Introduction

The two Latin maxims 'nemo iudex in causa sua' (ie, 'no one should be a judge in his or her own cause') and 'audi alteram partem' (ie, 'hear the other side too') form the basis of the principles of natural justice, which are the backbone of the legal system. They are similar in approach to the US notion of due process. Although the principles are not codified, they are well recognised and over the years have been made into law via court judgments; thus, they have a strong resonance within the legal system.

The courts have defined the contours of the principles in numerous precedents, each of which alludes to the oft-quoted truism that 'not only must justice be done, it should be seen to be done'. In Gorkha Security Services v Government,(1) the Supreme Court considered the right to a hearing and in doing so, reiterated one of the cornerstones of the principles of natural justice. The case related to the blacklisting of a contractor by the government in connection with a contract for providing security services to one of its instrumentalities.

Facts

Gorkha Security Services (the appellant) was awarded a contract to provide security services to a government hospital. The respondent requested that the appellant submit certain compliance documents in relation to labour laws and related contractual provisions. The appellant responded to the letters on different occasions with proof of compliance. Dissatisfied with the appellant's response, the respondent issued a show cause notice, among other things, on charges that the appellate had failed to comply with labour laws or submit required documents. The show cause notice directed the appellant to show cause as to why the action mentioned therein (along with any other actions deemed appropriate by the competent authority) should not be taken.

The appellant responded to the show cause notice, stating that it had complied with the labour laws and contractual provisions. Despite this, the respondent terminated the contract in a letter dated July 30 2013. On September 11 2013 the respondent issued an order imposing penalties and blacklisting the appellant. It also issued strictures on the wages of the employed security staff. The appellant appealed the impugned order before the principal secretary. When it received no response, it filed a writ petition before the Delhi High Court, seeking quashing of the order. The single judge in the Delhi High Court denied the appellant's petition. The high court judgment was upheld by the division bench. The appellant then appealed to the Supreme Court under a special leave petition.

The primary issue addressed in the judgment was whether:

  • show cause notices should explicitly state when blacklisting is proposed; or
  • show cause notices need not explicitly state when blacklisting is proposed if perceived to be imposed.

Decision

Requirement of show cause notice
The court recapitulated the well-established principle that any action for blacklisting must be preceded by a show cause notice. The parties did not dispute this principle. Nevertheless, the court considered Erusian Equipment & Chemicals v State of West Bengal,(2) in which the importance of a show cause notice was highlighted. In Erusian Equipment the court recognised that under Article 298 of the Constitution, the government has the power to:

  • trade;
  • aquire, hold and dispose of property; and
  • enter into contracts for any purpose.

However, the court held that while doing so, the government cannot overlook the principles of equality enshrined under Article 14 of the Constitution. The court stated that the government cannot afford to discriminate against parties and must follow the fundamental principle of fair play. Further, the court held that the appellant had a right to present its case before the competent authority. The court recognised that blacklisting deprives a party of equal opportunity in matters of public contracting; therefore, blacklisting is just only when the government is supported by law. The court also referred to its decision in Raghunath Thakur v State of Bihar,(3) in which it held that any order or action that has a civil consequence can be passed only if it complies with the principles of natural justice.

The court concluded that although a show cause notice must be issued before blacklisting, it is not mandatory to have an oral hearing; the opportunity to reply to the notice is sufficient.

Contents of show cause notice
The court agreed with the appellant that the nature of the action proposed must be categorically stated in the notice. This was based on the court's finding that the fundamental principle behind issue of a show cause notice is to enable the recipient to meet the grounds on which the action is proposed. Thus, it is paramount to specify the consequences of failing to meet those grounds. The court laid down two material requirements of natural justice that must be complied with:

  • The material/grounds which, according to the department, necessitate the action must be stated in the notice.
  • The proposed penalty or action must be stated in the notice.

The respondent argued that Clause 27(a) of the notice inviting tenders (NIT) provided that on the appellant's failure to comply with the contract's terms, the respondent could impose various penalties, including blacklisting for four years. According to the respondent, this constituted sufficient notice. The court rejected this argument and held that because the clause provided for various actions and penalties that the respondent could pursue, it had to specify in the show cause notice which remedy it intended to pursue. The court further held that the clause stated that blacklisting may be effected where warranted; thus, the respondent was responsible for determining whether the circumstances warranted blacklisting. The court concluded that it was incumbent on the respondent to state in the show cause notice that the competent authority intended to impose the penalty of blacklisting, so as to provide the appellant with adequate and meaningful opportunity to show cause against the same. It clarified that even if the particular remedy was not specifically mentioned but could be inferred from the show cause notice, the action was considered to have been proposed and thus the requirement was fufilled.

Natural justice
While discussing the issue, the court also explored the principles of natural justice. While it agreed that the principles of natural justice cannot be equated with fundamental rights, it held that their ultimate aim is to secure justice and prevent injustice. The court relied on Board of Mining Examination v Ramjee,(4) in which Justice Krishna Iyer held that fairness can eliminate a breach of the principles of natural justice.

In the case at hand, the court held that unless the statutory provisions expressly or impliedly excluded the application of the principles of natural justice, any exercise of power had to conform with those principles. The court ruled that since blacklisting amounts to civil death, no action can be taken without giving the other party a chance to show cause as to why it should not be taken.

Prejudice argument
The respondent argued that unless the appellant could prove that its failure to mention blacklisting as the proposed penalty had caused prejudice and resulted in injustice, the action could not be nullified. The court disagreed, holding that if the penalty of blacklisting had been specifically mentioned in the show cause notice, the appellant could have explained why the penalty was unjustified. Further, the appellant would have had the chance to plead with the respondent not to blacklist it or do so for a lesser period. Thus, the court held that the extreme nature of blacklisting would itself amount to causing prejudice against the appellant.

The court set aside the impugned order on the ground that it was contrary to the principles of natural justice, as blacklisting was not specifically proposed.

Comment

As the largest contracting party in the country, the government has often acted in a high-handed and harsh manner, imposing disproportionate penalties on its contractors, even for small contractual lapses. Blacklisting is one of the harshest actions that can be imposed on an entity and, as observed in this case, it leads to the civil death of a company. For companies that rely solely on government enterprise, a blacklisting order essentially renders them unable to carry out any business. Further, government tenders necessarily require bidders to disclose past actions against them. A blacklisted entity has no ability to tender, much less successfully tender for a government job. Blacklisting also hinders cross-border transactions, as globally, governments are uncomfortable dealing with a blacklisted entity.

The judgment highlights the maxim 'audi alteram partem' and provides entities dealing with the government with adequate protection against arbitrary actions. One facet of this maxim is to know the precise case that must be answered, without which it is impossible for a party to defend itself adequately, even where defaults or breaches can be satisfactorily explained. In the fast-changing legal landscape, this judgment stands out, as for once an imperious government act has been overturned.

Naresh Thacker, Rhia Marshall Banerjee

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