The Union of India as well as the States are authorized, under Article 298 of the Constitution of India, 1950, to carry on any trade or business and to make contracts for any purposes. However, the State and its instrumentalities can decline to enter into a contractual relationship with any person or class of persons. The Supreme Court has observed that this decision of the State or its instrumentalities to not deal with certain persons or class of persons on account of undesirability of entering into a contractual relationship with such persons or class of persons is called blacklisting (Patel Engineering Limited v. Union of India & Anr) [1].

It is a settled principle of law that blacklisting merely signifies a business decision by a party of not entering into a contractual relationship with another party, which has committed a breach of contract. In Kulja Industries Limited v. Western Telecom Project BSNL[2] the Supreme Court observed that while the freedom to contract or not to contract is unqualified in the case of private parties, however, when such decision is taken by the State or any of its instrumentalities, the same is subject to judicial review. Further, any such decision will be open to scrutiny on the touchstone of fairness, relevance, natural justice, non-discrimination, equality and proportionality.

In Gorkha Security Services v. Government (NCT of Delhi) and Ors.[3], the Supreme Court highlighted the legal principles to be followed prior to blacklisting. The Court observed that blacklisting has to be preceded by a show-cause notice thereby giving an opportunity to meet the allegations which were in the mind of the authority contemplating blacklisting of any person. The Court further observed that in order to fulfill the requirements of principles of natural justice, a show cause notice should meet two necessary requirements- (i) material/grounds to be stated  which necessitates an action; and (ii) particular penalty/action which is proposed to be taken.

An order of blacklisting has adverse civil consequences and therefore the objective of blacklisting should not be to penalize any person/entity. In Gorkha Security Services (supra) the Supreme Court in fact described blacklisting as “civil death” of a person who is foisted with an order of blacklisting, as such a person who is blacklisted is debarred from participating in government tenders, thereby precluding such person from being awarded government contracts. Further, in J.K. Surface Coatings Private Limited v. Oil and Natural Gas Corporation[4], the Bombay High Court, while discussing the settled principles of blacklisting and/or banning a party, observed that “the fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction before such an order is passed… merely due to some contractual disputes, a banning order passed by the concerned authority would be too harsh. Only on the basis of some contractual violations which have an equally efficacious remedy available for redressal of those violations, cannot be the only ground to for passing the banning order.”

The impact of blacklisting on a person/entity ought not to be greater than the objective intended by the business decision. While, the State and its instrumentalities have a right to enter or not to enter into any contract with any person, considering the consequences of an order of blacklisting, the process of blacklisting should be undertaken with care and caution, disclosing full application of mind and after providing an opportunity of being heard to the party against whom such an order is proposed to be passed.

Author:
Apoorva Gupta, Associate

Footnotes:
[1] (2012) 11 SCC 257
[2] (2014) 14 SCC 731
[3] (2014) 9 SCC 105
[4] (2016) 6 AIR Bom R 679