The Supreme Court on August 7, 2024, in The Blue Dreamz Advertising Pvt. Ltd. & Anr. v. Kolkata Municipal Corporation & Ors.[1] rendered a significant judgment in assessing the validity of a debarment or a blacklisting order. The court reiterated its position that invoking debarment in ordinary cases of breach of contract where there is a bona fide dispute, is not permissible.
FACTS:
In the present case, Kolkata Municipal Corporation (“Corporation”) invited bids for allotment of contract for display of advertisements on hoardings, kiosks, etc., which was awarded to the Appellant – The Blue Dreamz Advertising Pvt. Ltd. Thereafter, the Appellant flagged various issues it was facing, including the existence of fewer units of hoardings than the units allotted, non-receipt of formal work order and format of the Bank Guarantee as well as non-receipt of a ‘No Objection Certificate’ required to obtain permits for lighting up the hoardings, etc. In response, the Corporation stated that the Appellant had failed to cover all areas during the joint inspection and that the list of allotted locations was not submitted as per the Corporation’s request. It further noted that there was no necessity to insist on the format of Bank Guarantee nor on the No Objection Certificate, and demanded payment of money due to it.
Subsequently, the Corporation issued a Show Cause Notice (“SCN”), requiring the Appellant to justify why its allotment should not be cancelled for non-payment of dues. Simultaneously, a notice blacklisting the Appellant from participating in any advertising in Kolkata was published in the newspaper. Pursuant to the SCN and newspaper publication, two writ petitions were filed. In these proceedings, the Corporation submitted that the show cause notice and the blacklisting decision had been withdrawn, and that appropriate proceedings would be taken up before the Arbitrator.
After the said withdrawal of SCN, the Corporation issued another SCN for breach of terms of contract. In response, the Appellant stated that the dispute must be referred to arbitration as per the contractual terms. Thereafter, the Appellant invoked arbitration. Shortly after, the Corporation debarred the Appellant from participating in any tender for a period of five years or till the date of its exoneration, whichever is later. The reasons for blacklisting stated were that the Appellant agreed to the terms of the notice which included allotment of hoardings on an ‘as is where is’ basis, financial incapability to pay, etc. This debarment order was challenged in the Calcutta High Court by the Appellant and was later appealed by the Corporation before a Division Bench of the High Court.
PROCEEDINGS IN THE HIGH COURT:
The Debarment Order was challenged by the Appellant before a Single Judge of the Calcutta High Court.[2] The Single Judge held that blacklisting an entity was only allowed if the reasons pointed to public interest getting affected, if the Contractor continued to be awarded contracts by the Corporation. Alternatively, it must be established that the entity so blacklisted was a dishonest/ irresponsible business, wholly lacking in business integrity. The Court noted the existence of a civil dispute between the parties, which had been referred to arbitration. It further noted that by not terminating the contract, the Corporation implicitly accepted breach of contract by the Appellant. Relying on the judgment in B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. and Anr[3]., it was held that the Appellant, having raised a bona fide dispute, should not be blacklisted until the resolution of the dispute. Therefore, the debarment order was set aside.
The Corporation challenged the decision of the Single Judge.[4] The Division Bench held that the Appellant was provided with the opportunity of a hearing. Furthermore, it was noted that the Debarment Order was not unreasonable, unfair or disproportionate and that sufficient cause to blacklist the Appellant existed. Therefore, the Appeal was allowed. The appeal in the present decision has arisen, challenging the order passed by the Division Bench, setting aside the Single Judge order.
ISSUE:
The main issue before the Supreme Court was whether on the facts and circumstances of the case, the order blacklisting the Appellant was valid and justified in law.
FINDINGS BY THE SUPREME COURT:
In this judgment, the Supreme Court analysed the jurisprudence on blacklisting. It noted how debarment/ blacklisting had always been viewed as a drastic remedy and for this, reliance was placed on Erusian Equipment & Chemicals Ltd. v. State of West Bengal & Anr.[5], in which the court had highlighted the hindrance caused by such orders when entering commercial undertakings with the government. The Court opined that while setting out the legal position governing blacklisting in the US and UK, the apex court in Kulja Industries Ltd. v. Chief General Manager Western Telecom Project BSNL & Ors.[6] noticed that guidelines issued in those jurisdictions were to protect public interest from irresponsible, unscrupulous Contractors who might also be engaged in illegal conduct. Finally, the court observed that in B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. and Anr.[7], it was held that when a Contractor raises a bona fide dispute with respect to a claim, he cannot be declared to be a defaulter until the resolution of the dispute.
Based on the aforementioned authorities, the Supreme Court broadly arrived at two findings. First, debarment as a remedy is to be invoked when there is potential harm to the public interest, particularly where the conduct of the entity being blacklisted demonstrates that debarment as a penalty alone will protect public interest and act as a deterrent. Second, even if it is a temporary debarment, it would still result in a debilitating loss as that disqualification would render the entity ineligible to bid for other tenders. Hence, in case of an ordinary breach of contract, where the explanation offered raises a bona fide dispute, blacklisting is not allowed.
The facts of the instant case were examined basis the findings that the court had reached, post the review of the jurisprudence on blacklisting. Taking note of the reasons stated in the debarment order, it was held that all the reasons fell short of qualifying the conduct of the Appellant to be so abhorrent so as to justify invoking such a drastic remedy. Consequently, the penalty was held to be disproportionate. The Supreme Court also considered the conduct of the Corporation in not referring the matter to arbitration despite the submission made by it before the High Court. Moreover, the Court observed that both the parties had raised issues with each other, pertaining to the discharge of reciprocal obligations in the bid document. Without going into the merits of the dispute, the issues framed by the Arbitrator were relied on to conclude that the assertions and counter-assertions of the Appellant and the Corporation were clearly in the nature of a bona fide civil dispute. Therefore, the decision of the Division Bench was set aside and the appeal was allowed.
CONCLUSION:
In a significant step, the Supreme Court in this judgment took cognizance of the detrimental impact that blacklisting could have on a contractor or business. When a person/ company is blacklisted, they become ineligible to bid for other tenders as well. So the effect of this remedy exceeds the relationship between the two parties involved in that particular transaction. This commercial exile could potentially spell commercial death to the blacklisted party. Given how grave the repercussions of a debarment are, its fear should not hang over the parties like a Sword of Damocles. In this regard, the Supreme Court decision to necessitate the meeting of a higher threshold to mitigate arbitrary and frivolous usage of debarment/ blacklisting is a notable step towards ensuring judicious and proportionate usage of this sanction.
For further information, please contact:
Omar Ahmad Partner, Cyril Amarchand Mangaldas
omar.ahmad@cyrilshroff.com
[1] Special Leave Petition (Civil) No. 11682 of 2018.
[2] Writ Petition No. 6616(W) of 2016.
[3] (2006) 11 SCC 548
[4] M.A.T. No. 277 of 2017.
[5] (1975) 1 SCC 70.
[6] (2014) 14 SCC 731.
[7] (2006) 11 SCC 548.
