Holding

An order that indefinitely bars a supplier from government procurement is a debarring directive and, therefore, must comply with the principles of natural justice, including a prior hearing, and cannot be upheld without such compliance.

Summary

M/s Daffodills Pharmaceuticals, a bidder for a state tender to supply medicines, was barred from any local procurement by an order dated 21‑08‑2015 issued by the Principal Secretary, Government of Uttar Pradesh, on the ground that a FIR and CBI inquiry existed against a former director. Daffodills contended that the criminal case pertained only to the former director who had left the company in 2012, that the order amounted to an indefinite blacklisting, and that it was passed without any notice or opportunity to be heard. The Allahabad High Court upheld the order, holding that the State's action was within its policy‑making discretion and that natural‑justice principles did not apply to tender decisions. On appeal, the Supreme Court held that the order was effectively a debarring directive, was disproportionate, and violated the rule of audi alteram partem because Daffodills was not given a chance to present its case. Consequently, the Court quashed the 21‑08‑2015 order and set aside the High Court judgment, allowing the appeal.

Issues considered

Whether the order directing the State to cease procurement from Daffodills constitutes a blacklisting or debarring order requiring compliance with natural‑justice principles.
Whether the State may impose such an order without giving the affected party prior notice and an opportunity of hearing.
Whether the High Court erred in limiting judicial review of public‑contract award decisions on the ground of policy discretion.

Subjects

natural justiceright to hearingblacklistingdebarring orderpublic contracttenderjudicial reviewaudi alteram partem

Judgment

[2019] 15 S.C.R. 125 125

M/S. DAFFODILLS PHARMACEUTICALS & ANR. A
v.
STATE OF U.P. & ANR.
(Civil Appeal No. 9417 of 2019)
DECEMBER 13, 2019 B
[R. F. NARIMAN AND S. RAVINDRA BHAT, JJ.]
Natural Justice – Opportunity of hearing – Appellant-
pharmaceutical supplier had bid for contract to supply various
categories of medicines to the Health Department of the State – The
C
State issued order dated 21.08.2015 directing its Medical and Health
Department to stop local purchase from the appellant – It was alleged
that there was a FIR against the appellant and CBI was inquiring
into the same – The pending criminal case amounted to violation of
the terms of the tender conditions – Appellant challenged the order
dated 21.08.2015 before the High Court – Appellant contended D
that the criminal case in question was filed against an erstwhile
Director, who had ceased to have any connection with the appellant
– It was also contended that the decision of the State amounted to
blacklisting and that it was issued without notice or pre-decisional
hearing – High Court rejected the challenge – On appeal, held: In
E
the instant case, even if one assumes that accused in the pending
criminal case was involved and had sought to indulge in
objectionable activities, that ipso facto could not have resulted in
unilateral action of the kind which the State resorted to against the
appellant, which was never granted any opportunity of hearing or
a chance to represent against the order dated 21.08.2015 – It is F
settled that no one can be inflicted with an adverse order, without
being afforded a minimum opportunity of hearing and prior
intimation of such a move – High Court fell into error in holding
that in matters of award of public contracts, the scope of inquiry in
Judicial review is limited – Also, the order dated 21.08.2015 debarred
G
the purchase of medicines for an indefinite duration – This action
of the State, not to procure indefinitely, on assumption of complicity
by appellant was in violation of principles of natural justice –
Accordingly, order dated 21.08.2015 quashed – The impugned
judgment of the High Court set aside – Contract – Public contract.
H
125
126 SUPREME COURT REPORTS [2019] 15 S.C.R.

A Allowing the appeal, the Court
HELD: 1. The State of U.P. has argued that the impugned
order dated 21.08.2015 requiring that no procurement ought to
be made from appellant, is neither a blacklisting nor a debarring
order, in opinion of this Court, in fact and in reality, that order is
B nothing but an order or a directive, debarring and preventing the
State of U.P. from local purchase of medicines from appellants for
an indefinite duration. Unlike a “normal” blacklisting order which
has a finite life span (of three or maximum five years), the
indefinite directive (which appears to be co-terminus with the
lifetime of the criminal case) is facially far more disproportionate
C than a blacklisting order. Even as on date, it is not clear whether
formal charges have been framed against the accused.
[Para 13][131-D-E]
2. In the present case, even if one assumes that the accused
in the pending criminal case was involved and had sought to
D indulge in objectionable activities, that ipso facto could not have
resulted in unilateral action of the kind which the State resorted
to- against appellant, which was never granted any opportunity of
hearing or a chance to represent against the impugned order. If
there is one constant lodestar that lights the judicial horizon in
E this country, it is this: that no one can be inflicted with an adverse
order, without being afforded a minimum opportunity of hearing,
and prior intimation of such a move. This principle is too well
entrenched in the legal ethos of this country to be ignored, as
the state did, in this case. [Para 15][132-E-F]

