Abstract

Blacklisting of companies in India by the State and the Central government has largely affected the corporate sector and acts as deterrence for companies especially in the infrastructure sector to enter into any contract with the government. Several reasons can be attributed to this problem and the law has largely been ineffective in making the process of blacklisting fair and rational. The process of blacklisting has been detrimental to the companies because of their long-term impact on the business and its reputation. On several occasions blacklisting orders have violated the principles of natural justice and have been challenged in the court of law, however, the position of law concerning blacklisting is still not clear To resolve this problem, arbitration is considered a viable solution to prevent blacklisted companies suffer economically.  There are still a lot of gaps in the framework of blacklisting companies that need to be seriously relooked.

Introduction

The right to enter into a contract forms an essential part of private law which allows individuals and organizations to enter into a contract that largely governs the day-to-day activities of the businesses. The basic rationale behind contract law has been to allow parties to negotiate and have a consensus over the terms and conditions of the contract. [1] It also allows parties to fix the liability based on the nature of the business that the contract seeks to enforce. [2] In India, the Indian Contract Act 1872 governs the way contracts are formed and enforced. It lays down in detail the requirement of a valid contract and who all are eligible to enter into such a contract. Article 298 of the Constitution of India 1950, empowers the government to enter into a contract for trade or business and frames laws that give effect to such contracts. [3] It allows the executive to frame laws governing such government contracts. In the past, the government has often used its power under Article 298 for allocating tenders via public-private partnerships to different companies.

The right to contract provided to the executive also allows for a right to not enter into a contract as well. This has often been used by the government to blacklist companies that fail to deliver their contractual terms or violate any provision of the contract or gets involved in any activity that contravenes any law. There have been many disputes wherein companies have been blacklisted by the government for a considerable period ranging from 5 to 10 years which has significantly affected the blacklisted companies. In addition to this, the executive has immense power to blacklist a company without any accountability.

In this blog, it is argued that in the absence of any specific provision governing the power of government for blacklisting companies, the government must look beyond the superficial application of principles of natural justice and act in a manner that enhances the economic and social welfare of the country. To this end, the article shall first establish how imperative it is to follow the principle of natural justice while blacklisting companies to keep a check on executive power. In the second part, it shall further analyze the extent to which arbitration has been successful in limiting the excessive power of the executive with respect to blacklisting proceedings and whether such blacklisting would improve economic efficiency and social welfare.

How effective are principles of natural justice in Blacklisting Process?

The principles of natural justice form an essential part of the justice delivery system that binds the courts and legal institutions to follow these principles to ensure that proceedings are carried out fairly. With respect to the proceedings for blacklisting of companies, it has always been debated that the government does not give sufficient notice to the blacklisted companies regarding the show cause notice nor do they provide a reason for such blacklisting. In the case of V. Punnen Thomas v. the State of Kerala, [4] the Kerala High Court held that the principle of audi alteram partem could not be applied in such cases as it could hamper the administration of government and would unnecessarily widen the scope of judicial interference in every case where the outcome was against the defaulting company that is blacklisted. This decision is highly problematic as blacklisting debars the company or a member of the company for a set number of years without allowing them to present their case which simply violates the notion of fairness and must not be sustained. In Maneka Gandhi v. Union of India, [5] the Supreme Court specifically held that the procedure should be just fair, and reasonable and must not be arbitrary.

However, to make the procedure for blacklisting fair and reasonable, the Supreme Court in the case of Eurasian & Chemicals v. State of West Bengal [6] stated that a notice must be provided to the member of the company before blacklisting. It further held that since blacklisting results in a serious civil consequence by affecting the business and reputation of the company drastically, it should not be allowed without giving an opportunity of hearing to the other party. In this case, the Company of the Petitioner was engaged in the purchase and export of Cinchona, they alleged that despite having the highest tenders, their tenders were rejected by the State government without giving any reason for such rejection. It was contended that such an act of State government was unreasonable, arbitrary, and discriminatory. [7] On the other hand, the State government argued that due to the misconduct and malpractice on part of petitioners, the Company was blacklisted, and only when the charges of misconduct and malpractice would get cleared, it would continue working with the petitioner’s company. It was further argued that the government cannot be compelled to enter into a contract with companies that it considers to lack trust for integrity. While the court did consider the argument of the government that under Article 14, 19, and 21 of the Constitution it cannot be forced to continue the contract with a defaulted company, however, since the government is bound by the laws, it must act in conformity with the principles of natural justice. [8] Simply issuing an order of blacklisting a company is not sufficient. A prior notice of appearance or an opportunity to represent the case of company must be given before blacklisting. This is crucial because blacklisting not only affects the long-term business of the company but also leaves a bad remark on its reputation which has severe long-term consequences. However, giving an oral hearing to a party against whom show-cause notice is issued is not a ground to claim that the party was not given a proper hearing. In the case of M/S Patel Engineering Ltd v. Union of India & Anr, [9] it was held by the Supreme Court that “there is no inviolable rule that a personal hearing of the affected party must precede every decision of the State.” Thus, as long as the blacklisted party is given a chance to present their case as to why it should not be blacklisted, doing away with the requirement of oral hearing does not violate the principle of audi alteram partem.

