COMMERCIAL TRANSACTIONS

BLACKLISTING OF COMPANIES IN COMMERCIAL

TRANSACTIONS

(Assignment towards partial fulfillment of the assessment in the subject of Commercial

Transactions)

SUBMITTED BY:

Avantika Arun

Roll No. 1178

B.Sc. LL.B. (Hons.)

Semester III

SUBMITTED TO:

Mr. Bipin Kumar

Faculty of Law

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION

JULY-NOVEMBER 2015

ACKNOWLEDGEMENT

I would like to take this opportunity to express my sincere gratitude to my Commercial

Transactions professor, Mr. Bipin Kumar, for his constant support and guidance without

which completion of this project would not have been possible. Also, my parents, the library

staff and the National Law University, Jodhpur IT Department for equipping me with the

resources to work on this project to the best of my ability.

Lastly, my batchmates for their invaluable help and suggestions.

Avantika Arun

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................4

CRITERIA FOR BLACKLISTING..................................................................................5

RELEVANT PRECENDENTS.........................................................................................6

THE ISRAEL MILITARY INDUSTRIES CASE.............................................................8

DEBARMENT ABROAD.................................................................................................9

GOVERNMENT CONTRACTS: AN OVERVIEW.......................................................11

BLACKLISTING IN DIFFERENT SPHERES...............................................................14

INTRODUCTION

In order to accomplish the objective of this project, understanding the concept of

blacklisting is imperative. Black’s Law Dictionary defines blacklisting as a process of putting

the name of persons on a list who are to be boycotted or punished. It can also be

characterized as putting a person, group, or a company on a blacklist which contains names

of one or more individuals or one or more organizations which have been designated for

special discrimination or boycott or which are under suspicion, disfavour, censure etc. The

Government departments make regular purchases. They maintain a list of official suppliers

after takings into account the financial standard of the firm, their capacity and their past

performance. The removal from this list curated by the State is done for various reasons. The

grounds on which blacklisting may be ordered are if the proprietor of the firm is convicted by

court of law or security considerations justify the same or if there is strong evidence

supporting the fact that the proprietor or employee of the firm, has been guilty of

malpractices such as bribery, corruption, fraud or if the firm continuously refuses to return

Government dues or if the firm employs a Government servant, dismissed or removed on

account of corruption in a position where he could corrupt other Government servants. 

Blacklisting is the exclusion of a member of the public/company from dealing with the State

in commercial transactions. It has the effect of preventing him from purchasing and doing a

lawful trade in the goods by discriminating against him in favour of other people. The State

can impose reasonable conditions regarding rejection and acceptance of bids or qualifications

of bidders. Blacklisting has been stated as ‘the systematic compilation of information on

individual trade unionists and their use by employers and recruiters to impose certain

restrictions on those individuals because of their trade union membership or because of their

involvement in trade union activity’. Blacklisting has the effect of denying a person/entity the

privilege and advantage of entering into a 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. This project seeks to illustrate

in detail the issue related to blacklisting by the Indian government and will endeavour to

delineate upon all the related topics thereto.

CRITERIA FOR BLACKLISTING

The grounds on which blacklisting may be done are as follows :-

1. If the proprietor of the firm, employees, partner or representative is condemned by a

court of law, following which prosecution by a special project established under the

normal legal procedure is done involving normal turpitude in relation to business

dealings;

2. If security considerations, inclusive of loyalty to the State so warranty;

3. If there is strong reason to believe that the proprietor/employee/representative has

been involved in malpractices such as bribery, corruption, fraud, interpolation, tender

substitution, etcetera;

4. If the firm employs a Government servant who was previously dismissed on grounds

of corruption or was in a position to corrupt other Government officials or other

individuals to commit or abet the commission of the same offence. Before blacklisting

in such an instance, a Senior Officer of the Administrative Industry is expected to

notify the firm about the character of such an offender, without indication of the

consequences his conduct may entail.

The facts of blacklisting should not be communicated to the firm and the issue of such

order should involve immediate cessation of all future business with the firm by all

departments under the Government of India while intimating the issue of such orders to

other Ministries. The authority issuing the blacklisting orders shall specify.

i) The reasons due to which blacklisting has been decided upon;

ii) The period (whether indefinite or specific) for which they will be effective, and

iii) The names of all the partners of the firm, and its allied concerns to whom also such

orders would apply.

Care should be taken to ensure that the same company does not engage in any

transactions with the Government under an alias. Having said so, even the power to

blacklist a company is subject to some limitations. As already stated, the objective is to

ascertain the limitations imposed on the government when they exercise the power of

blacklisting a company. This can be accomplished after reviewing a number of cases in

this regard, and thereby arriving at a conclusion, a common principle emanating from the

cases. This principle will be dissected so as to ascertain any limitations, if identified.

