Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8944 OF 2013

(Arising out of S.L.P. (C) No.20716 of 2011)

M/s Kulja Industries Limited …Appellant

Versus

Chief Gen. Manager W.T. Proj.

BSNL & Ors. …Respondents

J U D G M E N T

T.S. THAKUR, J.

1.Leave granted.

2.The short question that falls for determination in this

appeal is whether the respondent-Bharat Sanchar Nigam

Limited (for short ‘BSNL’) could have blacklisted the

appellant for allotment of future contracts for all times to

come. High Court of Judicature at Bombay before whom the

blacklisting order was assailed by the appellant has answered

1

Page 2 that question in the affirmative and dismissed Writ Petition

No.2289 of 2011 filed by the appellant giving rise to the

present appeal.

3.Two tender notices for supply of Permanent Lubricated

HDPE Pipe (Telecom Ducts) and Installation of O.F. Cable

through Blowing Technique were issued by BSNL in the year

2004 and 2005. It is common ground that the appellant-

company emerged successful in regard to both the tender

notices. It is also not in dispute that several orders for supply

of the material were placed with the appellant-company

during the years 2004-2006 and that goods were supplied to

various consignee units of BSNL pursuant to the same. The

appellant’s case is that a “receipt certificate” was issued in its

favour after delivery of the goods and that bills for payment

of the price of the goods were raised in triplicate to the Chief

Controller of Accounts, WTP BSNL, Mumbai from time to

time. The appellant’s further case is that a single account to

receive 95% of the payment due from BSNL was maintained

by it and since the amounts received from the respondent-

BSNL by cheques did not carry any particulars of the

consignment for which such payment was being made it

2

Page 3 could, in no way, discover excess payment, if any, released

by BSNL against the bills sent by the appellant.

4.The appellant’s further case is that on gaining

knowledge about the excess payments received by it, an

offer for reconciliation of the accounts was made to the BSNL

and since any such reconciliation was likely to take 30 to 45

days, the appellant offered to adjust the excess amount

credited to its account towards the outstanding bills on an ad

hoc basis. A letter dated 10

th

May, 2006 was, according to

the appellant, addressed to the respondent-BSNL in that

regard.

5.The respondent-BSNL on the other hand has a different

story to tell. According to it four of its officers had abused

their official position and fraudulently generated 'voucher

numbers' on the duplicate and triplicate copies of the bills

submitted by the appellant to facilitate payments as if the

said bills were genuine thereby causing wrongful loss to the

respondent-BSNL and a corresponding gain to the appellant.

There was in this process an excess payment of Rs.7.98

crores made and credited to the account of the appellant by

the accounts officer of respondent-BSNL.

3

Page 4 6.Taking note of the fraudulent payments made to the

appellant, the BSNL lodged an FIR with CBI ACB Mumbai

against one of its Senior Accounts Officers and a Director of

the appellant-company alleging commission of offences

punishable under Section 120B read with Section 420 Indian

Penal Code and Section 13(2) read with Section 13(1)(d) of

Prevention of Corruption Act, 1988. Investigation that

followed has culminated in a charge-sheet filed before the

Special Judge for CBI cases, Bombay in which four officials of

the BSNL including D. Tripathi-Senior Accounts Officer,

Laxman Dixit-Assistant Accounts Officer, Krishnakumari

Patnaik-Junior Accounts Officer, Poolchand Yadav-Cashier

and Lalit Gupta-Director and Bhavani Sharma-Consultant of

the appellant-company have been arraigned as accused

persons.

