned counsel for the
petitioner that as per the bid document, the power to blacklist is
available only in the cases of the commission of any or some of
unacceptable practices by the bidder or his agents, etc., but not in
the case, where the successful bidder declines to enter into a
contract on being declared as a successful bidder. No doubt, the
bid document expressly declares that in the case of the commission
of a corrupt practice, etc., the bidder shall not be eligible to
participate in any tender issued by the 2nd respondent for a period
of two years from the date on which it is found that a corrupt
practice has been committed. Such an express stipulation is not to
be found in the bid document, in the context of the failure of the
successful bidder to execute the necessary documents to conclude
the contract. In our opinion, that is not determinative of the
authority of the 2nd respondent to blacklist a bidder, such as, the
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petitioner herein, who declines to execute the necessary documents
for creating a concluded contract after the offer made by the bidder,
is accepted by the 2nd respondent.
17. The authority of the 2nd respondent to enter into
contracts, consequently, the concomitant power not to enter into a
contract with a particular person, does not flow from Article 298, as
Article 298 deals with only the authority of the Union of India and
the States. The authority of the 2nd respondent to enter into a
contract with all the incidental and concomitant powers flow from
Section 3 (1) and (2)4 of the National Highways Authority Act. The
nature of the said power is similar to the nature of the power
flowing from Article 298 of the Constitution, though it is not
identical. The 2nd respondent, being a statutory Corporation, is
equally subject to all constitutional limitations, which bind the State
in its dealings with the subjects. At the same time, the very
authority to enter into contracts conferred under Section 3 of the
NHA Act, by necessary implication, confers the authority not to
enter into a contract in appropriate cases (blacklist). The ‘bid
document’ can neither confer powers, which are not conferred by
law on the 2nd respondent, nor can it substract the powers, which
4 (3) Constitution of the Authority.
(1) With effect from such date2 as the Central Government may, by notification in the Official Gazette, appoint in this behalf, there shall be constituted for the purposes of this Act an Authority to be called the National Highways Authority of India.
(2) The Authority shall be a body corporate by the name aforesaid having perpetual succession and a common seal, with power, subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract and shall by the said name sue and be sued.
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are conferred by law either by express provision or by necessary
implication. The bid document is not a statutory instrument.
Therefore, the rules of interpretation, which are applicable to the
interpretation of statutes and statutory instruments, are not
applicable to the bid document. Therefore, in our opinion, the
failure to mention blacklisting to be one of the probable actions that
could be taken against the delinquent bidder does not, by itself,
disable the 2nd respondent from blacklisting a delinquent bidder, if it
is otherwise justified. Such power is inherent in every person
legally capable of entering into contracts.
18. The next question that is required to be considered is
whether the 2nd respondent is justified in blacklisting the petitioner
in the facts and circumstances of the case. The necessary facts are
already mentioned and they are not in dispute. Failure of the
petitioner to conclude the contract by executing the necessary
documents, admittedly, resulted in a legal wrong. Whether the 2nd
respondent should have been satisfied with the forfeiture of the bid
security amount or should have gone further to also blacklist the
petitioner after forfeiting the bid security, is a matter requiring
examination. In other words, the issue is one of the proportionality
of the action taken by the 2nd respondent.
19. The reason given by the 2nd respondent in its show-
cause notice dated 24-02-2011 for proposing to blacklist the
petitioner is as follows:
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“It needs to be appreciated that the projects being undertaking by NHAI are of huge magnitude and both in terms of manpower and finance besides being of utmost National importance, striking at the root of economic development and prosperity and general public and a nation as a whole, the NHAI cannot afford to deal with entities who fail to perform their obligations as in your case.”
And in the impugned order dated 24-02-2011, the 2nd respondent
gave the following reasons:
“It is to be noted that your act of non-acceptance of LOA has resulted in huge financial loss to the tune of Rs.3077 crores, as assessed over the life of the concession period, in terms of lower premium, apart from cost of the time and effort, to NHAI. It is further noted that this is the first case where a bidder has not accepted the LOA, and warrants exemplary action, to curb any practice of ‘pooling’, and ‘malafide’ in future.
After considering all material facts, and your reply in response to the Show Cause Notice, NHAI is of the considered view that no justifiable grounds have been made out in support of your action of non-acceptance of LOA. Keeping in view the conduct of the addressees, NHAI find that they are not reliable and trustworthy and have caused huge financial loss to NHAI.”
20. The learned counsel for the petitioner argued that
Clause 4 of the bid document stipulates blacklisting to be one of the
actions that can be taken against a bidder or contractor, if the 2nd
respondent comes to the conclusion that such a person is guilty of
any one of the unacceptable practices, referred to earlier. Imposing
the same penalty on a person, who is not guilty of any one of the
unacceptable practices, though such a person is guilty of dereliction
of some legal obligation, would amount to imposition of a
punishment, which is disproportionate to the dereliction. In support
of the submission, the learned counsel relied upon the Judgment of
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this Court in Teri Oat Estates (P) Ltd. v. U.T.Chandigarh and others,
(2004) 2 SCC 130.