RELEVANT PRECENDENTS

In the Punnen v. State of Kerala1 case, the petitioner was a blacklisted Government

contractor who demanded an explanation for his name being enlisted. The judge came to a

conclusion that the Government, like a private individual, has got the right to enter or not to

enter into a contract with a particular person. In case, there is a law regulating the conduct of

business by the Government, such law might imply a right in others to insist on their

transactions with the Government being dealt with in accordance with that law, and

consequently a right to complain against a breach of the law. But when a person is excluded

or rejected from entering into business with the Government in accordance with the law,

there is no question of an invasion of his civil rights and the rules of natural justice or Article

14 cannot, therefore, be invoked. Justice Thomas of the Kerala High Court expressed his

dissent, saying that ‘No democratic Government should with impunity pass a proceeding

which will have civil consequences to a citizen without notice and an opportunity of being

heard. He may not have an absolute right of making a contract with Government, but he has

undoubtedly the right not to be discriminated against without a relevant reason.’

The Erusian Equipment2 case was one of the most important in this regard, which dealt with

whether a person put on the black list by the State Government was entitled to be heard

before his/her name was put on the black list. In passing an order of blacklisting the

Government department acts under what is described as a standardized Code. This code

serves the purpose of internal instruction. Government departments make regular purchases.

They maintain a list of approved suppliers after taking into account the financial standard of

the firm, their capacity and their past performance. The removal from the list is made for

various reasons. The grounds on which blacklisting may be ordered are if the proprietor of

the firm is convicted by court of law or security considerations so warrant or if there is strong

justification for believing that the proprietor or employee of the firm, has been guilty of

malpractices such as bribery, corruption, fraud, or if the firm continuously refuses to return

Government dues or if the firm employs a Government servant, dismissed or removed on

account of corruption in a position where he could corrupt Government servant. 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 1 V. Punnen Thomas v. State of Kerala, AIR 1969 Ker 81.2 Erusian Equipment & Chemicals Ltd. v. State of West Bengal and Anr., AIR 1975 SC 266.

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. It was held that the

fundamentals of fair play demand that the person concerned should be given an equal

opportunity to represent his/her case before being put on the black list.

A blacklisting order is not contract-specific and involves civil consequences. Blacklisting

creates; a barrier between the persons blacklisted and the Government in the matter of

transactions. The blacklists are "instruments of coercion".

The Punnen Thomas case was however, overruled by Southern Painters v. Travancore

Fertilizers3, wherein the appellant firm's name was deleted from a list of qualified contractors

on account of some vigilance report against it. The reasons for the exclusion were not

disclosed to the appellants before deletion. Here, the Erusian judgement was again relied

upon and it was held that any any order having civil consequences should be passed only

after following the principles of natural justice. It has to be realised that blacklisting any

person in respect of business ventures can have civil consequences for the future business of

the person concerned in any event. Even if the rules do not expressly state the same, it is an

elementary principle of natural justice that parties affected by any order of blacklisting should

have the right of being heard and making representations against the order.

In a more contemporary judgment of the Supreme Court in the case of Patel Engineering

Ltd.4, The petitioner went back on its contract for six-laning a section of National Highway

No. 6, running through the States of West Bengal and Orissa, which resulted in the National

Highway Authority of India issuing to the petitioner, a notice for debarment for a period of

five years, from participating or bidding for future projects undertaken by them, and forfeited

their security amount.

The petitioner’s contention was that:

(i) There was no power vested in NHAI as per the terms of the contract to blacklist

the petitioner except on the grounds of fraud and corrupt practices, the decision

not to enter into a contract could not fall under this category;

(ii) The punishment accorded to the petitioner was inappropriate, in as much as, it

would affect future business of the petitioner; and

(iii) Lastly, no oral hearing was accorded to the petitioner.

3 M/s. Southern Painters v. Fertilizers & Chemicals Travancore Ltd. and Anr., AIR 1994 SC 1277. 4 Patel Engineering Limited vs. Union of India and Anr., AIR 2012 SC 2342.

The Supreme Court arrived at the decision that ‘…inherent in the power to enter into a

contract was the power not to enter into a contract, which is akin to blacklisting.’

Simply put, specific power in the contract was no requisite for NHAI to come to the

conclusion, which it did, which resulted in the petitioner being blacklisted.

THE ISRAEL MILITARY INDUSTRIES CASE

FACTS

A writ petition was filed by Israel Military Industries Ltd.5 (“IMI”), a company established

under the laws of Israel, and also the lowest bidder in the tender to set up a plant for

manufacturing of By-modular Charge Systems in the State of Bihar. By virtue of this

development, it was expected to enter into a contract with Ordinance Factory Board (“OFB”).