7.What is important for the present is that by a letter

dated 21

st

April, 2010, BSNL blacklisted the appellant

permanently on the ground that the appellant had committed

gross misconduct and irregularities by receiving excessive

payments amounting to Rs.7,98,55,508/- from BSNL thereby

wrongfully causing loss to the said company. The appellant

4

Page 5 denied these allegations, inter alia, contending that BSNL

Policy/Manual did not provide for punitive action in the

nature of blacklisting and that excess payment at best was

an irregularity which had been cured by refund of the

amount in question. The appellant also alleged that

reconciliation of accounts revealed that the appellant was

entitled to an amount, far in excess of the payments received

by it. That assertion was repeated in a legal notice sent by

the appellant-company but since BSNL took no corrective

action in terms of the reconciliation, W.P. No.4536 of 2010

was filed before the High Court of Judicature at Bombay in

which it assailed the blacklisting order. The High Court

allowed the petition on the short ground that the appellant

had not been afforded any opportunity of being heard before

the blacklisting order was issued by the respondent. The

High Court did not go into the merits of the dispute but

reserved liberty to the appellant to raise all such contentions

as were open to it if and when BSNL issued a show cause

notice for blacklisting it again. The BSNL was left free to pass

a fresh order and take a final decision in the matter within six

weeks from the date of the issue of the show cause notice.

5

Page 6 8.A show cause notice was accordingly issued by BSNL on

4

th

November, 2010 to which the appellant filed a reply. The

appellant was also called for a personal hearing in support of

its reply to the show cause notice as directed by the High

Court. By an order dated 15

th

January, 2011 BSNL once

again directed the blacklisting of the appellant, inter alia,

holding that the appellant had defrauded BSNL by using

duplicate and triplicate copies of the bills that stood already

cleared for payment. These bogus and fraudulent claims

made under bogus and fabricated bills were then processed

by some of the officers of the BSNL for payment resulting in

double and at times triple payment in favour of the appellant.

The relevant portion of the blacklisting order is to the

following effect:

“Hence, the supplier with a clear intention to

defraud BSNL, WTP, Mumbai, have prepared

duplicate and triplicate copies of bills already

processed for payment and have again put up the

same for payment with BSNL. Thus, in short these

were bogus and/or fraudulent claims made on the

basis of forged and/or fabricated bills/documents.

Thereafter, by joining hands with some of the erring

officers of BSNL, the supplier has got the afore

mentioned duplicate and triplicate copies of bills

processed for payment and have fraudulently

received double/triple payment(s) for supplying

material only once.

Therefore, by not only claiming but also

receiving double and/or triple payment on the basis

6

Page 7 of forged/fabricated/duplicate and triplicate copies of

same bills, the supplier has committed gross fraud

on the public exchequer. The fraudulent act on the

part of supplier got completed by not only claiming

such bogus payments but also by receiving the

same from BSNL. Moreover, by letter dated 10

th

May, 2006, the supplier has not only acknowledged

but have also accepted the fact of claiming as also

accepting aforesaid bogus payments and hence the

supplier had agreed for reconciliation of same after

deducting such bogus payments. If the accounts

would not have reconciled, the supplier would have

caused huge losses to the public exchequer.

Hence, there is every apprehension that if the

supplier is allowed to deal in any manner with the

BSNL in future, the supplier will venture into

committing same and/or similar fraud (s) on the

public exchequer and therefore, it is not at all in the

interest of public exchequer that the supplier

continues to be authorised supplier of BSNL.

Hence, in view of the all the above facts and

circumstances and the entire record and proceedings

of this case, it is possible for this organisation to

take a view to permanent banning and impose

penalty upon the supplier so as to prevent the

supplier from dealing with entire BSNL, throughout

the country in any manner, consequently stopping

all the future business transactions of entire BSNL

with the supplier.

Hereby M/s. Kulja Industries Ltd., Solan

(Himachal Pradesh) is permanently banned and is

consequently prevented from having any business

dealing with entire BSNL through the country.

This is issued with the approval of the

competent authority.

Sd/-

AGM (MM) 15.1.2011

O/o CGM, WTP, Mumbai-54”

7

Page 8 9.Aggrieved by the above order the appellant once again

approached the High Court in W.P. No. 2289 of 2011 which

was heard and dismissed by a Division Bench of the High

Court in terms of the order impugned in this appeal. The

High Court was of the opinion that reconciliation of the

account had proved that the appellant had received payment

twice over for the supplies made by it and that merely

because the excess payment received had been

subsequently refunded by the appellant did not obliterate the

act of misconduct and fraud. The High Court observed:

“In the order impugned, the Authority has

stated that on the reconciliation of the account, it

was found as a fact that the Petitioner has received

payment twice for the supply of the same material,

because the supply was ongoing and the amount

was found to be payable to the Petitioner, that was

paid to him. Mere payment of the amount does not

wipe out the fact that the Petitioner had submitted

the Bills claiming double payment. In our opinion,

in view of this finding, no interference is called for in

the order impugned. The Petition is rejected. No

costs.”

