Case: M/S. J.K.Surface Coatings Private Limited Vs. Oil and Natural Gas Corporation &amp; Others

4. Brief facts give rise to the present controversy are asThe Petitioner specializes in corrosion resistant coating application in India and is the only Indian Company to offer vessel based blasting and painting services for offshore industries. The Petitioner also offerspainting. It is the case of the Petitioner that it has carried out business of painting works with several leading companies including a company in Saudi Arabia and has been awarded good quality and safety certificate in respect of their work. The Petitioner in the past has been awarded contracts by the 1st Respondent Corporation (ONGC) formaintenance painting as well as for painting of newplatforms etc. The first Respondent is ONGC and is a State within the meaning of Article 12 of the Constitution of India. Respondent Nos.2 and 3, are the officers/employees of ONGC and who have played a role in issuance of the impugned order dated 25th April, 2014, by virtue of which the Petitioner Company has been banned from participating in any tender floated by Respondent No.1 for a period of three years.(b) In the year 2008, Respondent No.1 invited bids for maintenance painting of its platforms of Mumbai offshore (Mumbai High, Neelam, Heera, Bassein and Satellite) for which the Petitioner had put in its bid. The bid of the Petitioner was accepted by Respondent No.1 and pursuant to a Notification of Award dated 2nd February, 2009, a contract dated 8th May, 2009 was executed between the Petitioner and Respondent No.1. The said contract set out scope of work including the total area which was proposed to be painted, as well as different paint coating systems that were to be employed in respect thereof. It is not in dispute that the said contract was for a period of three years and was completed on 31st May, 2011.(c) It is the case of the Petitioner that it successfully completed the work under this contract and under clause 18.1 thereof, the contract was successfully terminated on expiry of the contract period. There was no delay in performance of the said contract and the same was completed in time. In fact, a Completion Certificate was also issued by the 1st Respondent on 19th September, 2011. Thereafter, final payments towards performance of the said contract were also received by the Petitioner on 18th October, 2011.(d) It is the case of the Petitioner that after completion of the contract, a survey was carried out in respect thereof and the work completed by the Petitioner was found to be satisfactory. After that a second survey was carried out in terms of the contract and a Joint Survey Report was signed on 6th October, 2012 in respect of one of the facilities (Neelam) and on 7th October, 2012 in respect of other facility (Heera). Since, there was no dispute about the work completed by the Petitioner, there was no deduction made in the R.A. bill submitted by the Petitioner.(e) Thereafter, a fresh tender No.MC 11001 for maintenance painting for anotherplatform was issued by Respondent No.1. The Petitioner even participated in this tender. The technical bids for this fresh tender were opened on 11th October, 2012 and the price bids were opened on 29th May, 2013. Out of five bidders that participated in the said bidding process, three bidders qualified in the technical bid including the Petitioner. Accordingly, the price bid of all these bidders were opened and the Petitioner was the lowest bidderand Saraf Hospitality Services Pvt. Ltd. (another bidder) was the second lowestand its bid was 63% higher than that of the Petitioner.(f) In the interregnum, the Petitioner was served with the letter dated 16th May, 2012, alleging discrepancies and inconsistencies in the area painted and the quality of paint used in respect of the earlier contract, that was duly completed on 31st May, 2011. The said letter claimed a refund of an amount of approx Rs.57 Lacs on account of invoice Nos.34 and 43. Despite the fact that both these invoices were earlier certified by Respondent No.1 as well as a Third Party Inspection Agency (TPI), the Petitioner offered itsand requested for resolving of the issue and submitted a clarification/explanation in the prescribed format on 9th August, 2012.(g) It is the case of the Petitioner that thereafter a Committee was constituted to inquire into whether there was any excess payment in respect of said two invoices (Nos.34 and 43) and whether any claim was maintainable against the Petitioner Company. This Committee, (which comprised of the representatives of Respondent No.1, the Petitioner as well as the TPI), after reconciliation of the said invoices, gave a report dated 13th March, 2013 which was in favour of the Petitioner. This report inter alia concluded that the said invoice Nos.34 and 43 were different and some work under these invoices had been carried out by the Petitioner simultaneously. The report, therefore, concluded that the Petitioner was eligible for payment in respect of the work done for both these invoices. It is the Petitioners case that despite this, the Respondents, unilaterally and without any justification invoked two Bank Guarantees amounting to Rs.29.86 Lacs and Rs.25.56 Lacs (aggregating to Rs.55.42 Lacs) and appropriated the said amount towards their alleged claims. This invocation was done on 30th September, 2013. In view of this wrongful invocation, the Petitioner from time to time issued letters seeking refund of the said amounts, but without any success.