The government must follow the principles of natural justice as a norm while adjudicating matters since such decisions directly affect the civil rights of the concerned company. This is because such blacklisting orders often create disability wherein a lot of restrictions are imposed on the company with respect to carrying out their business venture and as a result, the same should be done only after an objective satisfaction. In the case of Raghunath Thakur v. the State of Bihar, [10] the court held that even if the rules do not lay down the conditions of giving a notice and an opportunity of hearing, it is an implied rule that any order or decision that directly affects the civil rights of a person must be followed by applying the principles of natural justice.

However, although the courts have allowed that an opportunity of hearing must be given to the blacklisted company and have upheld audi alteram partem as a quintessential part of such government decisions, whether sufficient reason must be given by the government for such blacklisting orders is something that needs further judicial scrutiny. In the case of Grosons Pharmaceuticals (P) v. State of Uttar Pradesh, [11] the court held that although the government is obliged to give a due notice and an opportunity of hearing to the blacklisted company by following the principles of natural justice, however, the government is not obligated to state the reasons for such blacklisting. The court further held that in the absence of any statutory rule which allows the government to give reasons for blacklisting, it is not mandatory for the government to state the material based on which they decided to blacklist the company. [12]

This again seems to be a problematic and halfway application of the principles of natural justice. The third principle of natural justice allows for ‘speaking order’, wherein every decision/order that leads to civil consequences and affects the civil rights of the people must be reasoned out. There must be a detailed reasoning behind every decision taken by the adjudicating body. [13] In this context, allowing for blacklisting companies without providing sufficient reasoning or material basis for such reasoning simply goes against the third prong of principles of natural justice. It just provides a free hand to the executive to blacklist companies without providing sufficient reasoning and takes away the very element of fairness and accountability on part of the government. This directly impacts the way companies’ functions and their willingness to enter into a contract with the government. While the power of the State to blacklist a person is an essential concomitant to the executive power of the State to carry on business or trade and the making of contracts etc., however, the exercise of such power must be within the limited principles of natural justice.

To what extent is arbitration procedure helpful for blacklisted companies?

Arbitration has always been considered as a comparatively fair mechanism as compared to judicial proceedings especially when the issue revolves around the unchecked power of the executive. [14] However to what extent is a show-cause notice allowed when there is an explicit clause of arbitration between the parties is something that needs to be looked at. In the case of Haldia Bulk Terminal Limited v. Board of Trustees for the Port of Kolkata [15], the show-cause notice was challenged by the petitioner since there was an arbitration clause in the agreement, and accordingly, it was argued that the  blacklisting should only be done  post arbitration proceeding is concluded. However, the court held that the “mere existence of an arbitration agreement does not preclude the Petitioner from blacklisting the Respondent.” [16] The existence of recourse to arbitration or even recourse to civil action cannot prevent an employer from blacklisting the contractor based on the employer’s perception of the contractor’s performance within the contract. However, the show cause notice for blacklisting and subsequently the blacklisting of the company can be challenged on the grounds of arbitrariness and mala fide intention.