F 3. The High Court, in the opinion of this court, fell into
error in holding that in matters of award of public contracts, the
scope of inquiry in judicial review is limited. Granted, such
jurisdiction is extremely circumscribed; no doubt the court had
refused to grant relief to appellant against its plea of wrongful
rejection of its tender. However, what the impugned judgment
G clearly overlooks is that the action of the state, not to procure
indefinitely, on an assumption of complicity by appellant, was in
flagrant violation of principles of natural justice. [Para 16][132-
G-H; 133-A]
Erusian Equipments and Chemicals Ltd. v. State of West
H Bengal (1975) 1 SCC 70 : [1975] 2 SCR 674;
M/S. DAFFODILLS PHARMACEUTICALS & ANR. v. 127
STATE OF U.P. & ANR.

Raghunath Thakur v. State of Bihar & Ors (1989) 1 A
SCC 229 : [1988] 3 Suppl. SCR 867; Southern
Painters v. Fertilizers & Chemicals Travancore Ltd.,
(1994) Supp 2 SCC 699; Grosons Pharmaceuticals (P)
Ltd. v. State of U.P., (2001) 8 SCC 604 : [2001] 2 Suppl.
SCR 567; B.S.N. Joshi & Sons Ltd. v. Nair Coal Services
B
Ltd. (2006) 11 SCC 548 : [2006] 8 Suppl. SCR 11 –
relied on.
Case Law Reference
[1975] 2 SCR 674 relied on Para 14
[1988] 3 Suppl. SCR 867 relied on Para 14 C

1994 Supp (2) SCC 699 relied on Para 14
[2001] 2 Suppl. SCR 567 relied on Para 14
[2006] 8 Suppl. SCR 11 relied on Para 14
D
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9417
of 2019.
From the final Judgment and Order dated 24.04.2017 of the High
Court of Judicature at Allahabad in MBN No.8071/2015.
Sibo Sankar Mishra, Adv. for the Appellants. E
Ankit Goel, Harsh Pratap Shahi, Advs. for the Respondents.
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. Leave granted. With consent, all counsel who appeared were F
heard.
2. The appellant (hereafter “Daffodills”), a pharmaceutical
supplier, is aggrieved by a decision of the Allahabad High Court, rejecting
its challenge to an order (dated 21.08.2015) issued by the Principal
Secretary, Government of U.P. to its Medical and Health Department, G
directing it to stop local purchase from the appellant. Daffodills had
participated in a tender process, in which the state called for bids from
interested parties, willing to supply various categories of pharmaceutical
products. The successful bidder was required to supply medicines to
various hospitals, under the control of the Medical and Health Department,
H
128 SUPREME COURT REPORTS [2019] 15 S.C.R.

A U.P. for one year. Daffodills was one amongst 56 bidders; its bid was
acceptable to the respondent, i.e. State of U.P.
3. Daffodills was asked to match its previous bid to the Tamil
Nadu Service Corporation Ltd. for the year 2015-16, at approved L1
rates, on or before, 29.05.2015 in respect of 14 specified drugs. At the
B time of bid submission, every tenderer/bidder had to furnish a declaration
to the following effect:
“Firms should give an affidavit that there is no Court Case/
Vigilance Case/CBI Case pending against the firm. All the
documents given in the tender are true. If found false/fake
C the person/firms will have to be accepted by the firm. (Court
case means “Criminal Case” against firm/board of Director/
Directors/principal stock holder as per relevant law)”.
It is not disputed that Daffodills furnished the required declaration
in terms of the tender.
D 4. While so, on 21.08.2015, the impugned letter/notice was issued
by the Principal Secretary to the Government of U.P. stating that a first
information report (FIR) had been lodged against Daffodills alleging that
it had committed offences, and that the Central Bureau of Investigation
(CBI) was inquiring into the issue. Accordingly, the offices under
E Department of Health was directed to desist and stop all procurements
from the appellant, i.e. Daffodills under the following terms:
“I am directed to say in the described situation that no more
local purchase is to be done till pre order of the government,
from the above said firms which are under the investigation
F of CBI in the NRHM Case, by the hospitals at the rate of
contract of DGS&D/ESIC and Tamil Nadu Medical Services
Corporation. If medicine is purchased by any hospital in-
charge from these firms without approval of the government
then strict action would be taken as per rules against him.”
5. Complaining of arbitrariness on various grounds, (including that
G
the impugned direction not to procure or purchase medicines issued
against it, was on a mistaken assumption that a criminal case was pending
against it), Daffodills submitted that the criminal case was filed against
one Mr. Surender Chaudhary, an erstwhile Director, who had ceased to
have any connection with it (i.e. Daffodills) from 22.02.2012. Besides,
H it was argued that the decision not to procure, amounted to blacklisting
M/S. DAFFODILLS PHARMACEUTICALS & ANR. v. 129
STATE OF U.P. & ANR. [S. RAVINDRA BHAT, J.]