(h) However, it did not stop here. It is the case of the Petitioner that thereafter a SCN was issued by the Investigation Officer (Respondent No.2) dated 4th December, 2013. This SCN called upon the Petitioner to submit an explanation / clarification no later than 11th December, 2013. This SCN called upon the Petitioner to explain the alleged irregularities and discrepencies that were committed by the Petitioner in respect of the contract dated 8th May, 2009. The SCN alleged basically three irregularities against the Petitioner. The first alleged irregularity was that the required quantity of paint, corresponding to the area of painting claimed for payment, was not supplied by the Petitioner. The second was that the Petitioner Company had submitted documents containing incorrect information with respect to the required manpower deployment. The third alleged irreularity was that the Petitioner had failed to maintain and furnish to the 1st Respondent, the necessary documents / record books / registers pertaining to quality of work and measurement, for payment.(i) The Petitioner replied to the said SCN and gave its explanations/ clarifications by its letter dated 16th December, 2013. To put it in a nutshell, it was pointed out that the contract was in respect of painting a particular area and hence the total quantity of paint applied was immaterial. It was stated that the total quantity of paint mentioned in the invoices was solely indicative and the total quantity against each group could vary. However, payment was made by the 1st Respondent for the actual quantity of job done and not related to the quantity of paint supplied. This is, according to the Petitioner, was in accordance with what was stipulated in the contract. It was further stated that the contract was for abased on the actual application of paint and the quality was verified by the DFT check. In respect of the discrepancies regarding Manpower Deployment, it was stated that the manpower was shifted and painting was done as per the directives of the 1st Respondent and as per their specifications. The 1st Respondent as well as the TPI representatives were also well aware about utilization of the manpower at different locations resulting into observations as regards reporting of manpower test due to clubbing of areas in respect of two platforms (Heera and Neelam) and shifting manpower from one location to the other as per the instructions of the 1st Respondent. It was also pointed out that Respondent No.1 followed the practice of engaging the TPI for inspection of works and that the representatives of the TPI were in fact deputed at platforms for complete supervision of painting jobs who had thereafter certified the same. Based on this certification,and monitoring the activities were also supervised by construction manager/OIM nominated by Respondent No.1, and who had certified the measurement accordingly. Thus the reports were verified by TPI and certified by the 1st Respondent before releasing payment. For all the foregoing reasons, the alleged irregularities regarding Manpower Deployment, as claimed in the SCN, according to the Petitioner, was explained appropriately. With regard to the third irregularity, namely, that the Petitioner had failed to maintain and furnish to the 1st Respondent the necessary documents / record books / registers pertaining to quantity of work etc., it was pointed out that in terms of the contract there was no contractual obligation to maintain records indefinitely after successful completion of the contract. Despite this, the appropriate record in terms of the actual measurement of area painted, manpower deployment, daily progress reports and all other relevant certificates and inspection reports were submitted to the 1st Respondent along with the invoices. The Petitioner also offered to submit the work completion certificate, all details of measurement sheets and inspection reports etc.(j) After this reply was sent by the Petitioner, the 1st Respondent issued the banning order dated 25th April, 2014 inter alia banning the Petitioner from participating in any futute tenders floated by Respondent No.1 (ONGC) for a period of 3 years from the date of the order. The relevant part of the banning order reads thus:AND WHEREAS, on inquiry and examination of the case including the reply of the contractor dated 16.12.2013, and having given an impartial, prudent and careful consideration to the facts, ONGC has come to the following conclusion that:(i) Contractor has failed to provide satisfactory and logical explanation to the issues of incorrect DPR, high productivity of manpower, required quantity of paint against surface area claimed for payment, deficiency in records documents, non availability of required records/documents for scrutiny.(ii) Contractor has failed to support their stand by furnishing relevant documents w.r.t. high productivity, mismatch of manpower deployment, quantity of paint and quality of work etc.(iii) Contractor tried to bank their clarification and arguments more on those documents, which are not available. At the same time, no explanations have been offered for the issues raised in the document, which are available.