M/S. DAFFODILLS PHARMACEUTICALS & ANR.V. STATE OF U.P. & ANR. versus STATE OF U.P. & ANR on 13 December 2019

1. Leave granted. With consent, all counsel who appeared wereheard.

2. The appellant (hereafter “Daffodills”), a pharmaceuticalsupplier, is aggrieved by a decision of the Allahabad High Court, rejectingits challenge to an order (dated 21.08.2015) issued by the PrincipalSecretary, Government of U.P. to its Medical and Health Department,directing it to stop local purchase from the appellant. Daffodills hadparticipated in a tender process, in which the state called for bids frominterested parties, willing to supply various categories of pharmaceuticalproducts. The successful bidder was required to supply medicines tovarious hospitals, under the control of the Medical and Health Department, G

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AU.P. for one year. Daffodills was one amongst 56 bidders; its bid wasacceptable to the respondent, i.e. State of U.P.

3. Daffodills was asked to match its previous bid to the TamilNadu Service Corporation Ltd. for the year 2015-16, at approved L1rates, on or before, 29.05.2015 in respect of 14 specified drugs. At theBtime of bid submission, every tenderer/bidder had to furnish a declarationto the following effect:

“Firms should give an affidavit that there is no Court Case/Vigilance Case/CBI Case pending against the firm. All thedocuments given in the tender are true. If found false/fakeCthe person/firms will have to be accepted by the firm. (Courtcase means “Criminal Case” against firm/board of Director/Directors/principal stock holder as per relevant law)”.

It is not disputed that Daffodills furnished the required declarationin terms of the tender.D

4. While so, on 21.08.2015, the impugned letter/notice was issuedby the Principal Secretary to the Government of U.P. stating that a firstinformation report (FIR) had been lodged against Daffodills alleging thatit had committed offences, and that the Central Bureau of Investigation(CBI) was inquiring into the issue. Accordingly, the offices underEDepartment of Health was directed to desist and stop all procurementsfrom the appellant, i.e. Daffodills under the following terms:

“I am directed to say in the described situation that no morelocal purchase is to be done till pre order of the government,from the above said firms which are under the investigationFof CBI in the NRHM Case, by the hospitals at the rate ofcontract of DGS&D/ESIC and Tamil Nadu Medical ServicesCorporation. If medicine is purchased by any hospital in-charge from these firms without approval of the governmentthen strict action would be taken as per rules against him.”

5. Complaining of arbitrariness on various grounds, (including thatGthe impugned direction not to procure or purchase medicines issuedagainst it, was on a mistaken assumption that a criminal case was pendingagainst it), Daffodills submitted that the criminal case was filed againstone Mr. Surender Chaudhary, an erstwhile Director, who had ceased tohave any connection with it (i.e. Daffodills) from 22.02.2012. Besides,Hit was argued that the decision not to procure, amounted to blacklisting and that it was issued without notice or pre-decisional hearing and wasconsequently liable to be set aside.

6. In the impugned order, the High Court recalled a previousdirection in other proceedings, i.e. Writ Petition No. 3611 (MB)/ 2011where it had enquired in regard to the execution and implementation ofthe National Rural Health Mission in regard to utilization of funds releasedby the Government of India. The impugned order states that in complianceof that order, CBI registered a case for preliminary inquiry and afterconcluding the investigation filed a charge-sheet in the competent courtagainst Surender Chaudhary, the then Director of Daffodils and otherco-accused.

