COMMERCIAL TRANSACTIONS

BLACKLISTING OF COMPANIES IN COMMERCIAL

TRANSACTIONS
(Assignment towards partial fulfillment of the assessment in the subject of Commercial
Transactions)

SUBMITTED BY:
Avantika Arun
Roll No. 1178
B.Sc. LL.B. (Hons.)
Semester III
SUBMITTED TO:
Mr. Bipin Kumar
Faculty of Law

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION
JULY-NOVEMBER 2015

ACKNOWLEDGEMENT

I would like to take this opportunity to express my sincere gratitude to my Commercial

Transactions professor, Mr. Bipin Kumar, for his constant support and guidance without
which completion of this project would not have been possible. Also, my parents, the library
staff and the National Law University, Jodhpur IT Department for equipping me with the
resources to work on this project to the best of my ability.
Lastly, my batchmates for their invaluable help and suggestions.
Avantika Arun

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................4
CRITERIA FOR BLACKLISTING...................................................................................5
RELEVANT PRECENDENTS..........................................................................................6
THE ISRAEL MILITARY INDUSTRIES CASE..............................................................8
DEBARMENT ABROAD.................................................................................................9
GOVERNMENT CONTRACTS: AN OVERVIEW.......................................................11
BLACKLISTING IN DIFFERENT SPHERES...............................................................14

INTRODUCTION

In order to accomplish the objective of this project, understanding the concept of

blacklisting is imperative. Blacks Law Dictionary defines blacklisting as a process of putting
the name of persons on a list who are to be boycotted or punished. It can also be
characterized as putting a person, group, or a company on a blacklist which contains names
of one or more individuals or one or more organizations which have been designated for
special discrimination or boycott or which are under suspicion, disfavour, censure etc. The
Government departments make regular purchases. They maintain a list of official suppliers
after takings into account the financial standard of the firm, their capacity and their past
performance. The removal from this list curated by the State is done for various reasons. The
grounds on which blacklisting may be ordered are if the proprietor of the firm is convicted by
court of law or security considerations justify the same or if there is strong evidence
supporting the fact that the proprietor or employee of the firm, has been guilty of
malpractices such as bribery, corruption, fraud or if the firm continuously refuses to return
Government dues or if the firm employs a Government servant, dismissed or removed on
account of corruption in a position where he could corrupt other Government servants.
Blacklisting is the exclusion of a member of the public/company from dealing with the State
in commercial transactions. It has the effect of preventing him from purchasing and doing a
lawful trade in the goods by discriminating against him in favour of other people. The State
can impose reasonable conditions regarding rejection and acceptance of bids or qualifications
of bidders. Blacklisting has been stated as the systematic compilation of information on
individual trade unionists and their use by employers and recruiters to impose certain
restrictions on those individuals because of their trade union membership or because of their
involvement in trade union activity. Blacklisting has the effect of denying a person/entity the
privilege and advantage of entering into a 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. This project seeks to illustrate
in detail the issue related to blacklisting by the Indian government and will endeavour to
delineate upon all the related topics thereto.

CRITERIA FOR BLACKLISTING

The grounds on which blacklisting may be done are as follows :1. If the proprietor of the firm, employees, partner or representative is condemned by a
court of law, following which prosecution by a special project established under the
normal legal procedure is done involving normal turpitude in relation to business
dealings;
2. If security considerations, inclusive of loyalty to the State so warranty;
3. If there is strong reason to believe that the proprietor/employee/representative has
been involved in malpractices such as bribery, corruption, fraud, interpolation, tender
substitution, etcetera;
4. If the firm employs a Government servant who was previously dismissed on grounds
of corruption or was in a position to corrupt other Government officials or other
individuals to commit or abet the commission of the same offence. Before blacklisting
in such an instance, a Senior Officer of the Administrative Industry is expected to
notify the firm about the character of such an offender, without indication of the
consequences his conduct may entail.
The facts of blacklisting should not be communicated to the firm and the issue of such
order should involve immediate cessation of all future business with the firm by all
departments under the Government of India while intimating the issue of such orders to
other Ministries. The authority issuing the blacklisting orders shall specify.
i) The reasons due to which blacklisting has been decided upon;
ii) The period (whether indefinite or specific) for which they will be effective, and
iii) The names of all the partners of the firm, and its allied concerns to whom also such
orders would apply.
Care should be taken to ensure that the same company does not engage in any
transactions with the Government under an alias. Having said so, even the power to
blacklist a company is subject to some limitations. As already stated, the objective is to
ascertain the limitations imposed on the government when they exercise the power of
blacklisting a company. This can be accomplished after reviewing a number of cases in
this regard, and thereby arriving at a conclusion, a common principle emanating from the
cases. This principle will be dissected so as to ascertain any limitations, if identified.