(iv) Contractor has manipulated manpower deployments details and submitted improper and erroneous documents alongwith their invoices for purpose of inflated measurement/payment of painting work.(v) Contractor has compromised the quality of work by not using required quantity of paint for the painting area billed for payment.(vi) Contractor has failed to maintain contractually required documents and records pertaining to the work. There has been an attempt on the part of Contractor to circumvent the documentation process, required under the contract.(vii) Contractor has, by and large, taken a plea that ONGC / TPI had checked and scrutinised all the required documents at the time of verification certification of payment and hence, everything was in order. Contractor cannot shed their contractual obligation like this and justify their misdeeds.(viii) The lapses as brought out above on the part of Contractor are not only gross violation of contractual obligations in terms of specifications and quality of work but also put a question mark on their intention, in the light of spirit of the contract. Hence, ONGC has decided to ban all business dealings with the Contractor, i.e., M/s J. K. Surface Coatings Pvt. Ltd., Navi Mumbai, India alongwith its allied concern(s), Partner(s) or Associate(s) or Director(s) or Proprietor involved in any capacity, for participation in future tenders of ONGC, whatsoever, for a period of 3 (three) years from the date of issue of this letter for gross violation of contractual obligations in terms of specifications and quality of work but also put a question mark on their intentions, in the light of spirit of the contract no. MR/MM/MH/SCON/Y 15 KC08002/ 90300003047. Neither any tender enquiry shall be issued nor offer(s) of the Contractor or its allied concern(s), Partner(s) or Associate(s) or Director(s) or Proprietor as aforesaid shall be considered in any of the ongoing tenders during the period the banning order is in force.(Dr.R.V.Marathe)Executive DirectorMH Asset.(k) It is in these circumstances that the Petitioner is before us challenging the validity and legality of the banning order dated 25th April, 2014.

Reasoning:
14. We have heard the learned counsel at length and perused the papers and proceedings in the Writ Petition along with the annexures thereto as well asfiled on behalf of all the Respondents. Before we deal with the rival contentions, we would like to set out some settled principles that have been laid down by the Supreme Court on blacklisting and/or banning a party from dealing and/or participating in contracts/tenders floated by the Government and or its undertakings. The power to blacklist a contractor, whether the contract be for supply of material or equipment or for the execution of any other work whatsoever, is inherent in the party allotting the contract. There is, therefore, no need for any such power being specifically conferred by the statute or reserved by the party awarding the contract. This is because blacklisting/banning simply signifies a business decision by which the party affected by the breach decides not to enter into any contractual relationship with the party committing the breach. In the normal course, 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. However, when such a decision is taken by the State or any of its instrumentalities, the same would be open to scrutiny not only on the touchstone of the principles of natural justice but also on the doctrine of proportionality. In other words, the Court would have the power to examine whether the punishment meeted out is commensurate with the crime. Therefore, a fair hearing to the party becomes an essentialfor a proper exercise of the power and to uphold the blacklisting order. Blacklisting has the effect of preventing a person from the privilege of entering into any contract or relationship with the Government for the purposes 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 before such an order is passed. Hence, objective satisfaction andon the part of the authority issuing the blacklisting order is of paramount importance. To put it in a nutshell, merely due to some contractual disputes, a banning order passed by the concerned authority would be too harsh. Only on the basis of some contractual violations which have an equally effacious remedy available for redressal of those violations, cannot be the only ground for passing the banning order. Considering that a blacklisting/banning order virtually leads to a civil death of the person/party blacklisted, there has to be definitely something more than just contractual disputes, such as frequency of incidents and/or duration of wrong doing; whether there is a pattern or prior history of wrong doing; whether the contractor has accepted the responsibility for the wrong doing and recognised the seriousness of the misconduct; etc. Suffice it to state that blacklisting/banning is recognized and often used as an effective method for disciplining deviant contractors who may have committed acts of fraud, misrepresentations, falsification of records and other breaches of regulations under which such contracts are awarded. What is important is that blacklisting is never permanent and the period of blacklisting would invariably depend upon the nature of the offence committed by the Contractor. These principles are very well