Every violation of a facet of natural justice not always makes order passed null and void, it has to be tested on the touchstone of prejudice caused
ABCAUS Case Law Citation
ABCAUS 3409 (2020) (10) HC
Important case law relied upon by the parties:
Dharampal Satyapal Ltd. Vs. Deputy Commissioner of Central Excise, Gauhati and others
M.C. Mehta Vs. Union of India and others
Ridge Vs. Baldwin and S.L. Kapoor Vs. Jagmohan
Gronsons Pharmaceuticals (P) Ltd. & Anr. Vs. State of Uttar Pradesh & Ors.
Mahabir Auto Stores & Ors. Vs. Indian Oil Corporation & Ors.
Kulja Industries Limited Vs. Chief General Manager, W.T. Project, BSNL & Ors.
M/s Erusian Equipment & Chemicals Ltd. Vs. State of West Bengal & Anr (1975) 1 SCC 70
M/s. Vindhyawasini T. Transport Vs. State of U.P. and others
Raghunath Thakur Vs. State of Bihar & Ors
In this case the petitioner hand challenged the order passed by a Government Department cancelling the contract of handling and transport awarded to the Petitioner and blacklisting him.
One of the terms of the contract was that the awardee should not have any relative in specified trades connected with the contract activity.
The guidelines of the government required the Petitioner to submit an affidavit providing that in the event the applicant conceals any fact, the candidature/contract would stand cancelled.
The Department issued a show cause notice on the Petitioner requiring him to submit explanation in respect of a complaint regarding his near relative being the owner of a related trade and to explain as to why the aforesaid fact was concealed in the affidavit submitted by the petitioner at the time of participation in the tender proceedings.
In terms of the show cause notice, the petitioner was required to submit an explanation for the same failing which he was to be blacklisted.
In reply, Petitioner made a request for a further three weeks’ time in order to submit his reply. However, due to the affidavit submitted of the petitioner submitted in e-tender process was found to be false, in terms of the guidelines the contracts awarded to the petitioner were been cancelled and the petitioner was blacklisted by the department.
Before the Hon’ble High Court, the principal ground taken by the Petitioner was that the impugned order had been passed in violation of the principles of natural justice and without affording a reasonable opportunity to the petitioner.
It was contended that the eligibility criteria prescribed under the government order was merely in the nature of a guideline and the contract granted to the petitioner could not be cancelled on the basis of the conditions prescribed therein.
It was also sought to be argued that the order impugned had the effect of permanently blacklisting the petitioner which is not permissible under law.
The Hon’ble High Court observed that the issue with regard to entitlement to a notice and a right to be heard before blacklisting was considered by the Hon’ble Supreme Court and referring to the powers of the State under Article 298 of the Constitution of India to carry on trade or business, it was held that the exercise of such powers and functions in trade by the State is subject to Part III of the Constitution and the State while having the right to trade has the duty to observe equality and cannot choose to exclude persons by discrimination.
The proposition that no order of blacklisting could be passed without affording opportunity of hearing to the affected party was reiterated by the Hon’ble Supreme Court
The Hon’ble High Court further noted that the exercise of the executive power of the State or its instrumentalities in entering into a contract with private parties flowing from Article 298 of the Constitution including the power to enter or not into a contract came up for consideration by the Hon’ble Supreme Court and it was held that the decision of the State or any of its instrumentalities to enter or not into a contract being an administrative action the same would be open to a challenge on the ground of violation of Article 14 of the Constitution and would also be subject to the power of judicial review.
The Hon’ble High Court further noted that the requirement of grant of opportunity to show cause before blacklisting was restated by the Hon’ble Supreme Court and it was held that since the order blacklisting of an approved contractor results in civil consequences, the principle of audi alteram partem is required to be observed.
In a yet another decision, the power to blacklist a contractor was held by the Hon’ble Supreme Court to be inherent in the party allotting the contract and the freedom to contract or not to contract was held to be unqualified in the case of private parties; however when the party is State, the decision to blacklist would be open judicial review on touchstone of proportionality and the principles of natural justice.