Consequently, OFB issued an order debarring IMI from further dealings with it for a term of

10 years. In other words, OFB ‘blacklisted’ IMI, in response to which the latter moved the

court with a petition filed under Article 226 of the Constitution of India.

While IMI was in preparation to execute the project, the Central Bureau of Investigation

(CBI) on receiving some intelligence inputs, initiated investigation against the OFB Director

General, and subsequently filed an FIR against him. In the light of this development, the

Ministry of Defence withheld all government contracts with foreign companies and added

IMI’s name to the blacklist on account of ‘payment of illegal gratification’.

PRINCIPLES

(i) The State has the discretion to decide as to whether or not it wishes to enter into a

contract, like any other private entity. No individual/entity has any fundamental

right to coax the Government to enter into a contract with it, the right that a person

can enforce with respect to a Government is the right of equal treatment in law.

Therefore, the State, cannot decide the deal or trade with one person or entity or

exclude the others, without a valid reason.

5 Israel Military Industries Ltd. v. Union of India & Anr, 2013 VIII AD (Delhi) 141.

(ii) Blacklisting, which takes several forms including internal instructions for

exclusion of entities or persons, entails civil consequences. It casts a slur on the

reputation of the person/entity, which is blacklisted.

(iii) The State can blacklist a person/entity which is convicted by a court of law or on

account of security consideration or even where there is a "strong justification",

that a person is guilty of malpractices, such as, bribery, corruption, fraud etc.

(iv) Where a State decides to blacklist a person/entity, it is obligatory on its part to act

fairly; meaning thereby to observe "certain aspects of the rules of natural justice".

In this behalf, the body, which takes the decision, as to whether, or not a person or

entity should be excluded, is duty bound to give "fair consideration" to the facts

and to consider the representations made in that regard. In this exercise, the body

vested with the right to decide is not bound to disclose the details of information

in its possession.

(v) Duty to act fairly would entail that a person should be given notice, and a right or

an opportunity to represent his case before he is blacklisted. Duty to act fairly

does not entail that, in all circumstances, he is entitled to an oral hearing.

DEBARMENT ABROAD

The legal position overseeing blacklisting of suppliers in USA and UK is no different. 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. Similarly, in USA instead of using the expression 'blacklisting', the term

"debarring" is used in statutes and by 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 plans 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 in a satisfactory manner. These guidelines

prescribe the following among other grounds for debarment, enlisted in the Kulja Industries

Ltd. v. Chief General Manager W.T. Proj, BSNL and Ors.6 case :

6 AIR 2014 SC 9.

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

(3) A willful violation of a statutory or regulatory provision or requirement applicable to a

public agreement or transaction;

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.

(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.

GOVERNMENT CONTRACTS: AN OVERVIEW

In the modern State, whatever be the form of government, the individual is affected in his

everyday life and in the exercise of his civil rights by acts of the State and its officials in

various domains and in several ways. Some of these acts are done by the State in its

sovereign capacity while others are done by the State in trading and other roles in the same

manner as a private individual does.

Hence, the subject of government contracts has assumed great importance in the modern

times. A contract is an agreement enforceable by law, which offers personal rights, and

imposes personal obligations, which the law protects and enforces against the parties to the

agreement. The general law of contract is an agreement which creates legal rights and

obligations, which are purely personal in their nature and are only enforceable by action

against the party in default. Section 2(h) of the Indian Contract Act, 1872 defines a contract

as "An agreement enforceable by law". The word "agreement" has been defined in Section

2(e) of the Act as "every promise and every set of promises, forming consideration for each

other." A contract to which The Central Government or a State Government is a party is

called a "Government Contract". Such contracts have also been accorded Constitutional

recognition. Under Article 298, the Constitution of India clearly lays down that the executive

power of the Union and of each state includes within its ambit "the carrying on of any trade

or business and to the acquisition, holding and disposal of property and the making of

contracts for any purpose." In India, Government contracts and the related aspects are

governed by Article 299 of the Constitution of India which makes it mandatory for the

government to make a contract in writing and generally forbids implied contracts. Further,

a contract in contravention to the said article is void.

It is to be noted that before 1979, the Government enjoyed unfettered discretion in the matter

of awarding contracts to whomsoever it wished. The courts followed the general principle

that the government was free to enter into a contract with anyone it liked. Hence, when one

person was chosen as opposed to the others, the aggrieved party could not claim the

protection of Article 14, which guarantees equality to all persons, because the choice of the

person to fulfil a particular contract was left to the government.

The judicial attitude to Article 299 has sought to balance two motivations:

Primarily, to protect the Government from unauthorised contracts; and

To shield the interests of unsuspecting and unwary parties who enter into contracts

with government officials without fulfilling all the formalities laid down in the

Constitution.