21. It was a case, where allotment of a piece of land, made
under the Capital of Punjab (Development and Regulation) Act,
1952 and the Rules made thereunder, was cancelled on the ground
that the allottee did not make the payment of the requisite
instalments agreed upon. One of the submissions made by the
allottee (appellant before this Court) was that the action of the
Chandigarh administration, seeking to evict the appellant and
resume the land, lacked proportionality in the background of the
specific facts of that case. This Court explained the doctrine of
proportionality at paras 45 and 46, as follows:
“45. The said doctrine originated as far back as in the 19th century in Russia and was later adopted by Germany, France and other European countries as has been noticed by this Court in Om Kumar v. Union of India. 46. By proportionality, it is meant that the question whether while regulating exercise of fundamental rights, the appropriate or least restrictive choice of measures has been made by the legislature or the administrator so as to achieve the object of the legislation or the purpose of the administrative order, as the case may be. Under the principle, the court will see that the legislature and the administrative authority
“maintain a proper balance between the adverse effects which the legislation or the administrative order may have on the rights, liberties or interests of persons keeping in mind the purpose which they were intended to serve”.
22. Tested in the light of the abovementioned principle, we
are required to examine; (1) the purpose sought to be achieved by
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the impugned decision of the 2nd respondent to blacklist the
petitioner; and (2) the adverse effects, the impugned action may
have on the rights of the petitioner.
23. From the impugned order it appears that the 2nd
respondent came to the conclusion that; (1) the petitioner is not
reliable and trustworthy in the context of a commercial transaction;
(2) by virtue of the dereliction of the petitioner, the 2nd respondent
suffered a huge financial loss; and (3) the dereliction on the part of
the petitioner warrants exemplary action to “curb any practice of
‘pooling’ and ‘mala fide’ in future”.
24. We do not find any illegality or irrationality in the
conclusion reached by the 2nd respondent that the petitioner is not
(commercially) reliable and trustworthy in the light of its conduct in
the context of the transaction in question. We cannot find fault with
the 2nd respondent’s conclusion because the petitioner chose to go
back on its offer of paying a premium of Rs.190.53 crores per
annum, after realising that the next bidder quoted a much lower
amount. Whether the decision of the petitioner is bona fide or mala
fide, requires a further probe into the matter, but, the explanation
offered by the petitioner does not appear to be a rational
explanation. The 2nd respondent in the impugned order, while
rejecting the explanation offered by the petitioner, recorded as
follows:
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“Further the fact remains that clarification / amendments communicated by NHAI were ‘minor’ and cannot be attributed as a cause for occurrence of an ‘error’ of ‘major’ nature and magnitude. With project facilities clearly spelt out in the RFP document, the project cost gets frozen well in advance and similarly traffic assessment & projections, which largely impact the financial assessment, are also not expected to be left for last few days of bid submission. Therefore stating that an ‘error’ of this nature and magnitude occurred is neither correct nor justified……… “
(Emphasis supplied)
25. We cannot say the reasoning adopted by the 2nd
respondent either irrational or perverse. The dereliction, such as
the one indulged in by the petitioner, if not handled firmly, is likely
to result in recurrence of such activity not only on the part of the
petitioner, but others also, who deal with public bodies, such as the
2nd respondent giving scope for unwholesome practices. No doubt,
the fact that the petitioner is blacklisted (for some period) by the 2nd
respondent is likely to have some adverse effect on its business
prospects, but, as pointed out by this Court in Jagdish Mandal v.
State of Orissa and others, (2007) 14 SCC 517:
“Power of judicial review will not be invoked to protect private interest at the cost of public interest, or to decide contractual disputes.”
The prejudice to the commercial interests of the petitioner, as
pointed out by the High Court, is brought about by his own making.
Therefore, it cannot be said that the impugned decision of R-2 lacks
proportionality.
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26. Coming to the submission that R-2 ought to have given
an oral hearing before the impugned order was taken, we agree
with the conclusion of the High Court that there is no inviolable rule
that a personal hearing of the affected party must precede every
decision of the State. This Court in Union of Indian and another v.
Jesus Sales Corporation, (1996) 4 SCC 69, held so even in the
context of a quasi-judicial decision. We cannot, therefore, take a
different opinion in the context of a commercial decision of State.
The petitioner was given a reasonable opportunity to explain its
case before the impugned decision was taken.
27. We do not see any reason to interfere with the
Judgment under Appeal. The S.L.P. is, therefore, dismissed.
…………………………….J. ( ALTAMAS KABIR )
………………………………….J. ( J. CHELAMESWAR )
New Delhi; May 11th , 2012.
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