7. After noticing Daffodil’s contention that Surender Chaudharyceased to be its Director and also that it was not given opportunity ofhearing before the passing of the order, the High Court observed that inmatters of contractual disputes relating to policy decisions, the scope ofjurisdiction under Article 226 is limited and therefore, it could not beassumed that the action of the State Government was unreasonable orcontrary to public interest. Dealing with the complaint of breach ofprinciples of natural justice, the High Court was of the opinion that suchprinciples cannot be placed under a straight-jacket formula andconsequently, Daffodills’ failure to comply with express terms of thecontract and its breach of the terms resulted in the State resorting torecalling its business through various directions to State Agencies. TheHigh Court, therefore, concluded as follows:

“32. It is clear that when there is a failure on the part of thecontractor to comply with the express terms of the contractand/or to commit breach of the said terms resulting into failureto commence/execute the work or supply the items as perspecification as stipulated in the agreement or giving theperformance that does not meet the statutory requirements ofthe contract or the action of the petitioner is reported againstthe provisions and against the interest of the State, theDepartment has a right to regulate its business through variousdirections to State Agencies in which the petitioner has noright to interfere.

8. It is argued on behalf of Daffodills that the impugned decisionis erroneous because the High Court overlooked a salient aspect, i.e.

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ASurender Chaudhary has resigned as Director, way back in 2012.Therefore, his being implicated in the criminal case could not have resultedin an adverse impact on the business of Daffodills, i.e. the appellant. Itwas argued furthermore that besides an unwarranted and arbitrary actionagainst the company on account of the acts and omissions of its erstwhileDirector, the High Court committed an error in overlooking bindingBdecisions of this Court (including Rastriya Ispat Nigam v. Verma (2006)7 SCC 275 and Kalja Industries v. Western Telecom (2014) 14 SCC731), which clearly held that before proposing to pass a blacklisting ordebarring orders, the parties had to be given hearing followed by anappropriate reasoned order.C9. It was argued on behalf of the State that the order made by itdirecting the officials of the Health Department to discontinueprocurement, does not amount to a debarring order. It was urged thatSurender Chaudhary was acting in the capacity of Director of Daffodills,for which he was charged of various offences by the CBI. These involvedDfictitious accounts of supply to various individuals and persons in orderto obtain procurement orders from the State. The concerned clause 14clearly stated that a court case means “criminal case” against the firm,Board of Directors or individual Directors. Therefore, the involvementof Surender Chaudhary was close, who was none other than the bloodrelative of the existing director, the appellant’s contention that the actsEof omission and commission did not in any manner affect it, is not sound.Learned counsel submitted that having regard to these facts, the ordermade by the Principal Secretary (on 21.08.2015) was only a direction tonot procure medicines locally from the appellant; it could not becharacterized as a debarring or blacklisting order. It was pointed out that Fthe appellant had filed a suit in 2014, seeking a direction not to finalizethe tender for which it had bid; furthermore, the order dated 21.08.2015was made pursuant to the directions of the court. Consequently, theappellant could have no grievance against it.

10. Daffodills had bid for the contract, (as is evident from theGfactual narration), to supply various categories of medicines to the HealthDepartment of the State of U.P. One of the terms of the tender conditionsrequired each bidder to declare that no criminal case was pending againstit. The appellant, Daffodills, had approached the Allahabad High Court,complaining of arbitrariness on account of the State’s decision to rejectits bid, by filing a previous Writ Petition No. 35253/ 2015. This wasHdismissed.

11. The Allahabad High Court held that in the facts andcircumstances of the case there was no illegality in exclusion of thepetitioner, i.e. Daffodills from the tender for supply of medicines and infact, debarring procurement from Daffodills was made after the orderof the Allahabad High Court dismissing the Writ Petition, challenging therejection of Daffodil’s tender.

12. Although in the proceedings, it appears that the suit was filedby Daffodills at some stage against the finalization of tender (issued in2014) it is not clear whether the suit was withdrawn, in the wake of thefiling and dismissal of its writ petition in 2015. What is clear, though fromthe narrative is that before the order of 21.08.2015 was made, no show-cause notice or opportunity was granted to the appellant to representagainst the proposed action.