and that it was issued without notice or pre-decisional hearing and was A
consequently liable to be set aside.
6. In the impugned order, the High Court recalled a previous
direction in other proceedings, i.e. Writ Petition No. 3611 (MB)/ 2011
where it had enquired in regard to the execution and implementation of
the National Rural Health Mission in regard to utilization of funds released B
by the Government of India. The impugned order states that in compliance
of that order, CBI registered a case for preliminary inquiry and after
concluding the investigation filed a charge-sheet in the competent court
against Surender Chaudhary, the then Director of Daffodils and other
co-accused.
C
7. After noticing Daffodil’s contention that Surender Chaudhary
ceased to be its Director and also that it was not given opportunity of
hearing before the passing of the order, the High Court observed that in
matters of contractual disputes relating to policy decisions, the scope of
jurisdiction under Article 226 is limited and therefore, it could not be
assumed that the action of the State Government was unreasonable or D
contrary to public interest. Dealing with the complaint of breach of
principles of natural justice, the High Court was of the opinion that such
principles cannot be placed under a straight-jacket formula and
consequently, Daffodills’ failure to comply with express terms of the
contract and its breach of the terms resulted in the State resorting to E
recalling its business through various directions to State Agencies. The
High Court, therefore, concluded as follows:
“32. It is clear that when there is a failure on the part of the
contractor to comply with the express terms of the contract
and/or to commit breach of the said terms resulting into failure F
to commence/execute the work or supply the items as per
specification as stipulated in the agreement or giving the
performance that does not meet the statutory requirements of
the contract or the action of the petitioner is reported against
the provisions and against the interest of the State, the
Department has a right to regulate its business through various G
directions to State Agencies in which the petitioner has no
right to interfere.
8. It is argued on behalf of Daffodills that the impugned decision
is erroneous because the High Court overlooked a salient aspect, i.e.
H
130 SUPREME COURT REPORTS [2019] 15 S.C.R.

A Surender Chaudhary has resigned as Director, way back in 2012.
Therefore, his being implicated in the criminal case could not have resulted
in an adverse impact on the business of Daffodills, i.e. the appellant. It
was argued furthermore that besides an unwarranted and arbitrary action
against the company on account of the acts and omissions of its erstwhile
Director, the High Court committed an error in overlooking binding
B
decisions of this Court (including Rastriya Ispat Nigam v. Verma (2006)
7 SCC 275 and Kalja Industries v. Western Telecom (2014) 14 SCC
731), which clearly held that before proposing to pass a blacklisting or
debarring orders, the parties had to be given hearing followed by an
appropriate reasoned order.
C 9. It was argued on behalf of the State that the order made by it
directing the officials of the Health Department to discontinue
procurement, does not amount to a debarring order. It was urged that
Surender Chaudhary was acting in the capacity of Director of Daffodills,
for which he was charged of various offences by the CBI. These involved
D fictitious accounts of supply to various individuals and persons in order
to obtain procurement orders from the State. The concerned clause 14
clearly stated that a court case means “criminal case” against the firm,
Board of Directors or individual Directors. Therefore, the involvement
of Surender Chaudhary was close, who was none other than the blood
relative of the existing director, the appellant’s contention that the acts
E of omission and commission did not in any manner affect it, is not sound.
Learned counsel submitted that having regard to these facts, the order
made by the Principal Secretary (on 21.08.2015) was only a direction to
not procure medicines locally from the appellant; it could not be
characterized as a debarring or blacklisting order. It was pointed out that
F the appellant had filed a suit in 2014, seeking a direction not to finalize
the tender for which it had bid; furthermore, the order dated 21.08.2015
was made pursuant to the directions of the court. Consequently, the
appellant could have no grievance against it.
10. Daffodills had bid for the contract, (as is evident from the
G factual narration), to supply various categories of medicines to the Health
Department of the State of U.P. One of the terms of the tender conditions
required each bidder to declare that no criminal case was pending against
it. The appellant, Daffodills, had approached the Allahabad High Court,
complaining of arbitrariness on account of the State’s decision to reject
its bid, by filing a previous Writ Petition No. 35253/ 2015. This was
H dismissed.
M/S. DAFFODILLS PHARMACEUTICALS & ANR. v. 131
STATE OF U.P. & ANR. [S. RAVINDRA BHAT, J.]