10.The present appeal calls in question the correctness of

the above order of the High Court as noticed earlier.

11.Appearing for the appellant-company, Mr. Mukul

Rohatgi, strenuously argued that debarring the appellant

8

Page 9 permanently and for all times to come was wholly arbitrary

and unjustified. It was contended that the blacklisting order

had serious civil consequences for the person blacklisted

making it obligatory for the Authority passing the order to act

fairly and reasonably. Inasmuch as respondent-BSNL had

blacklisted the appellant permanently, the decision was

neither fair nor reasonable. Paras 31 and 32 of the bid

document also, according to the learned counsel, provides

for blacklisting only for a “suitable period”. This implies that

blacklisting had to be for a definite period and not for all

times to come. Since the products manufactured by the

appellant were mostly, if not entirely, supplied for

consumption to the respondent-BSNL, any order

permanently blacklisting the appellant from entering into

contracts making supplies was tantamount to rendering the

appellant jobless and economically defunct. No such order of

blacklisting could, therefore, be sustained as the punishment

implicit in such an order was totally disproportionate to the

gravity of the offence allegedly committed by the appellant.

12.On behalf of the respondent-BSNL, it was argued by Mr.

Bansal that the blacklisting order under challenge was not

9

Page 10 relatable to paras 31 and 32 of the bid document. The order

simply declared the petitioner-company ineligible for

allotment of any contract in future in terms of para 2.3 of the

tender document, the relevant portion wherefore reads as

under:

“2.3 Disqualification Clause: The supplier/

Manufacturers in the following category are not

eligible to bid in the said tender.

i ....

ii. Firms against whom investigation cases are

registered with the CBI or other statutory

investigations agencies of State/Central Govt.

iii ....”

13.It was further contended by the learned counsel that

even if the order was held to be referable to paras 31 and 32

of the bid document, an order permanently blacklisting the

appellant was also justified having regard to the nature of

the fraud committed by it in collusion with the officers of the

respondent-corporation and involving a huge amount of

nearly eight crores.

14.We may at the outset deal with the contention whether

paras 31 and 32 of the bid document to which Mr. Rohtagi

10

Page 11 has made reference is the only source of the power to

blacklist a defaulting contractor. These paras are as under:

“31. Purchaser reserves the right to disqualify the

supplier for a suitable period who habitually failed to

supply the equipment in time. Further, the

suppliers whose equipment do not perform

satisfactory in the field in accordance with the

specifications may also be disqualified for a suitable

period as decided by the purchaser.

32. Purchaser reserves the right to blacklist a bidder

for a suitable period in case he fails to honour his

bid without sufficient grounds.”

15.A plain reading of the above would show that BSNL, the

purchaser has reserved the right to disqualify any supplier

who

(a) habitually fails to supply the equipment in time or (b)

the equipment supplied by the supplier does not perform

satisfactory in the field in accordance with the

specifications or

(c) fails to honour his bid without sufficient grounds.

16.A literal construction of the provisions of paras 31 and

32 extracted above would mean that the power to disqualify

or blacklist a supplier is available to the purchaser only in the

three situations enumerated in paras 31 and 32 and no

11

Page 12 other. Any such interpretation would, however, give rise to

anomalous results. We say so because in cases where a

supplier is found guilty of much graver offences, failures or

violations, resulting in much heavier losses and greater

detriment to the purchasers in terms of money, reputation or

prejudice to public interest may go unpunished simply

because all such acts of fraud, misrepresentation or the like

have not been specifically enumerated as grounds for

blacklisting of the supplier in paras 31 and 32 of the tender

document. That could in our opinion never be the true

intention of the purchaser when it stipulated paras 31 and 32

as conditions of the tender document by which the purchaser

has reserved to itself the right to disqualify or blacklist

bidders for breach or violation committed by them. If

bidders who commit a breach of a lesser degree could be

punished by an order of blacklisting there is no reason why a

breach of a more serious nature should go unpunished, be

ignored or rendered inconsequential by reason only of an

omission of such breach or violation in the text of paras 31

and 32 of the tender document. Paras 31 and 32 cannot, in

12

Page 13 that view, be said to be exhaustive; nor is the power to

blacklist limited to situations mentioned therein.