13. Although, State of U.P. has argued that the impugned orderrequiring that no procurement ought to be made from Daffodills, is neithera blacklisting nor a debarring order, in our opinion, in fact and in reality,that order is nothing but an order or a directive, debarring and preventingthe State of U.P. from local purchase of medicines from Daffodills foran indefinite duration. Unlike a “normal” blacklisting order which has afinite life span (of three or maximum five years), the indefinite directive(which appears to be co-terminus with the lifetime of the criminal case)is facially far more disproportionate than a blacklisting order. Even as ondate, it is not clear whether formal charges have been framed againstthe accused i.e. Surender Chaudhary.

14. The decisions in Erusian Equipments and Chemicals Ltd. v.State of West Bengal[1]and Raghunath Thakur v. State of Bihar &Ors[2] as well as later decisions[3] have now clarified that before anyexecutive decision maker proposes a drastic adverse action, such as adebarring or blacklisting order, it is necessary that opportunity of hearingand representation against the proposed action is given to the party likelyto be affected. This has been stated in unequivocal terms in RaghunathThakur (supra) as follows:

1 1975 (1) SCC 70

2 1989 (1) SCC 229

3 Southern Painters v. Fertilizers & Chemicals Travancore Ltd., 1994 Supp (2) SCC699; Grosons Pharmaceuticals (P) Ltd. v. State of U.P., (2001) 8 SCC 604; B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. (2006) 11 SCC 548

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A“ 20. Blacklisting has the effect of preventing a person fromthe privilege and advantage of entering into lawfulrelationship with the Government for purposes of gains. Thefact that a disability is created by the order of blacklistingindicates that the relevant authority is to have an objectivesatisfaction. Fundamentals of fair play require that the personBconcerned should be given an opportunity to represent hiscase before he is put on the blacklist.”

In Southern Painters (supra) the grievance was with respect tounilateral deletion of the petitioners’ name from the list of approvedcontractors, maintained by the public sector agency. This court held thatCsuch an action was arbitrary:

“The deletion of the appellant’s name from the list of approvedcontractors on the ground that there were some vigilancereport against it, could only be done consistent with and afterdue compliance with the principles of natural justice. ThatDnot having been done, it requires to be held that withholdingof the tender form from the appellant was not justified. In ouropinion, the High Court was not justified in dismissing thewrit petition.”

15. In the present case, even if one assumes that SurenderEChaudhary, the accused in the pending criminal case was involved andhad sought to indulge in objectionable activities, that ipso facto couldnot have resulted in unilateral action of the kind which the State resortedto- against Daffodils, which was never granted any opportunity of hearingor a chance to represent against the impugned order. If there is oneFconstant lodestar that lights the judicial horizon in this country, it is this:that no one can be inflicted with an adverse order, without being affordeda minimum opportunity of hearing, and prior intimation of such a move.This principle is too well entrenched in the legal ethos of this country tobe ignored, as the state did, in this case.

G16. The High Court, in the opinion of this court, fell into error inholding that in matters of award of public contracts, the scope of inquiryin judicial review is limited. Granted, such jurisdiction is extremelycircumscribed; no doubt the court had refused to grant relief to Daffodilsagainst its plea of wrongful rejection of its tender. However, what theimpugned judgment clearly overlooks is that the action of the state, notH

to procure indefinitely, on an assumption of complicity by Daffodils,was in flagrant violation of principles of natural justice.

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17. Normally, this court would have quashed the Government ofU.P.’s decision, and left it to grant a hearing to Daffodils, before takingany action. However, given that the impugned order of debarring (i.e.directive not to procure locally from Daffodills) was made over 4 yearsBand 3 months ago, this court is of the opinion that it would be in theoverall interest of justice that appropriate relief is granted. Accordingly,the said order of the Principal Secretary, Government of U.P. directingall concerned departments to desist from resorting to local purchasefrom the appellant is hereby quashed. The impugned judgment of theCHigh Court is hereby set aside. The appeal is allowed in the above terms.No costs.

Ankit Gyan

Appeal allowed.

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