settled and have been succinctly set out by the Supreme Court in the case of Kulja Industries Limited Vs. Chief Manager, Western Telecom Project Bharat Sanchar Nigam Limited and Others (2014) 14 SCC 731  ).In this regard, the Petitioner was advised to furnish its clarification / explanation, if any. There is not a whisper in the said SCN that any action is going to be taken against the Petitioner, letalone the fact that the Petitioner was being considered for being blacklisted from dealing with the 1st Respondent Corporation. As mentioned earlier, this SCN was replied to by the Petitioner by its letter dated 16th December, 2013 and sought to explain all the above alleged irregularities / discrepancies. It is in this light that, we are surprised that the impugned order dated 25th April, 2014, bans / blacklists the Petitioner from doing any business with the 1st Respondent Corporation for a period of three years from the date of the blacklisting order. We find considerable force in the argument of Mr Moray that the SCN did not even indicate,mention, that the same was issued with a view to consider whether to ban / blacklist the Petitioner Company. In other words, the Petitioner was not even called upon to show cause as to why they should not be blacklisted and/or banned from dealing with the 1st Respondent.17. In this regard, it would be apposite to refer to a decision of the Supreme Court in the case of Gorkha Security Services Vs Govt. (NCT of Delhi). (2014) 9 SCC 105  )Paragraphs 21, 32 and 33 of the aforesaid decision are very instructive and clearly lay down that mentioning or even indicating the proposed action of blacklisting in the SCN is imperative so as to make the noticee understand the proposed case set up against him which he has to meet. In the absence of this, the blacklisting/banning order would be bad in law. The relevant portion of this Supreme Court decision readsThe central issue, however, pertains to the requirement of stating the action which is proposed to be taken. The fundamental purpose behind the serving ofnotice is to make the notice understand the precise case set up against him which he has to meet. This would require the statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another requirement, according to us, is the nature of action which is proposed to be taken for such a breach. That should also be stated so that the noticee is able to point out that proposed action is not warranted in the given case, even if the defaults/breaches complained of are not satisfactorily explained. When it comes to blacklisting, this requirement becomes all the more imperative, having regard to the fact that it is harshest possible action.******32. It was sought to be argued by Mr Maninder Singh, learned Additional Solicitor General appearing for the respondent, that even if it is accepted that thenotice should have contained the proposed action of blacklisting, no prejudice was caused to the appellant inasmuch as all necessary details mentioning defaults/prejudices committed by the appellant were given in thenotice and the appellant had even given its reply thereto. According to him, even if the action of blacklisting was not proposed in thenotice, the reply of the appellant would have remained the same. On this premise, the learned Additional Solicitor General has argued that there is no prejudice caused to the appellant byof the proposed action of blacklisting. He argued that unless the appellant was able to show thatof blacklisting as the proposed penalty has caused prejudice and has resulted in miscarriage of justice, the impugned action cannot be nullified. For this proposition he referred to the judgment of this Court in Haryana Financial Corpn. v. Kailash Chandra Ahuja [(2008) 9 SCC 31   : (2008) 2 SCC789] : (SCC pp. 38,4, paras 21, 31, 3644).21. From the ratio laid down in B. Karunakar [ECIL v. B. Karunakar, (1993) 4 SCC 727   : 1993 SCC1184 : (1993) 25 ATC 704] it is explicitly clear that the doctrine of natural justice requires supply of a copy of the inquiry officers report to the delinquent if such inquiry officer is other than the disciplinary authority. It is also clear thatof report of the inquiry officer is in the breach of natural justice. But it is equally clear that failure to supply a report of the inquiry officer to the delinquent employee would not ipso facto result in the proceedings being declared null and void and the order of punishment non est and ineffective. It is for the delinquent employee to plead and prove thatof such report had caused prejudice and resulted in miscarriage of justice. If he is unable to satisfy the court on that point, the order of punishment cannot automatically be set aside.***31. At the same time, however, effect of violation of the rule of audi alteram partem has to be considered. Even if hearing is not afforded to the person who is sought to be affected or penalised, can it not be argued thatwould have served no purpose orcould not have made difference orperson could not have offered any defence whatsoever. In this connection, it is interesting to note that under the English law, it was held few years before thatwith principles of natural justice would make the order null and void and no further inquiry was necessary.