17.That apart the power to blacklist a contractor whether

the contract be for supply of material or equipment or for the

execution of any other work whatsoever is in our opinion

inherent in the party allotting the contract. There is no need

for any such power being specifically conferred by statute or

reserved by contractor. That is because ‘blacklisting’ simply

signifies a business decision by which the party affected by

the breach decides not to enter into any contractual

relationship with the party committing the breach. Between

two private parties the right to take any such decision is

absolute and untrammelled by any constraints whatsoever.

The freedom to contract or not to contract is unqualified in

the case of private parties. But any such decision is subject

to judicial review when the same is taken by the State or any

of its instrumentalities. This implies that any such decision

will be open to scrutiny not only on the touchstone of the

principles of natural justice but also on the doctrine of

proportionality. A fair hearing to the party being blacklisted

thus becomes an essential pre-condition for a proper

13

Page 14 exercise of the power and a valid order of blacklisting made

pursuant thereto. The order itself being reasonable, fair and

proportionate to the gravity of the offence is similarly

examinable by a writ Court. The legal position on the subject

is settled by a long line of decisions rendered by this Court

starting with Erusian Equipment & Chemicals Ltd. v.

State of West Bengal and Anr. (1975) 1 SCC 70 where

this Court declared that blacklisting has the effect of

preventing a person from entering into lawful relationship

with the Government for purposes of gains and that the

Authority passing any such order was required to give a fair

hearing before passing an order blacklisting a certain entity.

This Court observed:

“20. Blacklisting has the effect of preventing a

person from the privilege and advantage of entering

into lawful relationship with the Government for

purposes of gains. The fact that a disability is

created by the order of blacklisting indicates that the

relevant authority is to have an objective

satisfaction. Fundamentals of fair play require that

the person concerned should be given an

opportunity to represent his case before he is put on

the blacklist.”

18.Subsequent decisions of this Court in M/s Southern

Painters v. Fertilizers & Chemicals Travancore Ltd. and

14

Page 15 Anr. AIR 1994 SC 1277 ; Patel Engineering Ltd. Union

of India (2012) 11 SCC 257 ; B.S.N. Joshi & Sons Ltd. v.

Nair Coal Services Ltd. & Ors. (2006) 11 SCC 548 ;

Joseph Vilangandan v. The Executive Engineer, (PWD)

Ernakulam & Ors. (1978) 3 SCC 36 among others have

followed the ratio of that decision and applied the principle of

audi alteram partem to the process that may eventually

culminate in the blacklisting of a contractor.

19.Even the second facet of the scrutiny which the

blacklisting order must suffer is no longer res integra. The

decisions of this Court in Radha krishna Agarwal and Ors.

v. State of Bihar & Ors. (1977) 3 SCC 457 ; E.P.

Royappa v. State of Tamil Nadu and Anr. (1974) 4 SCC

3; Maneka Gandhi v. Union of India and Anr . (1978) 1

SCC 248; Ajay Hasia and Ors. v. Khalid Mujib

Sehravardi and Ors., (1981) 1 SCC 722 ; R.D. Shetty v.

International Airport Authority of India and Ors.,

(1979) 3 SCC 489 and Dwarkadas Marfatia and sons v.

Board of Trustees of the Port of Bombay (1989) 3 SCC

751 have ruled against arbitrariness and discrimination in

every matter that is subject to judicial review before a Writ

15

Page 16 Court exercising powers under Article 226 or Article 32 of the

Constitution. It is also well settled that even though the

right of the writ petitioner is in the nature of a contractual

right, the manner, the method and the motive behind the

decision of the authority whether or not to enter into a

contract is subject to judicial review on the touchstone of

fairness, relevance, natural justice, non-discrimination,

equality and proportionality. All these considerations that go

to determine whether the action is sustainable in law have

been sanctified by judicial pronouncements of this Court and

are of seminal importance in a system that is committed to

the rule of law. We do not consider it necessary to burden

this judgment by a copious reference to the decisions on the

subject. A reference to the following passage from the

decision of this Court in M/s Mahabir Auto Stores & Ors.

