Blacklisting Is Not Automatic Upon Contract Termination; Requires Independent Application Of Mind : Supreme Court

The Supreme Court on April 2 held that termination of a contract does not automatically justify blacklisting, and that blacklisting requires an independent show cause notice and proper application of mind.A bench of Justice PS Narasimha and Justice Alok Aradhe set aside the Jharkhand High Court's order upholding the termination cum blacklisting order issued by the Drinking Water and Sanitation Department for the alleged construction deficiencies on the part of the Appellant, which resulted in the collapse of a structure built by the Appellant. Although the termination was upheld, the court however, found the blacklisting order to be arbitrary, noting that no automatic blacklisting follows upon termination of a work contract, without abiding by the principles of natural justice “…the blacklisting order suffers from patent infirmities: it evinces no application of mind, disregards the mandatory precept of audi alteram partem, and fails to precede with a show-cause notice requiring the contractor to demonstrate why such drastic action should not be taken. Blacklisting, being stigmatic and exclusionary in nature, cannot be imposed mechanistically but must comport with principles of natural justice and reasonableness.”, the Court observed. The dispute arose from a contract awarded to the Appellant-M/s A.K.G. Construction and Developers Pvt. Ltd. by the Jharkhand Water and Sanitation Department for the construction of an Elevated Service Reservoir (ESR) in March 2023. In June 2024, the top dome of the under-construction reservoir collapsed. While the contractor attributed the collapse to an unexpected cyclone and offered to reconstruct the structure at its own cost, multiple inquiry reports, including those supported by technical inputs from premier institutions, found serious deficiencies in construction quality and deviation from approved designs. Following a show-cause notice issued on June 4, 2024, the department passed an order on August 23, 2024, terminating the contract and blacklisting the contractor for five years, along with forfeiture of the security deposit and cancellation of registration. The contractor's appeal and writ petition were dismissed by the High Court, prompting an appeal before the Supreme Court. Setting aside the impugned order, the Court struck down the blacklisting order, emphasizing that blacklisting is a distinct and far more serious action than termination, thus it should not be automatic upon the contract's termination. “A decision of blacklisting is not automatic and certainly not a logical consequence of a decision of termination. Even after the Department decides to terminate the contract, there is still a choice of exercising the power of blacklisting.”, the court observed. “In other words, an order of blacklisting transcends the existing contract and debars the contractor from contracts that could probably be executed in the next five years. In view of the serious consequences, it is necessary for the Department to issue a specific notice proposing blacklisting of a contractor and call for an explanation as to why an order of blacklisting should not be passed.”, the court added. The Court relied on UMC Technologies Pvt Ltd v. Food Corporation of India (2020) to emphasize that a contractor must be given a clear opportunity to defend itself through a proper show cause notice before being blacklisted, based on the authority's objective satisfaction. Applying the law, the Court held that the impugned show cause notice does not purport to be a show cause notice for blacklisting at all, as it lacked the application of mind. “the decision to blacklist is independent of the decision to terminate, the Department must demonstrate application of mind before it takes the next step of blacklisting the contractor, over an order of termination. Upon taking such a decision, it must also issue a show cause notice calling upon the contractor to explain why a consequential order of blacklisting should also not be passed. The letter must be indicative of the proposed decision to blacklist and the requirement of the contractor to respond to it. The show cause notice dated 04.06.2024 falls short of these requirements.”, the court held. Accordingly, the appeal was dismissed to the extent it upheld the termination order but the blacklisting order against the appellant was set aside.“taking into account the unimpeachable material about the negligence of the appellant leading to collapse of the top dome of the ESR, we are of the opinion that the order of termination of all contracts is legal and valid. Civil Appeals to this extent are dismissed. However, the decision of blacklisting of the appellant is illegal, arbitrary and unreasonable. The declaration of blacklisting is set aside, and shall cease to operate with immediate effect.”, the court ordered. Cause Title: M/S A.K.G. CONSTRUCTION AND DEVELOPERS PVT. LTD VERSUS STATE OF JHARKHAND & ORS.Citation : 2026 LiveLaw (SC) 321Click here...

Blacklisting Is Not Automatic Upon Contract Termination; Requires Independent Application Of Mind : Supreme Court

Yash Mittal

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