***36. The recent trend, however, is ofEven in those cases where procedural requirements have not been complied with, the action has not been held ipso facto illegal, unlawful or void unless it is shown thathad prejudicially affected the applicant.***44. From the aforesaid decisions, it is clear that though supply of report of the inquiry officer is part and parcel of natural justice and must be furnished to the delinquent employee, failure to do so would not automatically result in quashing or setting aside of the order or the order being declared null and void. For that, the delinquent employee has to showUnless he is able to show thatof report of the inquiry officer has resulted in prejudice or miscarriage of justice, an order of punishment cannot be held to be vitiated. And whether prejudice had been caused to the delinquent employee depends upon the facts and circumstances of each case and no rule of universal application can be laid down.(emphasis in original)33. When we apply the ratio of the aforesaid judgment to the facts of the present case, it becomes difficult to accept the argument of the learned Additional Solicitor General. In the first instance, we may point out that no such case was set up by the respondents that by omitting to state the proposed action of blacklisting the appellant in thenotice, has not caused any prejudice to the appellant. Moreover, had the action of blacklisting being specifically proposed in thenotice, the appellant could have mentioned as to why such extreme penalty is not justified. It could have come out with extenuating circumstances defending such an action even if the defaults were there and the Department was not satisfied with the explanation qua the defaults. It could have even pleaded with the Department not to blacklist the appellant or do it for a lesser period in case the Department still wanted to blacklist the appellant. Therefore, it is not at all acceptable thatof proposed blacklisting in thenotice has not caused any prejudice to the appellant. This apart, the extreme nature of such a harsh penalty like blacklisting with severe consequences, would itself amount to causing prejudice to the appellant.18. In view of this authoritative pronouncement of the Supreme Court in the case of Gorkha Security Services (2014) 9 SCC 105  ), we would be justified in setting aside the impugned banning order dated 25th April, 2014 on this ground alone.19. Even otherwise, on carefully going through the facts of the present case and more particularly the SCN and the banning order passed pursuant thereto, what we find is that the disputes in the present case are predominantly of a contractual nature. The SCN does not even allege that there is any fraud or misrepresentation done by the Petitioner or that he is a habitual offender. Furthermore, this SCN has been issued almost 2 d years after completion of the contract and even though a completion certificate was issued to the Petitioner by Respondent No.1. Even the operative part of the banning order (and which is reproduced by us earlier), also clearly indicates that the disputes between the parties was of a contractual nature and there were no serious allegations against the Petitioner. The only allegation made against the Petitioner was that the Petitioner had manipulated manpower deployment details and submitted improper and erroneous documents for the purpose of inflating payment of the painting work. On what basis this finding has been arrived at is completely silent in the banning order. Further, though the banning order states that the 1st Respondent having given an impartial and prudent consideration to the facts, is coming to the conclusions that it did, is completely silent as to who was the Officer who had given this impartial, prudent and careful consideration. It is also an admitted fact that no inquiry report was ever served upon the Petitioner pursuant to the investigation carried out by the Inquiry Officer (A. K. Srivastava). What can be gathered from the facts is that there appears to be a dispute with reference to two invoices, namely, invoice Nos. 34 and 43. It was the case of the 1st Respondent that double payment / over payment had been made with reference to these invoices and these monies were to be recovered from the Petitioner. This was in fact done by the 1st Respondent by invoking the two bank guarantees referred to earlier. Looking to all these facts, and applying the principles on which a blacklisting/banning order can be passed and succinctly set out by the Supreme Court in the case of Kulja Industries Limited (2014) 14 SCC 731  ), we do not think that in the facts and circumstances of the present case, the order of blacklisting (dated 25th April, 2014) was at all justified. In fact, we find considerable force in the argument of Mr Moray that the aforesaid action is taken only with a view to ensure that the Petitioner is kept out of the bidding process and could not be awarded the subsequent tender No.Even on the principle of proportionality, we find that the banning order cannot be continued any further. The impugned banning order was passed on 25th April, 2014 and has continued till date which is for a period of more than 2 d years. Even if we were to assume that the allegations in the blacklisting order (dated 25th April, 2014) as the gospel truth, the Petitioner, having suffered the banning order for a period of 2 d years (out of the total period of three years) has to go.