Economic Analysis of Blacklisting companies

The economic cost associated with the blacklisting of companies by the state government is very high and is solely borne by the company and its shareholders. Here economic cost refers to the loss suffered by the company due to blacklisting which directly impacts the future business prospects and reputation of the company. [17] This loss is borne solely by the shareholders who invest in the company. [18] On the other hand for the State government, the political cost is very low it does not have to answerable to the people or any other authority for such blacklisting and the executive has uncontrolled power in this respect. Even the social cost of blacklisting companies is not considered very high since the public is not affected directly when companies are blacklisted but instead, it is the taxpayer’s money that is generally involved in the projects which these companies undertake, and the same goes in vain when the companies are blacklisted. The social cost here ought to be understood as the cost incurred in social welfare and how it impacts the public. [19] Thus, it cannot be denied that the state must have the power to blacklist the companies when they indulge in corrupt practices or violate the stipulated conditions of a contract, however, keeping in view, that this power must not be exercised arbitrarily by the executive because the economic cost of such move is very high. [20] It acts as an obstacle for the companies to enter into a contract with the government and reduces the ease of doing business for companies in India. [21] There must be certain checks and balances to keep a check on the government action and principles of natural justice must necessarily be adhered to by the government. 

Conclusion

Throughout this blog, it is argued that the power given to the executive government with respect to blacklisting the companies must be exercised fairly and reasonably with sufficient checks and balances and by applying the principle of natural justice in a prudent manner. This becomes important in the case of companies because blacklisting affects not just their existing contract with the government but also their future business prospects, reputation and leads to considerable loss to trade and business in general. The political cost of such blacklisting orders might be less since they are mainly guided by the will of the ruling government, however, it imposes a very high economic cost on the company in terms of loss of business, employment etc. Thus, blacklisting must be undertaken reasonably in fair manner and one such way  to ensure such fairness in the blacklisting procedure is to ensure that all three principles of natural justice are strictly adhered to and followed upon by the government.

About the Authors

Nadiya Sarguroh is a Senior Associate at MZM Legal, Mumbai.

Gunjan Shrivastav is a 3rd year student at National Law School of India University (NLSIU), Bangalore and is also an associate editor at the Indian Journal of Projects, Infrastructure and Energy Laws (IJPIEL).

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel & Aakaansha Arya

Senior Editor: Aakaansha Arya

Associate Editor: Gunjan Shrivastav

Junior Editor: Dipali Singh

Preferred Method of Citation

Nadiya Sarguroh and Gunjan Shrivastav, “Need to Relook at the Framework for Blacklisting of Companies in India” (IJPIEL, 9 April 2021)

<https://ijpiel.com/index.php/2021/04/08/need-to-relook-at-the-framework-for-blacklisting-of-companies-in-india/?et_fb=1&PageSpeed=off>

Endnotes

[1] Avtar Singh, Contracts and Specific Relief Act (Eastern Book Company 6th ed 2017).
[2] Ibid.
[3] Constitution of India 1950, art 298.
[4] V. Punnen Thomas v. State of Kerala, AIR 1969 Ker 81.
[5] Maneka Gandhi v Union of India, 1978 AIR 597.
[6] Eurasian & Chemicals v. State of West Bengal, 1975 AIR 266.
[7] Ibid.
[8] Ibid.
[9] M/S Patel Enginnering Ltd v. Union Of India & Anr, (2012) SCC 11 257.
[10] Raghunath Thakur v. State of Bihar, AIR 1989 SC 620.
[11] Grosons Pharmaceuticals (P) v. State of Uttar Pradesh, AIR 2001 SC 3707.
[12] Ibid.
[13] V.S, Chauhan, Reasoned Decision: A Principle Of Natural Justice, Journal of Indian Law Institute, Vol 37, No.1 (1995).
[14] Jhanvi Sindhu, Public Policy And Indian Arbitration: Can The Judiciary And The Legislature Rein In The ‘Unruly Horse’?, Journal of Indian Law Institute, Vol 58, No. 4 (2016).
[15] Appeal No. 972 of 2012.
[16] Ibid.
[17] Kundan Kumar Thakur, British Colonial Exploitation of India and Globalisation, Proceedings of the Indian History Congress, 2013, Vol. 74 (2013).
[18] Ibid.
[19] Ibid.
[20] Ajai Shukla, Corruption in defence procurement: ‘Blacklisting’ must remain an option, Business Standard (July 28, 2015), https://www.business-standard.com/article/economy-policy/corruption-in-defence-procurement-blacklisting-must-remain-an-option-115072800013_1.html
[21] Aruna Chandrashekhar, Why the World’s Largest Sovereign Wealth Fund is Leaving Indian Companies in the Cold and What That Tells Us About Make in India, The Wire (Mar 18, 2017), https://thewire.in/business/norway-wealth-fund-blacklists-vedanta-indian-firms.