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Case Number

W.P (C) 5223/2011

Advocates

Mr. Neeraj Kishan Kaul, Sr. Adv. with Mr. Sudheer Pandey, Adv.
Mr. Jatan Singh, Adv. with Mr. Kunal Kahol, Adv. along with Mr. Onkar Nath, Section Officer, DGS&D, New Delhi.

Judges

Rajiv Sahai Endlaw, J.

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Smart Summary

Judgment Summary — Rajiv Sahai Endlaw, J. (W.P.(C) 5223/2011)

Factual and Procedural Background

The petitioner is a manufacturer/supplier registered with the respondent Directorate General of Supplies & Disposals (DGS&D). The petitioner challenged two communications from the respondent dated 24 June 2011 and 27 June 2011.

The communication dated 24 June 2011 informed the petitioner that, on the basis of a prima facie view that the petitioner was guilty of an offence involving moral turpitude in relation to business dealings, the respondent had decided to short-close the rate contract with the petitioner effective from 8 August 2011.

The communication dated 27 June 2011 was a show-cause notice stating allegations of financial embezzlement, fraud and raising bills and claiming payments from the Chief Controller of Accounts fraudulently, and asked the petitioner to show cause why its registration certificate should not be cancelled for failure to abide by conditions of registration.

The petitioner submitted a reply within the 14-day period but, according to the petitioner, no hearing was held and no order was passed. The petitioner also complained that its name had been published on the DGS&D website as someone who had obtained payments fraudulently (the counsel for the respondent later informed the Court that the name had been removed).

The writ petition sought relief against these actions; the Court heard counsels finally and did not issue formal notice or call for a counter-affidavit in view of the state of controversy.

Legal Issues Presented

Whether the respondent (DGS&D) could short-close a rate contract or take steps amounting to blacklisting the petitioner on the basis of a prima facie opinion, without first giving the petitioner a hearing and passing a reasoned order.
Whether publication of the petitioner's name (as someone who obtained payments fraudulently) and the threatened short-closing constituted a stigmatic action requiring prior hearing and a reasoned order.
Whether the show-cause notice issued to the petitioner was sufficiently particularized, and whether the petitioner had been given a "reasonable opportunity" as required by the contract terms (Clause 20.1 of the DGS&D Manual).
Whether provisions in the DGS&D Manual permitting suspension of dealings pending inquiry (e.g., Clause 5.18.2) permitted the respondent to suspend or short-close the contract in the manner and at the time they proposed to do so.

Arguments of the Parties

Petitioner's Arguments

The petitioner had submitted a reply within the prescribed 14-day period to the show-cause notice, but no hearing had been granted and no order had been passed against the petitioner.
The threatened short-closing of the rate contract effective 8 August 2011 amounted to blacklisting, which could not be done without hearing the petitioner and passing a reasoned order.
The show-cause notice did not disclose the requisite particulars; accordingly, the petitioner did not know the case it had to meet.
The publication of the petitioner's name on the website as a person who had obtained payments fraudulently was stigmatic and wrongful (the petitioner's counsel noted that the name was later removed).

Respondent's Arguments

The Court should not interfere at the show-cause notice stage; reliance was placed on Special Director v. Mohd. Ghulam Ghouse, AIR 2004 SC 1467.
The respondent contended that a further communication dated 29 June 2011 had been issued providing particulars to the petitioner.
The respondent stated that the petitioner's name had been removed from the website.
The respondent initially argued that any order in pursuance of the show-cause notice would be made before 8 August 2011; subsequently, on instructions, the respondent said the investigation was still ongoing and a decision might take up to a month's time.
The respondent relied on Clause 20.1 of the General Terms and Conditions in the DGS&D Manual to contend that it was entitled to short-close the rate contract, and also pointed to Clauses 5.17.3 and 5.18.2 as authority for suspension of dealings pending inquiry.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Special Director v. Mohd. Ghulam Ghouse, AIR 2004 SC 1467	Authority for the proposition that courts should not ordinarily interfere at the show-cause notice stage.	The respondents relied on this case in arguing that the Court should not interfere at the show-cause stage. The opinion records this reliance but proceeds to consider the substance and grant interim relief to protect the petitioner pending determination.
Mekaster Trading Corporation v. Union of India, 106 (2003) DLT 573	Authority cited for the proposition that blacklisting cannot be done without giving an opportunity of hearing and passing a reasoned order.	The Court referenced this decision to support the principle that short-closing or virtual blacklisting for the same reasons as cancellation requires hearing and a reasoned order.
R.K. Machine Tools Ltd. & Anr. v. Union of India, MANU/DE/0428/2010	Authority cited for the same principle that blacklisting or similar stigmatic administrative action cannot be taken without hearing and a reasoned order.	The Court cited this decision alongside Mekaster Trading Corporation to demonstrate established jurisprudence that such consequences cannot be imposed without due opportunity and reasons.