11. The Allahabad High Court held that in the facts and A
circumstances of the case there was no illegality in exclusion of the
petitioner, i.e. Daffodills from the tender for supply of medicines and in
fact, debarring procurement from Daffodills was made after the order
of the Allahabad High Court dismissing the Writ Petition, challenging the
rejection of Daffodil’s tender.
B
12. Although in the proceedings, it appears that the suit was filed
by Daffodills at some stage against the finalization of tender (issued in
2014) it is not clear whether the suit was withdrawn, in the wake of the
filing and dismissal of its writ petition in 2015. What is clear, though from
the narrative is that before the order of 21.08.2015 was made, no show- C
cause notice or opportunity was granted to the appellant to represent
against the proposed action.
13. Although, State of U.P. has argued that the impugned order
requiring that no procurement ought to be made from Daffodills, is neither
a blacklisting nor a debarring order, in our opinion, in fact and in reality, D
that order is nothing but an order or a directive, debarring and preventing
the State of U.P. from local purchase of medicines from Daffodills for
an indefinite duration. Unlike a “normal” blacklisting order which has a
finite life span (of three or maximum five years), the indefinite directive
(which appears to be co-terminus with the lifetime of the criminal case)
is facially far more disproportionate than a blacklisting order. Even as on E
date, it is not clear whether formal charges have been framed against
the accused i.e. Surender Chaudhary.
14. The decisions in Erusian Equipments and Chemicals Ltd. v.
State of West Bengal1 and Raghunath Thakur v. State of Bihar &
Ors2 as well as later decisions3 have now clarified that before any F
executive decision maker proposes a drastic adverse action, such as a
debarring or blacklisting order, it is necessary that opportunity of hearing
and representation against the proposed action is given to the party likely
to be affected. This has been stated in unequivocal terms in Raghunath
Thakur (supra) as follows: G

1
1975 (1) SCC 70
2
1989 (1) SCC 229
3
Southern Painters v. Fertilizers & Chemicals Travancore Ltd., 1994 Supp (2) SCC
699; Grosons Pharmaceuticals (P) Ltd. v. State of U.P., (2001) 8 SCC 604; B.S.N. Joshi
& Sons Ltd. v. Nair Coal Services Ltd. (2006) 11 SCC 548 H
132 SUPREME COURT REPORTS [2019] 15 S.C.R.

A “ 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
B
concerned should be given an opportunity to represent his
case before he is put on the blacklist.”
In Southern Painters (supra) the grievance was with respect to
unilateral deletion of the petitioners’ name from the list of approved
contractors, maintained by the public sector agency. This court held that
C such an action was arbitrary:
“The deletion of the appellant’s name from the list of approved
contractors on the ground that there were some vigilance
report against it, could only be done consistent with and after
due compliance with the principles of natural justice. That
D not having been done, it requires to be held that withholding
of the tender form from the appellant was not justified. In our
opinion, the High Court was not justified in dismissing the
writ petition.”
15. In the present case, even if one assumes that Surender
E Chaudhary, the accused in the pending criminal case was involved and
had sought to indulge in objectionable activities, that ipso facto could
not have resulted in unilateral action of the kind which the State resorted
to- against Daffodils, which was never granted any opportunity of hearing
or a chance to represent against the impugned order. If there is one
F constant lodestar that lights the judicial horizon in this country, it is this:
that no one can be inflicted with an adverse order, without being afforded
a minimum opportunity of hearing, and prior intimation of such a move.
This principle is too well entrenched in the legal ethos of this country to
be ignored, as the state did, in this case.

G 16. The High Court, in the opinion of this court, fell into error in
holding that in matters of award of public contracts, the scope of inquiry
in judicial review is limited. Granted, such jurisdiction is extremely
circumscribed; no doubt the court had refused to grant relief to Daffodils
against its plea of wrongful rejection of its tender. However, what the
impugned judgment clearly overlooks is that the action of the state, not
H
M/S. DAFFODILLS PHARMACEUTICALS & ANR. v. 133
STATE OF U.P. & ANR. [S. RAVINDRA BHAT, J.]

to procure indefinitely, on an assumption of complicity by Daffodils, A
was in flagrant violation of principles of natural justice.
17. Normally, this court would have quashed the Government of
U.P.’s decision, and left it to grant a hearing to Daffodils, before taking
any action. However, given that the impugned order of debarring (i.e.
directive not to procure locally from Daffodills) was made over 4 years B
and 3 months ago, this court is of the opinion that it would be in the
overall interest of justice that appropriate relief is granted. Accordingly,
the said order of the Principal Secretary, Government of U.P. directing
all concerned departments to desist from resorting to local purchase
from the appellant is hereby quashed. The impugned judgment of the
High Court is hereby set aside. The appeal is allowed in the above terms. C
No costs.

Ankit Gyan Appeal allowed.

D

E

F

G

H