A Contractor Cannot Be Debarred Without Notice, Even If There Is A Provision For Deemed Debarment In The Contract Following Its Termination: Delhi High Court

The bench of Justice Prathiba M. Singh held that an order of debarment has a domino effect which of results in the civil death of an entity. It held that debarment is different from a simple termination of contract, therefore, the notice for termination would not suffice the pre-requisites for debarment order even when the contract provides for deemed debarment.

Facts

The parties entered into an EPC Contract dated 30.07.2021. In terms of this agreement, the petitioner was to execute certain construction work for the respondent within a period of one year.

The project work could not be completed within the contract period due to failure of the respondent to provide Right of Way (ROW) to the petitioner. Thereafter, respondent issued a SCN dated 12.05.2022 to the petitioner declaring it as 'non-performer' owing to the slow progress of the work.

On 17.08.2022, the petitioner terminated the agreement. Thereafter, the respondent issued a Suspension Notice on 19.08.2022. Thereafter, the respondent issued a notice with the intention to terminate the agreement. Finally, the notice of termination was issued by the respondent on 09.12.2022, consequently, blacklisting the petitioner for a period of 2 years.

Aggrieved thereby, the petitioner invoked arbitration. Upon the failure of the parties to mutually appoint an arbitrator, the petitioner approached the High Court under Section 11(6) of the A&C Act. The Court allowed the petition and appointed the arbitrator.

Before the arbitral tribunal, the petitioner moved an application under Section 17 of the A&C Act praying for stay on the order of debarment. The tribunal dismissed the application on the ground that the issue would require detailed examination and the issue can only be decided at a later stage.

Aggrieved thereby, the petitioner approached the Court in appeal under Section 37 of the Act.

Submissions of the Parties

The petitioner challenged the order on the following grounds:

• There was no notice issued prior to debarment order and the petitioner was deprived of right to object to the grounds of debarment. Non-issuance of such notice results in violation of principles of natural justice since the party aggrieved by such an order is deprived of its right to know the case against it and to respond to the allegations.
• A show cause notice in relation to the termination of agreement would not suffice the requirement of notice for debarment.
• The debarment clause under the agreement also requires a specific notice.
• The debarment is triggered post termination of notice and any notice given during the currency of the contract cannot be considered as notice for debarment.
• MoRTH circular requires respondent to give 15 days notice to the contractor before blacklisting it.

Respondent made the following counter-arguments:

• The agreement provides for an automatic debarment when the agreement is terminated due to reasons attributable to the contractor. Therefore, the notice for termination could very well be understood to be a notice for debarment when the notice had explicitly mentioned that the consequence of termination would be debarment.
• The petitioner was given adequate opportunity to cure its defect and explain its position with respect to the delays.

Analysis by the Court

The Court observed that the respondent had issued a notice for termination, however, it did not issue any notice for debarment. It held that in the notice for termination though a reference was made to the clause providing for debarment, however, it did not expressly provide for debarment. The Court held that notice for debarment must be unambiguous.

The Court held that a simple termination of agreement merely ends the contractual relationship between the parties, however, debarment on the other hand prohibits an entity from entering into any contractual relationship with the blacklisting entity for the period of debarment. It held that it has a domino effect in as much as the contractor would be required to disclose the fact of its debarment in every other tender and such declaration would have a negative effect on its prospects.

The Court observed that the tribunal failed to appreciate that its failure to decide the issue at that stage would result in an irretrievable injury to the petitioner as the period of 1.5 year of debarment was already complete and any further delay would make the issue infructuous. It held that if the tribunal ultimately decides in favour of the respondent on the issue of debarment, it can always give effect to the remaining period of debarment.

The Court held that held that a contract cannot be debarred or blacklisted without a prior notice or opportunity of hearing even in cases where there is a provision in the contract for deemed debarment in case of termination of the contract.

The Court relied on the judgment of the Court in ACE Integrated Solutions v. FCI^[1] and Atlanta Ltd. v. Union of India^[2] to hold that termination and blacklisting are two distinct matters and the latter cannot be an automatic consequence for the former.

The Court observed that Clause 23.1 of the contract provides for debarment as an automatic consequence only when it is terminated due to contractor's fault. It held that the issue whether the petitioner is at fault is yet to be decided by the tribunal.

Accordingly, the Court allowed the appeal and stayed the debarment of the petitioner.

Case Title: M/s Oasis Projects Ltd v. National Highway & Infrastructure Development Corporation Ltd

Citation: 2024 LiveLaw (Del) 508

Counsel for the Petitioner: Mr. Sanjoy Ghose, Sr Adv, Mr Mayank Arora and Mr. Prasoon Shekhar, Advs.

Counsel for the Respondent: Mrs. Malvika Trivedi, Sr. Adv with Mr. Pratishth Kaushal, Mr. Shailendra Slaria, Ms. Sujal Gupta, Ms. Raghwi Singh, Advocates, Mr. Rishinandan M. U., Manager (Technical), Mr. Anshul Agarwal

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