Banning or Blacklisting simply signifies a business decision by which the party affected by a breach of contract 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.
The state can decline to enter into a contractual relationship with a person or a class of persons for a legitimate purpose. The authority of State to blacklist a person is a necessary concomitant to the executive power of the State to carry on the trade or the business and making of contracts for any purpose. There need not be any statutory grant of such power. The only legal limitation upon the exercise of such an authority is that the State is to act fairly and rationally without in any way being arbitrary. 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.
In India, banning of business dealing is done by Central and State Govt. departments and Public Sector enterprises. They are generally based on the following grounds:
- If the security consideration, including questions of loyalty of the entity to the State, so warrants;
- If the Director/Owner of the entity, proprietor or partner of the firm, is convicted by a Court of Law for offences involving moral turpitude in relation to its business dealings with the Government or any other public sector enterprises;
- If there is strong justification for believing that the Directors, Proprietors, Partners, owner of the entity have been guilty of malpractices such as bribery, corruption, fraud, substitution of tenders, interpolations, etc;
- If the entity employs a public servant dismissed/removed or employs a person convicted of an offence involving corruption or abetment of such offence;
- If business dealings with the entity have been banned by the Govt. or any other public sector enterprise;
- If the entity has resorted to Corrupt, fraudulent practices including misrepresentation of facts;
- If the entity uses intimidation/threatening or brings undue outside pressure or its official in acceptance/performances of the job under the contract;
- If the entity indulges in repeated and/or deliberate use of delay tactics in complying with contractual stipulations;
- Based on the findings of the investigation report of CBI/Police against the entity for malafide/unlawful acts or improper conduct;
- Poor performance of the entity in existing or past contracts;
The legal position governing blacklisting in USA and UK is no different. In the 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 the integrity of the processes for federal acquisitions.
Comprehensive guidelines are, therefore, issued by the government for protectin the 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 offence 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 offence 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 wilful 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 wilful violation of a statutory or regulatory provision or requirement applicable to a public agreement or transaction;
c) Any other cause of so serious or compelling a nature that it affects its present responsibility.
The guidelines also stipulate the factors that may influence the debarring official’s decision which include the following:
- The actual or potential harm or impact that results or may result from the wrongdoing.
- The frequency of incidents and/or duration of the wrongdoing.
- Whether there is a pattern or prior history of wrongdoing.
- Whether the contractor has been excluded or disqualified by an agency of the Federal Government or has 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.
- Whether and to what extent did the contractor plan, initiate or carry out the wrongdoing.
- Whether the contractor has accepted responsibility for the wrongdoing and recognised the seriousness of the misconduct.
- 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.
- Whether the contractor has cooperated fully with the government agencies during the investigation and any court or administrative action.
- Whether the wrongdoing was pervasive within the contractor’s organisation.
- The kind of positions held by the individuals involved in the wrongdoing.
- Whether the contractor has taken appropriate corrective action or remedial measures, such as establishing ethics training and implementing programs to prevent recurrence.
- 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.
In England, Wales and Northern Ireland, there are statutory provisions that make Contractors ineligible on several grounds including fraud, fraudulent trading or conspiracy to defraud, bribery etc.
Banning has the effect of preventing a person from the privilege and advantage of entering into the lawful relationship with the Government or its instrumentalities for purpose of gain. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction.
It has to be realised that blacklisting any person in respect of business ventures has a civil consequence for the future business of the person concerned in any event. Even if the rules do not expressly say so, the principle of natural justice requires that parties affected by any order should have the right of being heard and making representations against the order.
The Supreme Court of India in a recent judgment (Kulja Industries Ltd v. BSNL AIR2014SC9) held that before blacklisting, a fair hearing to the party being blacklisted is essential pre-condition for a proper exercise of the power and a valid order of blacklisting made pursuant thereto. The order of blacklisting must be reasonable, fair and proportionate to the gravity of the offence. Even so permanent debarment from future contracts for all times to come may sound too harsh and heavy a punishment to be considered reasonable.
An order of banning of business dealing should also be a reasoned order. Allahabad High Court in Veekay Connectors (P) Ltd.v National Small Industries Corporation Ltd (AIR 2005 All 57) has held that:“….even assuming that opportunity of hearing was given yet the order dated 25-3-2004 is illegal because it does not contain reasons. It is well settled that before passing an order which has civil consequences not only opportunity of hearing must be given to the party but there must be reasons in the impugned order also.”
In case no concluded contract came into existence between the parties and the bidder had only withdrawn the offer that was made by offering the tender, the penalty of blacklisting for withdrawal of offer is arbitrary and blacklisting was set aside (Bhimsain Vs Union of India AIR 1989 Delhi 206).
Similarly, Punjab and Haryana High Court in (Supra Enterprises Vs PSEB AIR2007P&H23) has held that the action of the respondent state in blacklisting the petitioner firm at the negotiation stage on the ground that it had quoted a high rate for its produce does not stand the test of reasonableness under Article 14 of the Constitution of India and is liable to be quashed. The Court further held that normally blacklisting should be carried out after the contract has been executed between the parties.
The Supreme Court in Eurasian Equipment and Chemical Ltd Vs State of Bengal (AIR1975SC266) has observed that the State need not enter into any contract with anyone but if it does so, it must do as fairly without discrimination and without unfair procedure. Reputation is a part of person’s character and personality. Blacklisting tarnishes one’s reputation. Exclusion of a member of the public from dealing with a State in sales transactions 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.
Where the State is dealing with individuals in transactions of sales and purchase of goods, the two important factors are that an individual is entitled to trade with the Government and an individual is entitled to a fair and equal treatment with others. A duty to act fairly can be interpreted as meaning a duty to observe certain aspects of rules of natural justice. 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.