Summary
The Kolkata Municipal Corporation debarred an advertising contractor for five years over unpaid licence fees on hoarding contracts, while the contractor alleged reciprocal breaches by the Corporation and arbitration was under way. The Supreme Court held that blacklisting is a drastic penalty, amounting to civil death, that must meet the test of proportionality and is not to be used for ordinary breaches of contract where a bona fide dispute exists. It set aside the debarment and restored the Single Judge's judgment.
Issues
- Whether the Corporation's order debarring the appellant from tenders for five years was valid and proportionate.
- Whether blacklisting may be imposed for an ordinary breach of contract where the contractor raises a bona fide dispute that is pending in arbitration.
- Whether a statutory corporation enjoys the same unfettered freedom as a private party in deciding to blacklist.
Held
- Blacklisting is a drastic remedy subject to rigorous scrutiny: it deprives a person of the privilege of dealing with the State and requires objective satisfaction. Since blacklisted persons are usually ineligible under tender conditions generally, debarment, even for a fixed period, operates as civil death, commercially ostracising the person and affecting those employed by them. (¶¶ 22, 25, 26)
- Debarment is meant for cases of harm or potential harm to public interest, such as dishonesty, lack of business integrity or conduct that only debarment will deter. Where the case is an ordinary breach of contract and the explanation offered raises a bona fide dispute, blacklisting ought not to be resorted to; following B.S.N. Joshi, a person raising a bona fide dispute about a claim may not be treated as a defaulter while the dispute is unresolved. (¶¶ 23, 25, 26, 27)
- Here both sides had blamed each other from the outset about reciprocal obligations (work orders, bank guarantee format, no-objection certificate for electricity connections, unlocated hoardings and non-payment). The reasons in the debarment order, including the inference that the appellant lacked financial capacity and had set a bad example, fell far short of conduct justifying blacklisting; the penalty was disproportionate, a sledgehammer to crack a nut. (¶¶ 28, 29, 30)
- The arbitral award in the appellant's favour after set-off, and the issues framed by the arbitrator, showed a bona fide civil dispute, without the Court passing on the award's correctness. The case was stronger still because the Corporation had told the High Court that proceedings would be taken before the arbitrator, yet did not itself invoke arbitration. (¶¶ 31, 32, 33, 34)
- It is not enough that a blacklisting order records reasons; the question is whether the reasons justify blacklisting and whether the penalty is proportionate. A statutory corporation discharging public functions is not a private party with an absolute right to refuse to deal; its decision to blacklist must stay within the law and comport with proportionality. (¶¶ 35, 36, 37)
- Courts must ask whether the conduct was part of the normal vicissitudes of commerce or crossed the line warranting temporary banishment in public interest, as in Patel Engineering (withdrawal from a bid after seeing lower bids) and Kulja Industries (fraudulent withdrawal of money). The Division Bench overlooked this distinction. (¶¶ 38, 39, 40, 41)
Result
Appeal allowed; Division Bench judgment set aside and the Single Judge's judgment restored, so the writ petition stands allowed and the debarment order dated 02.03.2016 is quashed; no order as to costs.