Court's Reasoning and Analysis

The Court undertook a step-by-step analysis based only on what was presented in the record:

The Court observed that the respondent had short-closed the contract not for commercial reasons but on the basis of forming a prima facie opinion that the petitioner was guilty of an offence involving moral turpitude in relation to business dealings; such short-closing, in those circumstances, is stigmatic.
The Court held that no notice or opportunity was given to the petitioner before forming that prima facie opinion and that the show-cause notice was issued subsequently. Clause 20.1 of the DGS&D Manual requires the purchaser to give a reasonable opportunity to the contractor to represent against cancellation and provides that revocation/cancellation shall take effect "thereafter." The Court emphasized that giving a reasonable opportunity cannot be an empty exercise; it must lead to a finding and reasons based on the contractor's response.
The Court noted that the respondent's reliance on provisions permitting suspension of dealings (Clause 5.18.2) did not relieve the respondent of the obligation to state particulars supporting the prima facie view. The notice dated 24 June 2011 was "bereft of any particulars whatsoever" despite stating a prima facie case. Clause 5.18.2 requires that, if suspension is ordered pending full enquiry, the respondent should state the details on the basis of which such prima facie opinion is formed.
The Court further observed that the suspension proposed by the respondent was not immediate; it was to come into effect after nearly one and a half months. The subsequent show-cause notice also did not provide adequate particulars and only granted 14 days to respond. The Court found that if the respondent delays taking a decision, it cannot, for that reason, be entitled to suspend business prior to making a decision, especially where the investigation was not complete.
Concerning the contention that the show-cause notice was vague, the Court stated that the petitioner was entitled to take such pleas in its reply and in the hearing; the respondent could cure any deficiencies in the show-cause notice. The Court declined to monitor the ensuing proceedings but noted that if the petitioner is not given a proper opportunity later, any challenge to the show-cause notice would be maintainable along with a challenge to any order passed pursuant to it.
Balancing these considerations, the Court concluded that interim protection was appropriate to prevent stigmatic consequences (blacklisting or short-closing on the same grounds) before the respondent, after hearing, made any order finding the petitioner guilty.

Holding and Implications

HOLDING: The petition was allowed with directions restraining the respondent from taking certain actions until after a hearing and an order in pursuance of the show-cause notice.

The Court's directions (the operative effects) were:

Until the respondent, after hearing the petitioner and in pursuance of the show-cause notice, makes an order finding the petitioner guilty of the offences charged, the respondent shall not take any steps of blacklisting or steps which may have the effect of blacklisting the petitioner.
Since the short-closing was on the same grounds as contained in the show-cause notice, any short-closing shall not be given effect to until/after an order in pursuance of the show-cause notice is made.
This order does not prevent the respondents from stopping payments for supplies which are legitimately claimed by the respondents to have not been made.
Any order made against the petitioner shall not be given effect to for a period of one week from the date of communication of that order to the petitioner, to enable the petitioner to avail remedies against such order.

Implications for the parties: The direct effect is to protect the petitioner from stigmatic administrative consequences (blacklisting or short-closing) until a proper hearing is held and a reasoned order is passed. The Court left open the respondent's ability to proceed with the inquiry and to take appropriate action after affording the petitioner the required opportunity and giving reasons for any adverse finding.

The opinion does not set out any broader legal rule beyond applying established principles that stigmatic administrative actions (blacklisting/short-closing for alleged moral turpitude) require notice, hearing and reasoned orders; it confines relief to the present facts by granting interim protection.

Disposition: Petition allowed with the directions summarized above. No orders as to costs. Dasti.

Show full summary ...

Allied Engineering Works Petitioner v. Directorate General Of Supplies & Disposals & Ors. S

RAJIV SAHAI ENDLAW, J.

C.M No. 10600/2011(exemptions)

Allowed, subject to all just exceptions.