v. Indian Oil Corporation Ltd., (1990) 3 SCC 752

should, in our view, suffice:

“11. It is well settled that every action of the State

or an instrumentality of the State in exercise of its

executive power, must be informed by reason. In

appropriate cases, actions uninformed by reason

may be questioned as arbitrary in proceedings under

Article 226 or Article 32 of the Constitution. Reliance

in this connection may be placed on the

observations of this Court in Miss Radha Krishna

16

Page 17 Agarwal and Ors. v. State of Bihar and Ors., [1977]

3 SCR 249 …... In case any right conferred on the

citizens which is sought to be interfered, such action

is subject to Article 14 of the Constitution, and must

be reasonable and can be taken only upon lawful

and relevant grounds of public interest. Where there

is arbitrariness in State action of this type of

entering or not entering into contracts, Article 14

springs up and judicial review strikes such an action

down. Every action of the State executive authority

must be subject to rule of law and must be informed

by reason. So, whatever be the activity of the public

authority, in such monopoly or semi-monopoly

dealings, it should meet the test of Article 14 of the

Constitution. If a Governmental action even in the

matters of entering or not entering into contracts,

fails to satisfy the test of reasonableness, the same

would be unreasonable……. It appears to us that rule

of reason and rule against arbitrariness and

discrimination, rules of fair play and natural justice

are part of the rule of law applicable in situation or

action by State instrumentality in dealing with

citizens in a situation like the present one. Even

though the rights of the citizens are in the nature of

contractual rights, the manner, the method and

motive of a decision of entering or not entering into

a contract, are subject to judicial review on the

touchstone of relevance and reasonableness, fair

play, natural justice, equality and non-discrimination

in the type of the transactions and nature of the

dealing as in the present case.”

20.The legal position governing blacklisting of suppliers in

USA and UK is no different. In USA instead of using the

expression ‘Blacklisting’ the term “debarring” is used by the

Statutes and the Courts. The Federal Government considers

‘suspension and debarment’ as a powerful tool for protecting

taxpayer resources and maintaining integrity of the

processes for federal acquisitions. Comprehensive guidelines

17

Page 18 are, therefore, issued by the government for protecting

public interest from those contractors and recipients who are

non-responsible, lack business integrity or engage in

dishonest or illegal conduct or are otherwise unable to

perform satisfactorily. These guidelines prescribe the

following among other grounds for debarment:

(a)Conviction of or civil judgment for --

(1) Commission of fraud or a criminal offense in

connection with obtaining, attempting to obtain, or

performing a public or private agreement or

transaction;

(2) Violation of Federal or State antitrust statutes,

including those proscribing price fixing between

competitors, allocation of customers between

competitors, and bid rigging;

(3)Commission of embezzlement, theft, forgery,

bribery, falsification or destruction of records,

making false statements, tax evasion, receiving

stolen property, making false claims, or obstruction

of justice; or

(4)Commission of any other offense indicating a lack of

business integrity or business honesty that seriously

and directly affects your present responsibility;

(b) Violation of the terms of a public agreement or

transaction so serious as to affect the integrity

of an agency program, such as —

(1) A willful failure to perform in accordance with the

terms of one or more public agreements or

transactions;

(2) A history of failure to perform or of unsatisfactory

performance of one or more public agreements or

transactions; or

18

Page 19 (3) A willful violation of a statutory or regulatory

provision or requirement applicable to a public

agreement or transaction;

(c) xxxx

(d)Any other cause of so serious or compelling a

nature that it affects your present

responsibility.

21.The guidelines also stipulate the factors that may

influence the debarring official’s decision which include the

following:

(a)The actual or potential harm or impact that results

or may result from the wrongdoing.

(b)The frequency of incidents and/or duration of the

wrongdoing.

(c)Whether there is a pattern or prior history of

wrongdoing.

(d)Whether contractor has been excluded or

disqualified by an agency of the Federal Government

or have not been allowed to participate in State or

local contracts or assistance agreements on a basis

of conduct similar to one or more of the causes for

debarment specified in this part.

(e) Whether and to what extent did the contractor plan,

initiate or carry out the wrongdoing.

