The Supreme Court recently ruled that a contractor cannot be blacklisted solely based on allegations of contractual breach unless there are solid grounds to justify such an action. The court emphasized that even while issuing a show-cause notice, the principles of natural justice must be followed.
The bench comprising Justices J.B. Pardiwala and R. Mahadevan stated:
"Authorities must exercise caution while issuing a show-cause notice. They must thoroughly understand the facts and determine the nature of the alleged violation by the contractor. Merely having the power to blacklist does not justify its exercise without reasonable grounds."
The court further noted that blacklisting is a severe penalty as it can effectively put an end to a contractor’s business.
Case Background
In this case, the appellant, Techno Prints, was awarded a contract by the Chhattisgarh Textbook Corporation to print books. However, due to the COVID-19 pandemic, they were unable to meet the deadline. According to the contract terms, failure to complete the work on time could lead to blacklisting.
Based on this, the Chhattisgarh Textbook Corporation issued a show-cause notice to Techno Prints, proposing to blacklist the company for three years and forfeit their ₹5,00,000 earnest money deposit (EMD).
The appellant challenged this decision in the High Court, but their petition was dismissed. Subsequently, they appealed to the Supreme Court.
1. Blacklisting Order Was Unjustified : The court held that blacklisting requires strong justification and cannot be imposed merely based on allegations.
"If a contractor is to face the severe penalty of blacklisting due to a contract breach, their conduct must be exceptionally negligent or dishonest. A mere allegation of contractual breach, without additional evidence, does not justify such an extreme measure."
2. A Show-Cause Notice Cannot Be a Mere Formality : The court criticized the tendency of authorities to issue show-cause notices as a mere formality when they have already decided to blacklist the contractor.
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"In many cases, authorities issue a show-cause notice only as a formality, having already made up their minds to blacklist the contractor. This is improper and violates the principles of natural justice."
3. Breach of Contract and Fraud Are Not the Same : The Supreme Court clarified that breaching a contract is not equivalent to fraudulent intent or wrongdoing.
"Blacklisting should not be imposed solely because a contractor failed to fulfill a contract. Unless it is proven that they acted with fraudulent intent or sought undue advantage, such punishment is excessive."
Final Verdict by Supreme Court
The Supreme Court ruled that the blacklisting order was unlawful and set it aside. However, it allowed the Chhattisgarh Textbook Corporation to forfeit the ₹5,00,000 EMD.
"We clarify that the Chhattisgarh Textbook Corporation may forfeit the ₹5,00,000 EMD, but the blacklisting order is unlawful and is hereby quashed."