W.P(C)5223/2011

1. The petitioner, a manufacturer/supplier registered with the respondent DGS&D, is aggrieved from the communications dated 24th June, 2011 and 27 June, 2011. The respondent DGS&D vide communication dated 24 June, 2011 informed the petitioner that owing to a prima facie case of the petitioner being guilty of offence involving moral turpitude in relation to business dealings having been made out, it had decided to short close the rate contract with the petitioner after 8 August, 2011.

2. The respondent DGS&D vide notice dated 27 June, 2011 informed the petitioner that it has been reported that the petitioner has been involved in financial embezzlement, fraud and had been raising bills and claiming payments from Chief Controller of Accounts fraudulently; the petitioner was, thus, asked to show cause as to why its registration certificate should not be cancelled for the reason of failure to abide by the conditions of registration.

3. The grievance of the petitioner is that though the petitioner within the period of 14 days prescribed therefor had submitted a reply to the show cause notice but without passing any order and without holding the petitioner guilty of charge of which it has been asked to show cause, the respondent DGS&D has published the name of the petitioner on its website as a person who had obtained payments fraudulently. The senior counsel for the petitioner has contended that no hearing even has been granted to the petitioner till now. It is urged that the short closing of the rate contract w.e.f 8 August, 2011 as threatened amounts to blacklisting the petitioner; that the same cannot be done without hearing the petitioner and passing a reasoned order thereon. It is further contended that the show cause notice as given does not disclose the requisite particulars and as such the petitioner does not even know the case which the petitioner has to meet.

4. The counsel for the respondents, appearing on advance notice, has at the outset contended that this Court ought not to interfere at the show cause notice stage. Reliance in this regard is placed on The Special Director v. Mohd. Ghulam Ghouse AIR 2004 SC 1467. It is further contended that another communication dated 29 June, 2011 has been issued to the petitioner giving all the particulars. The counsel for the respondents also informs that the name of the petitioner has since been removed from the website. Qua the suspension of the Rate Contract w.e.f 8 August, 2011, it was initially argued that the order in pursuance to the show cause notice would be made before 8 August, 2011 and thus it is not a case of blacklisting without opportunity and passing order thereon. However, subsequently, on instructions, it is stated that since the investigation is still going on, it may not be possible to pass order in pursuance to the show cause notice by 8 August, 2011 and the same may take upto a month's time from now. It is further contended that the respondent DGS&D under the terms and conditions of the contract is always entitled to short close the rate contract. Reference, in this regard, is made to Clause 20.1 of the General Terms and Conditions as contained in the DGS&D Manual and which is as under:-

“20. PURCHASER'S RIGHT TO SHORTCLOSE THE RATE CONTRACT.

20.1 Since the rate contract is a standing offer and is merely a document embodying various terms of the standing offer made by the Contractor, the purchaser i.e DGS&D can legally cancel the Rate Contract at any time during the currency of the contract giving a reasonable opportunity to the contract to represent against such cancellation. The revocation/cancellation of the Rate Contract shall take effect immediately, thereafter. Any order placed by Direct Demanding Officer after the date of cancellation of the Rate Contract should not be taken up by the contractor for execution. The purchaser i.e DGS&D may, at its option negotiate with for execution. The purchaser i.e DGS&D may, at its option negotiate with the Contractor so as to bring the R/C prices in line with the Market Prices, whenever market fluctuation affects prices abnormally. If the negotiation fails, then the Rate Contract will be foreclosed and fresh Rate Contract will be concluded separately.”

5. In the aforesaid state of controversy, need is not felt to issue formal notice or to call for the counter affidavit and the counsels have been heard finally on the writ petition.

6. The respondent, in the present case, has short closed the contract not for commercial reasons but for the reason of forming a prima facie opinion of the petitioner being guilty of offence involving moral turpitude in relation to business dealings. The short closing threatened is thus stigmatic. No notice/opportunity was given to the petitioner before forming such prima facie opinion. In fact, notice to show cause, on the same grounds, is given on a subsequent date. Even otherwise, the terms and conditions of short closing require the respondent to give a reasonable opportunity to the petitioner to represent against such cancellation/short closing. Though the counsel for the respondent has sought to urge that reasonable opportunity has been given by issuance of show cause notice but admittedly no hearing has taken place till now and no order in pursuance to the cause shown has been made. Giving of a reasonable opportunity cannot be an empty exercise and has to lead to a finding giving reasons on the response/defence of the contractor. Clause 20.1 (supra) permits the respondents to short close only “thereafter” and not prior thereto. Admittedly, no order on the representation/reply of the petitioner has been made till now.

