Page 1

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  

1

Page 2

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  

2

Page 3

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  

3

Page 4

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  

4

Page 5

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.”

5

Page 6

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  

6

Page 7

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.

7

Page 8

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;”

8

Page 9

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;

9

Page 10

“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  

1

Page 11

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.

1

Page 12

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:

1

Page 13

“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  

1

Page 14

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  

1

Page 15

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:

1

Page 16

“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.

1

Page 17

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.  

1