By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

In its June 2013 decision in Israel Military Industries Ltd. v. Union of India, the High Court of Delhi upheld the debarment of an Israeli government-owned arms company due to bribery allegations that resulted in the rescission of a contract award and a ten-year ban from future contracts. The arms company, Israel Military Industries Ltd. (referred to in the decision as IMI), challenged these decisions, arguing that they were made without due regard to natural justice and its right to respond to the allegations.

As the High Court of Delhi summarized, India’s Central Bureau of Investigation claimed that the head of India’s Ordinance Factory Board had accepted bribes from a third party in exchange for awarding six arms contracts, including the IMI contract, and that this resulted in freezing the contract in question:

It appears that while, IMI was preparing itself to execute the BMCS Nalanda project, the Central Bureau of Investigation (in short CBI) had received intelligence inputs, pursuant to which investigations were commenced against the then Director General of OFB, one Shri Sudipta Ghosh and his associates. This had resulted in a FIR being: RC No. 0102009A019 dated 17.05.2009, being registered against Shri Sudipta Ghosh, Shri Aashish Ghosh, Shri Pradeep Rana and others. In view of this development, respondent no. 1, through Ministry of Defence, issued an order on 01.06.2009, to put contracts dealing with defence acquisitions entered into on behalf of the Government of India with foreign suppliers, including the contract in issue, on hold.
IMI, on becoming aware of this development, vide communication dated 18.06.2009 respondent no.1 protested the “on hold” directive being applied to the contract in issue, as it claimed that it had always acted in strict compliance with the Indian laws. 10. Respondent no. 1, by a return communication dated 21.07.2009, formally informed IMI that the CBI had on 17.05.2009, registered a FIR against IMI and other suppliers; which alleged payment of illegal gratification to secure supply orders from OFB. IMI, was informed that, the FIR specifically mentioned that someone who allegedly acted as a middle man had agreed to pay a bribe to the then Director General of Ordinance Factory and Chairman of OFB, on its behalf, and, therefore, procurement in respect of the contract in issue and six other contracts, (in respect of six other suppliers) referred to in the FIR, had been put on hold.

The High Court of Delhi summarized the case law principles applicable to the debarment of government contractors, as established in the decision of the Supreme Court of India in Erusian Equipment & Chemicals Ltd. v. State of West Bengal, which confirmed that the principles of natural justice applied to debarment decisions due to the significant impact of those decisions on government contractors:

The Supreme Court allowed the two writ petitions and dismissed the appeal of the Union of India. The Supreme Court, briefly, observed that while the State has the liberty to enter into a contract with any person it chooses to and that, no person has a fundamental right to insist that the government must enter into a contract with it, a person though has the right to claim equal treatment in law. The court went on to observe: Blacklisting entails civil consequences. It casts a slur on the reputation of a person. Internal instructions, which seek to exclude a person from consideration, also falls within the ambit of blacklisting. It was, however, observed that blacklisting could be ordered: where a person is convicted by a court of law, or if security considerations, so warrant, or in case where there is a “strong justification” that the person involved is guilty of malpractices, such as, bribery, corruption, fraud etc. 29.2 More significantly, qua the issue of application of principles of natural justice, the court made the following observations in paragraph 19 and 20 of the judgment, which for the sake of convenience are extracted hereinbelow:
“…..19. 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. A body may be under a duty to give fair consideration to the facts and to consider the representations but not to disclose to those persons details of information in its possession. Sometimes duty to act fairly can also be sustained without providing opportunity for an oral hearing. It will depend upon the nature of the interest to be affected, the circumstances in which a power is exercised and the nature of sanctions involved therein. 20. Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. 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…..”

The High Court of Delhi noted that the Supreme Court of India required the government to follow due process in its debarment decisions. The High Court of Delhi then cited the Supreme Court of India’s decision in Joseph Vilangandan v. The Executive Engineer, (PWD), Ernakulam & Ors. as authority for requiring government institutions to provide clear notice to suppliers, as part of that due process, before making a debarment decision. The High Court of Delhi also cited the Supreme Court of India’s decision in Patel Engineering Ltd. v. UOI & Anr., recognizing that the prior notice requirements did not automatically entitle suppliers to a live hearing and that due process duties restricted the government to setting ban time limits proportionate to the suppliers’ transgressions:

The High Court of Delhi then detailed the five natural justice principles applicable to government debarment decisions:
The broad principles which may be deduced from the judgments referred to above are as follows:
(i) The State is at liberty to decide as to whether or not it wishes to enter into a contract, like any other private entity. No person has any fundamental right to insist that the Government must enter into a contract with it, the right that a person can enforce qua a Government is the right of equal treatment in law. Therefore, the State, cannot decide the deal or trade with one person or entity or exclude the others, without good reasons.
(ii) Blacklisting, which takes several forms including internal instructions for exclusion of entities or persons, entails civil consequences. It casts a slur on the reputation of the person/entity, which is blacklisted.
(iii) The State can blacklist a person/entity which is convicted by a court of law or on account of security consideration or even where there is a “strong justification”, that a person is guilty of malpractices, such as, bribery, corruption, fraud etc.
(iv) Where a State decides to blacklist a person/entity, it is duty bound to act fairly; meaning thereby to observe “certain aspects of the rules of natural justice”. In this behalf, the body, which takes the decision, as to whether, or not a person or entity should be excluded, is duty bound to give “fair consideration” to the facts and to consider the representations made in that regard. In this exercise, the body vested with the right to decide is not bound to disclose the details of information in its possession (See paragraph 19 of Erusian Equipment and Chemicals).
(v) Duty to act fairly would entail that a person should be given notice, and a right or an opportunity to represent his case before he is blacklisted. (see Erusian Equipment and Chemicals, Raghunath Thakur vs State of Bihar and Joseph Vilangandan’s case). Duty to act fairly does not entail that, in all circumstances, an oral hearing should be accorded [see para 19 of the Erusian Equipment and Chemicals, paragraph 38 at page 268 of Patel Engineering and paragraph 5 at page 75 of the Jesus Sales Corporation vs Union of India (1996) 4 SCC 69].

The High Court of Delhi then considered whether the challenged debarment met these due process standards and concluded that those rules were respected since the supplier was provided with notice and an opportunity to make submissions at a show cause hearing prior to the final deliberations that led to the debarment decision:

The respondents before blacklisting IMI, were duty bound to act fairly. Towards this end, admittedly, show cause notices were issued and opportunity was given to the representatives of the IMI, not only to make a written representation but also to present their case, in person, before a body whose inputs were sought by the OFB. Both, the written representation and the recommendation of the Committee were placed before the OFB. The OFB passed the impugned order after deliberating upon the same. There was, therefore, in my view, no breach of any principle of natural justice as alleged or at all.

The High Court of Delhi also considered the complainant’s assertion that the debarment decision was premature in view of the unproven bribery allegations and the related ongoing criminal proceedings. However, the Court disagreed, ruling that there was “strong justification” to support the debarment decision and further confirmed the government’s right to avoid doing business with suppliers who were implicated in a bribery scandal that was the subject of ongoing criminal proceedings. The Court also refused to rule on the merits of those bribery allegations since that would amount to conducting parallel civil proceedings into the same evidentiary issues:

In my opinion, having regard to the fact that a criminal case has been lodged by the CBI, which is underway, the extent of involvement of Pradeep Rana who is alleged to be an intermediary of IMI, will get known, only on conclusion of the trial. Therefore, at this stage, what has to be seen is that, is there enough basis for the respondents to take a decision not to continue with the contract it entered into with IMI. The decision in this behalf would be entirely that of the respondents, i.e., the State. The courts under Article 226 of the Constitution can interfere only if it is a case where there is no material at all or is a case of breach of principles of natural justice or lack of jurisdiction. The adequacy of material does not fall within the scope of consideration of the court. The State is free to take the stand that it will not engage with IMI. Surely this Court, exercising equitable jurisdiction under Article 226 of the Constitution, will not interdict this decision of the respondents and force them to continue a relationship, which it seeks to terminate. The argument that these are only allegations and none of these allegations are linked to the petitioner, in as much as it is not named as an accused, cannot be fully grappled with in the midst of a trial. The material presently available with the respondents would, to my mind, provide “strong justification” for the respondents to say that it does wish to continue to deal with the petitioner. That such a decision of the respondents results in a collateral damage to the reputation of the petitioner, is an aspect with which the petitioner will have to live with, at least till the trial is over.

The High Court of Delhi ultimately upheld the government’s debarment decision and dismissed the legal challenge.

As this case illustrates, debarment decisions remain subject to natural justice and corresponding due process duties. Public institutions should therefore establish sound debarment processes and proceed with caution when making their debarment decisions, especially when those decisions are based on unproven allegations that remain subject to ongoing legal proceedings.