RELEVANT PRECENDENTS
In the Punnen v. State of Kerala1 case, the petitioner was a blacklisted Government contractor
who demanded an explanation for his name being enlisted. The judge came to a conclusion
that the Government, like a private individual, has got the right to enter or not to enter into a
contract with a particular person. In case, there is a law regulating the conduct of business by
the Government, such law might imply a right in others to insist on their transactions with the
Government being dealt with in accordance with that law, and consequently a right to
complain against a breach of the law. But when a person is excluded or rejected from entering
into business with the Government in accordance with the law, there is no question of an
invasion of his civil rights and the rules of natural justice or Article 14 cannot, therefore, be
invoked. Justice Thomas of the Kerala High Court expressed his dissent, saying that No
democratic Government should with impunity pass a proceeding which will have civil
consequences to a citizen without notice and an opportunity of being heard. He may not have
an absolute right of making a contract with Government, but he has undoubtedly the right not
to be discriminated against without a relevant reason.
The Erusian Equipment2 case was one of the most important in this regard, which dealt with
whether a person put on the black list by the State Government was entitled to be heard
before his/her name was put on the black list. In passing an order of blacklisting the
Government department acts under what is described as a standardized Code. This code
serves the purpose of internal instruction. Government departments make regular purchases.
They maintain a list of approved suppliers after taking into account the financial standard of
the firm, their capacity and their past performance. The removal from the list is made for
various reasons. The grounds on which blacklisting may be ordered are if the proprietor of
the firm is convicted by court of law or security considerations so warrant or if there is strong
justification for believing that the proprietor or employee of the firm, has been guilty of
malpractices such as bribery, corruption, fraud, or if the firm continuously refuses to return
Government dues or if the firm employs a Government servant, dismissed or removed on
account of corruption in a position where he could corrupt Government servant. 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
1 V. Punnen Thomas v. State of Kerala, AIR 1969 Ker 81.
2 Erusian Equipment & Chemicals Ltd. v. State of West Bengal and Anr., AIR 1975 SC 266.

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. It was held that the
fundamentals of fair play demand that the person concerned should be given an equal
opportunity to represent his/her case before being put on the black list.
A blacklisting order is not contract-specific and involves civil consequences. Blacklisting
creates; a barrier between the persons blacklisted and the Government in the matter of
transactions. The blacklists are "instruments of coercion".
The Punnen Thomas case was however, overruled by Southern Painters v. Travancore
Fertilizers3, wherein the appellant firm's name was deleted from a list of qualified contractors
on account of some vigilance report against it. The reasons for the exclusion were not
disclosed to the appellants before deletion. Here, the Erusian judgement was again relied
upon and it was held that any any order having civil consequences should be passed only
after following the principles of natural justice. It has to be realised that blacklisting any
person in respect of business ventures can have civil consequences for the future business of
the person concerned in any event. Even if the rules do not expressly state the same, it is an
elementary principle of natural justice that parties affected by any order of blacklisting should
have the right of being heard and making representations against the order.
In a more contemporary judgment of the Supreme Court in the case of Patel Engineering
Ltd.4, The petitioner went back on its contract for six-laning a section of National Highway
No. 6, running through the States of West Bengal and Orissa, which resulted in the National
Highway Authority of India issuing to the petitioner, a notice for debarment for a period of
five years, from participating or bidding for future projects undertaken by them, and forfeited
their security amount.
The petitioners contention was that:
(i)

There was no power vested in NHAI as per the terms of the contract to blacklist
the petitioner except on the grounds of fraud and corrupt practices, the decision

(ii)

not to enter into a contract could not fall under this category;
The punishment accorded to the petitioner was inappropriate, in as much as, it

(iii)

would affect future business of the petitioner; and

Lastly, no oral hearing was accorded to the petitioner.

The Supreme Court arrived at the decision that inherent in the power to enter into a
contract was the power not to enter into a contract, which is akin to blacklisting.
3 M/s. Southern Painters v. Fertilizers & Chemicals Travancore Ltd. and Anr., AIR 1994 SC 1277.
4 Patel Engineering Limited vs. Union of India and Anr., AIR 2012 SC 2342.

Simply put, specific power in the contract was no requisite for NHAI to come to the
conclusion, which it did, which resulted in the petitioner being blacklisted.

THE ISRAEL MILITARY INDUSTRIES CASE

FACTS
A writ petition was filed by Israel Military Industries Ltd. 5 (IMI), a company established
under the laws of Israel, and also the lowest bidder in the tender to set up a plant for
manufacturing of By-modular Charge Systems in the State of Bihar. By virtue of this
development, it was expected to enter into a contract with Ordinance Factory Board (OFB).
Consequently, OFB issued an order debarring IMI from further dealings with it for a term of
10 years. In other words, OFB blacklisted IMI, in response to which the latter moved the
court with a petition filed under Article 226 of the Constitution of India.
While IMI was in preparation to execute the project, the Central Bureau of Investigation
(CBI) on receiving some intelligence inputs, initiated investigation against the OFB Director
General, and subsequently filed an FIR against him. In the light of this development, the
Ministry of Defence withheld all government contracts with foreign companies and added
IMIs name to the blacklist on account of payment of illegal gratification.
PRINCIPLES
(i)

The State has the discretion to decide as to whether or not it wishes to enter into a
contract, like any other private entity. No individual/entity has any fundamental
right to coax the Government to enter into a contract with it, the right that a person
can enforce with respect to 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 a valid reason.