After going through a plethora of judgments by the Hon’ble Supreme Court, the Hon’ble High Court stated that the right to enter into a contractual relationship is inherent in every person capable of entering into a contract with a concomitant right also not to enter into a contract. The right to refuse to enter into a contract however does not vest with the State and its instrumentalities in the same manner as it vests with a private individual. The right to enter into a contract by the State flows from the power under Article 298 of the Constitution and together with it is the right not to enter into a contract and the choice to blacklist any particular person with whom the State does not wish to enter into a contract. This decision however in case it is taken by the State or any of its instrumentalities is to be made reasonably and in accord with the principles of natural justice.
The Hon’ble High Court stated that an order of blacklisting has the effect of depriving a person of equality of opportunity in the manner of public contract and in a case where the State acts to the prejudice of a person it has to be supported by legality. The activities of the State having the public element quality must be imbued with fairness and equality.
In the instant case the Hon’ble High Court noted that it was undisputed that the statement of fact mentioned in the affidavit along with the application submitted by the petitioner at the time of participation in the tender process was incorrect and false.
Thus, the question was as to whether any prejudice was caused to the petitioner by not allowing further time to him to submit his explanation and also as to whether grant of any further opportunity would have made any difference in the outcome or that the same would have been a mere formality.
The Hon’ble High Court observed that the application of the principles of ‘useless formality theory’ as an exception to the principles of natural justice was discussed by various Courts and it was pointed out that even in cases where the facts are not all admitted or beyond dispute, there is considerable unanimity that the courts can, in exercise of their ‘discretion’, refuse certiorari, prohibition, mandamus or injunction even though natural justice is not followed.
The Hon’ble High Court noted that the applicability of the ‘useless formality test’ or the ‘test of prejudice’ in the context of the nature, scope and applicability of the principles of natural justice has been explained and it was held that there may be situations where it is felt that a fair hearing ‘would make no difference’ – meaning that a hearing would not change the ultimate conclusion reached by the decision-maker; then no legal duty to supply a hearing arises and it may not be necessary to strike down the action and refer the matter back to the authorities to take a fresh decision after complying with the procedural requirements in those cases where non-grant of hearing has not caused any prejudice to the person against whom the action is taken.
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Applicability of principle of audi alteram partem to blacklisting of a contractor
In the facts of the present case, the Hon’ble High Court noted that the petitioner did not dispute the fact that he had been duly served upon with a SCN. The petitioner had also not disputed the fact that he violated the relative clause and as per terms of the eligibility criteria he was not eligible. It had also not been denied that the declaration made by him in the affidavit filed along with his application while participating in e-tender in this regard was not correct. In view of the aforesaid facts, the contention that the opportunity granted was not reasonable, was not tenable.
The Hon’ble High Court stated that in a case of a mere technical infraction of principles of natural justice where the facts are admitted and undisputed and no prejudice can be demonstrated, there is a considerable case law and literature for the proposition that relief can be refused if the Court thinks that the case of the petitioner is not one of ‘real substance’ or that there is no substantial possibility of his success or that the result would not be different, even if fresh opportunity is to be granted.
According to the Hon’ble High Court it would be in such situation that ‘useless formality theory’ may be pressed into if it would be reasonable to believe that a fair hearing would make no difference or that grant of a fresh opportunity of hearing would not change the ultimate conclusion to be reached by the decision maker. In such situations, there would be no legal duty to grant a fresh opportunity of hearing and it may not be necessary to strike down the action and remit the matter back to the authority concerned to take a fresh decision.
The Hon’ble High Court stated that every violation of a facet of natural justice may not always lead to the conclusion that order passed is always null and void. The validity of the order is to be tested on the touchstone of ‘prejudice’ and in a case where the petitioner is not able to demonstrate real likelihood or certainty of prejudice, this Court may refuse to exercise its discretionary jurisdiction to interfere in the matter.
As regards the question whether the blacklisting can be for an indefinite period, the Hon’ble High Court reiterated that though blacklisting or debarment is recognised as an effective tool for disciplining deviant contractors but the debarment is never to be a permanent nature.
The petition was finally dismissed.
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In a recent judgment (ABCAUS 3410 (2020) (10) SC) a Full Bench the Supreme Court has laid down the following touchstone where a breach of the audi alteram partem rule would vitiate the order passed:
