Case Note & Summary
The appellant, M/s Daffodills Pharmaceuticals Ltd., a pharmaceutical supplier, participated in a tender process called by the State of Uttar Pradesh for supply of medicines to hospitals under the Medical and Health Department. Daffodills was one of 56 bidders and its bid was acceptable. It was asked to match its previous bid to the Tamil Nadu Service Corporation Ltd. for 2015-16 at approved L1 rates for 14 specified drugs. At the time of bid submission, each bidder had to furnish a declaration that no court case, vigilance case, or CBI case was pending against the firm, with 'court case' defined as a criminal case against the firm, Board of Directors, or individual Directors. Daffodills furnished the required declaration. On 21.08.2015, the Principal Secretary to the Government of U.P. issued a letter directing all offices under the Health Department to stop all local procurements from Daffodills, stating that an FIR had been lodged against it and the CBI was inquiring into the issue. Daffodills challenged this order before the Allahabad High Court, arguing that the criminal case was against one Surender Chaudhary, an erstwhile Director who had resigned in 2012, and that the order was passed without notice or hearing, amounting to blacklisting. The High Court dismissed the writ petition, holding that in contractual disputes relating to policy decisions, the scope of jurisdiction under Article 226 is limited, and that Daffodills' failure to comply with express terms of the contract justified the State's action. The Supreme Court granted leave and heard the appeal. The Court noted that the order of 21.08.2015 was in effect a debarring or blacklisting order, preventing the State from local purchase of medicines from Daffodills for an indefinite duration, co-terminus with the criminal case. The Court observed that even if Surender Chaudhary was involved in objectionable activities, that could not justify unilateral action without any opportunity of hearing to Daffodills. Relying on precedents such as Erusian Equipments and Chemicals Ltd. v. State of West Bengal, Raghunath Thakur v. State of Bihar, and Southern Painters v. Fertilizers & Chemicals Travancore Ltd., the Court held that before any drastic adverse action like debarment or blacklisting, the affected party must be given an opportunity of hearing and representation. The Court found that no show-cause notice or opportunity was granted to Daffodills before the impugned order, rendering it arbitrary and violative of principles of natural justice. The Supreme Court allowed the appeal, set aside the impugned order of the High Court and the direction dated 21.08.2015 issued by the Principal Secretary, and directed that the matter be remitted to the State Government for a fresh decision after giving Daffodills an opportunity of hearing.
Headnote
A) Administrative Law - Principles of Natural Justice - Blacklisting and Debarment - Requirement of Prior Hearing - The court held that before any executive decision maker proposes a drastic adverse action such as a debarring or blacklisting order, it is necessary that opportunity of hearing and representation against the proposed action is given to the party likely to be affected. The order directing stoppage of local purchase from the appellant for an indefinite duration was in effect a blacklisting order, and the failure to grant any hearing rendered it arbitrary and unsustainable. (Paras 13-15) B) Contract Law - Government Contracts - Debarment - Indefinite Duration - The court observed that an indefinite directive to stop procurement, co-terminus with the lifetime of a criminal case, is facially far more disproportionate than a finite blacklisting order. The absence of any time limit or clarity on the status of the criminal case further vitiated the action. (Para 13) C) Constitutional Law - Article 226 - Scope of Judicial Review - The High Court erred in holding that in contractual disputes relating to policy decisions, the scope of jurisdiction under Article 226 is limited, and that the failure to comply with express terms of the contract justified the State's action without hearing. The court clarified that even in contractual matters, principles of natural justice must be observed before imposing a debarment. (Paras 7, 15)
Issue of Consideration
Whether an order directing stoppage of local purchase from a supplier without prior notice or hearing, based on a criminal case against an erstwhile director, amounts to blacklisting and is violative of principles of natural justice.
Final Decision
The Supreme Court allowed the appeal, set aside the impugned order of the Allahabad High Court and the direction dated 21.08.2015 issued by the Principal Secretary, Government of U.P., and remitted the matter to the State Government for a fresh decision after giving the appellant an opportunity of hearing.
Law Points
- Principles of natural justice
- Blacklisting requires prior hearing
- Debarment order without notice is arbitrary
- Opportunity of hearing before adverse action