(f) Whether the contractor has accepted responsibility

for the wrongdoing and recognized the seriousness

of the misconduct.

(g)Whether the contractor has paid or agreed to pay all

criminal, civil and administrative liabilities for the

improper activity, including any investigative or

administrative costs incurred by the government,

and have made or agreed to make full restitution.

19

Page 20 ((h) Whether contractor has cooperated fully with the

government agencies during the investigation and

any court or administrative action.

(i) Whether the wrongdoing was pervasive within the

contractor’s organization.

(j) The kind of positions held by the individuals involved

in the wrongdoing.

(k)Whether the contractor has taken appropriate

corrective action or remedial measures, such as

establishing ethics training and implementing

programs to prevent recurrence.

(l)Whether the contractor fully investigated the

circumstances surrounding the cause for debarment

and, if so, made the result of the investigation

available to the debarring official.”

22.As regards the period for which the order of debarment

will remain effective, the guidelines state that the same

would depend upon the seriousness of the case leading to

such debarment.

23.Similarly in England, Wales and Northern Ireland, there

are statutory provisions that make operators ineligible on

several grounds including fraud, fraudulent trading or

conspiracy to defraud, bribery etc.

24.Suffice it to say that ‘debarment’ is recognised and

often used as an effective method for disciplining deviant

suppliers/contractors who may have committed acts of

20

Page 21 omission and commission or frauds including

misrepresentations, falsification of records and other

breaches of the regulations under which such contracts were

allotted. What is notable is that the ‘debarment’ is never

permanent and the period of debarment would invariably

depend upon the nature of the offence committed by the

erring contractor.

25.In the case at hand according to the respondent-BSNL,

the appellant had fraudulently withdrawn a huge amount of

money which was not due to it in collusion and conspiracy

with the officials of the respondent-corporation. Even so

permanent debarment from future contracts for all times to

come may sound too harsh and heavy a punishment to be

considered reasonable especially when (a) the appellant is

supplying bulk of its manufactured products to the

respondent-BSNL and (b) The excess amount received by it

has already been paid back.

26.The next question then is whether this Court ought to

itself determine the time period for which the appellant

should be blacklisted or remit the matter back to the

21

Page 22 authority to do so having regard to the attendant facts and

circumstances. A remand back to the competent authority

has appealed to us to be a more appropriate option than an

order by which we may ourselves determine the period for

which the appellant would remain blacklisted. We say so for

two precise reasons. Firstly, because blacklisting is in the

nature of penalty the quantum whereof is a matter that rests

primarily with the authority competent to impose the same.

In the realm of service jurisprudence this Court has no doubt

cut short the agony of a delinquent employee in exceptional

circumstances to prevent delay and further litigation by

modifying the quantum of punishment but such

considerations do not apply to a company engaged in a

lucrative business like supply of optical fibre/HDPE pipes to

BSNL. Secondly, because while determining the period for

which the blacklisting should be effective the respondent-

Corporation may for the sake of objectivity and transparency

formulate broad guidelines to be followed in such cases.

Different periods of debarment depending upon the gravity of

the offences, violations and breaches may be prescribed by

such guidelines. While, it may not be possible to exhaustively

22

Page 23 enumerate all types of offences and acts of misdemeanour,

or violations of contractual obligations by a contractor, the

respondent-Corporation may do so as far as possible to

reduce if not totally eliminate arbitrariness in the exercise of

the power vested in it and inspire confidence in the fairness

of the order which the competent authority may pass against

a defaulting contractor.

27.In the result, we allow this appeal, set aside the order

passed by the High Court and allow writ petition No.2289 of

2011 filed by the appellant but only to the extent that while

the order blacklisting the appellant shall stand affirmed, the

period for which such order remains operative shall be

determined afresh by the competent authority on the basis

of guidelines which the Corporation may formulate for that

purpose. The needful shall be done by the Corporation

and/or the competent authority expeditiously but not later

than six months from today. The parties are left to bear

their own costs.

23

Page 24 .………………….……….…..…J.

(T.S. THAKUR)

………..…………………..…..…J.

(VIKRAMAJIT SEN)

New Delhi

October 4, 2013

24