As per the language of Article 299(1), a contract can be entered into on behalf of the

Government by a person aurhorised for the purpose by the President, or the Governor, as the

case may be. The authority to carry out the contract on behalf of the government may be

granted by way of rules, formal notifications, or special orders; such authority may also be

given in respect of a particular contract or contracts by the President/Governor to an officer

other than the one notified under the rules. Article 299(1) does not prescribe any particular

manner in which authority ought to be conferred; authorization may be conferred ad hoc on

any person.

PRINCIPLES UNDERLYING CONTRACTUAL LIABILITY OF STATE

(i) Reasonableness and Fairness: The principle of equanimity and rationality which is

legally as well as philosophically an integral aspect of equality or non-

arbitrariness is envisaged by Article 14 and it must be embodied in every State

Action , whether it be under the authority of law or in exercise of executive power

without making of law.

(ii) Public Interest: This is of paramount importance. here may be situations where

there are persuasive reasons necessitating the departure from the rule, but there the

reasons for the deviation must be rational and should not be suggestive of

discrimination. Every action of the public authority or of the person acting in

public interest should be guided by public interest. Nothing should be done which

may be a reflection of personal biases, jobbery or nepotism.

(iii) Contractual Liability: Article 299(2) provides the benefit of immunity to the

President, or the Governor, or the person executing any contract on his behalf,

from any personal liability in respect of any contract executed or any enactment

for the purposes of the Constitution. This immunity is purely personal and does

not immunise the government, as such, from a contractual liability arising under a

contract which fulfills the requirements under Article 299(1).

The State cannot, therefore, act arbitrarily in entering into relationship, contractual or

otherwise with a third party, but its action must conform to some standard or norm which

is rational an non- discriminatory. The action of the Executive Government should be

informed with reason and should be free from arbitrariness. The test of liability of the

State should not be the origin of the functions but the nature of the activity carried on by

the State. In the FCI. v. Kamdhenu Cattle Feed Industries7 case, it was laid down that the

State and all its instrumentalities have to adhere to Article 14 of the Constitution of which

non-arbitrariness is a significant component and this entails the duty to act fairly, and to

adopt a procedure which is fairplay in action. The reason why the aforementioned

oscillation of views has been discussed is to draw attention to the rights available to

parties against the government before entering into a contract with the latter. Since, a pre-

contractual right also includes right against blacklisting by government, wherein the

government restrains a person/company from entering into a contract with itself, the

judgments would prove to be helpful in the discussion of the subsequent topics. Judicial

review can be a sufficient tool to determine the ambit of contractual liability of the State.

7 Food Corporation of India v. M/s. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601.

BLACKLISTING IN DIFFERENT SPHERES

Blacklisting is a step which is predominant in different associations such as in a debtor-

creditor relationship, wherein names of delinquent debtors are printed and disseminated to

other lenders to indicate that persons whose names are printed are unreliable. It is even

common in employee-employer relationships in which, the employer leaks derogatory

information about the employee, thereby hindering the latter from getting employment.

Even in the corporate realm, blacklisting comes into the picture in situations where the

government disallows or debars a company from carrying on its business for a specific

period of time.

Effects of blacklisting on companies

Since the endeavour of the paper is only to scrutinize the blacklisting of companies by

Government of India, hence the effort will be to scrutinize the concept of blacklisting

narrowly, thereby focusing only on blacklisting of corporations and various other aspects

related thereto. By its very description, blacklisting is a purposeful conduct intended to

punish the victim. It is emphasized that blacklisting of companies can have adverse

impact on their growth and development. This is because blacklisting leads to tarnishing

of an entity’s image and mostly disables the companies from borrowing funds from banks

and financial institutions. Even the Supreme Court has commented on the effects of

blacklisting in M/s. Erusian Equipment & Chemicals Limited v. Union of India and Ors.

wherein it stated that “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.” This well accepted principle has been reiterated in a number of cases.

Blacklisting has an adverse impact on companies, by forbidding them from entering into

lucrative contracts.

BIBLIOGRAPHY

Rao, Swati, Contractual Liability Of The State In India: An Analysis,

http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=a4122e98-7362-

4e05-87ce-bed7af3b9b2f&txtsearch=Subject:%20contract

Uniform Guidelines for Blacklisting of Manufacturers, Suppliers, Distributors,

Contractors and Consultants, http://www.dpwh.gov.ph/pdf/blacklisting.pdf

Israel Military Industries Loses Indian Blacklist Challenge,

http://www.stratpost.com/israel-military-industries-loses-indian-blacklist-challenge

Consumer Protection from Unfair Trade Regulations, December 2010,

http://www.out-law.com/page-9050

Standard Code : Blacklisting, http://punjabgovt.gov.in/