7. The senior counsel for the petitioner has also rightly contended that the short closing for the same reasons for which cancellation of registration is threatened would amount to a virtual blacklisting of the petitioner and which this Court has repeatedly held cannot be done without giving opportunity of hearing and without passing a reasoned order thereon. Reference in this regard may be made to Mekaster Trading Corporation v. Union of India 106(2003) DLT 573, R.K Machine Tools Ltd. & Anr.… v. Union Of India…. MANU/DE/0428/2010.

8. The counsel for the respondents has, thereafter, invited the attention of this Court to Clause 5.17.3 and 5.18.2 also stated to be part of the DGS&D Manual and an extract whereof has been handed over in the Court to contend that suspension of dealings pending full inquiry into the allegation can also be done. Clause 5.18.2 in this regard is as under:-

“5.18.2 GROUNDS FOR SUSPENSION OF BUSINESS DEALINGS WITH FIRMS:- Suspension of business dealings may be ordered where pending full enquiry into the allegation, it is considered not desirable that business with the firm should continue. Such an order may be passed:-

(i) If the firm is suspended to be of doubtful loyalty to India.

(ii) If the Central Bureau of Investigation or any other investigating agency recommends such a course in respect of a case under investigation and

(iii) If a prima-facie case is made out that the firm is guilty of an offence involving moral turpitude in relation to business dealings which, if established, would result in business dealings with it being banned.”

9. The senior counsel for the petitioner has contended that he has to take instructions about existence of such a provision.

10. However, even if the said provision is to be read, it does not entitle the respondent to so suspend the business dealings in all cases. The respondent in the present case, though in the notice dated 24 June, 2011 has stated that a prima facie case of the petitioner being guilty of offence involving moral turpitude in relation to business dealings was made out but the notice is otherwise bereft of any particulars whatsoever. The respondent under Clause 5.18.2 was required to at least state the details on the basis whereof such prima facie opinion had been formed. Moreover, the respondent did not suspend the business immediately. The suspension was to come into effect after nearly one and a half months of the issuance of the notice. The subsequent notice dated 27 June, 2011 to show cause also did not give any particulars/facts and gave only 14 days' time to the petitioner to respond. The scheme appears to have been that the suspension would come into effect after a decision pursuant to the show cause notice has been taken. There is still plenty of time for the respondent to so take a decision. If the respondent for its own reasons delays taking decision, the respondent cannot be held entitled to prior thereto suspend the business particularly when it appears that even the investigation is not complete.

11. However, as far as the contention of the senior counsel for the petitioner of the notice being vague is concerned, I am of the opinion that it is open to the petitioner to take all such pleas in the reply to the show cause notice and in the hearing in pursuance thereto and it is open to the respondent to make up the deficiencies, if any felt in the show cause notice. However, this Court cannot monitor proceedings pursuant to the show cause notice and if at all the show cause notice remains ineffective for the reason of the proper opportunity being not given to the petitioner, the challenge if any thereto is maintainable along with the challenge against the order, if any against the petitioner in pursuance to the said show cause notice and not at this stage.

12. The petition is therefore allowed with the directions that till the respondent in pursuance to the show cause notice and after hearing the petitioner makes an order finding the petitioner guilty of the offences with which it is charged with, the respondent shall not take any steps of blacklisting or steps which may have the effect of blacklisting the petitioner. Since short closing is on the same grounds as contained in the show cause notice, it is clarified that any short closing also shall not be given effect to till/after the order in pursuance to the show cause notice is made. It is further made clear that this order will not come in the way respondents stopping payments for the supply which are claimed to have not been made. On request, it is further directed that order if any made against the petitioner shall not be given effect to for a period of one week from the date of communication to the petitioner, to enable the petitioner to avail remedies thereagainst.

No orders as to costs.

Dasti.

Allied Engineering Works Petitioner v. Directorate General Of Supplies & Disposals & Ors. S

Judgment Summary — Rajiv Sahai Endlaw, J. (W.P.(C) 5223/2011)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Allied Engineering Works Petitioner v. Directorate General Of Supplies & Disposals & Ors. S

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