5 Israel Military Industries Ltd. v. Union of India & Anr, 2013 VIII AD (Delhi) 141.

(ii)

Blacklisting, which takes several forms including internal instructions for

exclusion of entities or persons, entails civil consequences. It casts a slur on the

(iii)

reputation of the person/entity, which is blacklisted.

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",

(iv)

that a person is guilty of malpractices, such as, bribery, corruption, fraud etc.
Where a State decides to blacklist a person/entity, it is obligatory on its part 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

(v)

in its possession.
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. Duty to act fairly
does not entail that, in all circumstances, he is entitled to an oral hearing.

DEBARMENT ABROAD
The legal position overseeing blacklisting of suppliers in USA and UK is no different. In
England, Wales and Northern Ireland, there are statutory provisions that make operators
ineligible on several grounds including fraud, fraudulent trading or conspiracy to defraud,
bribery etc. Similarly, in USA instead of using the expression 'blacklisting', the term
"debarring" is used in statutes and by the courts. The Federal Government considers
'suspension and debarment' as a powerful tool for protecting taxpayer resources and
maintaining integrity of the processes for federal acquisitions. Comprehensive plans are,
therefore, issued by the government for protecting public interest from those contractors and
recipients who are non-responsible, lack business integrity or engage in dishonest or illegal
conduct or are otherwise unable to perform in a satisfactory manner. These guidelines
prescribe the following among other grounds for debarment, enlisted in the Kulja Industries
Ltd. v. Chief General Manager W.T. Proj, BSNL and Ors.6 case :
A. Conviction of or civil judgment for -6 AIR 2014 SC 9.

(1) Commission of fraud or a criminal offense in connection with obtaining, attempting to

obtain, or performing a public or private agreement or transaction;
(2) Violation of Federal or State antitrust statutes, including those proscribing price fixing
between competitors, allocation of customers between competitors, and bid rigging;
(3) Commission of embezzlement, theft, forgery, bribery, falsification or destruction of
records, making false statements, tax evasion, receiving stolen property, making false claims,
or obstruction of justice; or
(4) Commission of any other offense indicating a lack of business integrity or business
honesty that seriously and directly affects your present responsibility;
B. Violation of the terms of a public agreement or transaction so serious as to affect the
integrity of an agency program, such as(1) A willful failure to perform in accordance with the terms of one or more public
agreements or transactions;
(2) A history of failure to perform or of unsatisfactory performance of one or more public
agreements or transactions; or
(3) A willful violation of a statutory or regulatory provision or requirement applicable to a
public agreement or transaction;
The factors that may influence the debarring official's decision which include the following:
(a) The actual or potential harm or impact that results or may result from the wrongdoing.
(b) The frequency of incidents and/or duration of the wrongdoing.
(c) Whether there is a pattern or prior history of wrongdoing.
(d) Whether contractor has been excluded or disqualified by an agency of the Federal
Government or have not been allowed to participate in State or local contracts or assistance
agreements on a basis of conduct similar to one or more of the causes for debarment specified
in this part.
(e) Whether and to what extent did the contractor plan, initiate or carry out the wrongdoing.
(f) Whether the contractor has accepted responsibility for the wrongdoing and recognized the
seriousness of the misconduct.
(g) Whether the contractor has paid or agreed to pay all criminal, civil and administrative
liabilities for the improper activity, including any investigative or administrative costs
incurred by the government, and have made or agreed to make full restitution.

(h) Whether contractor has cooperated fully with the government agencies during the
investigation and any court or administrative action.
(i) Whether the wrongdoing was pervasive within the contractor's organization.
(j) The kind of positions held by the individuals involved in the wrongdoing.
(k) Whether the contractor has taken appropriate corrective action or remedial measures, such
as establishing ethics training and implementing programs to prevent recurrence.
(l) Whether the contractor fully investigated the circumstances surrounding the cause for
debarment and, if so, made the result of the investigation available to the debarring official.

GOVERNMENT CONTRACTS: AN OVERVIEW

In the modern State, whatever be the form of government, the individual is affected in his
everyday life and in the exercise of his civil rights by acts of the State and its officials in
various domains and in several ways. Some of these acts are done by the State in its
sovereign capacity while others are done by the State in trading and other roles in the same
manner as a private individual does.
Hence, the subject of government contracts has assumed great importance in the modern
times. A contract is an agreement enforceable by law, which offers personal rights, and
imposes personal obligations, which the law protects and enforces against the parties to the
agreement. The general law of contract is an agreement which creates legal rights and
obligations, which are purely personal in their nature and are only enforceable by action
against the party in default. Section 2(h) of the Indian Contract Act, 1872 defines a contract
as "An agreement enforceable by law". The word "agreement" has been defined in Section
2(e) of the Act as "every promise and every set of promises, forming consideration for each
other." A contract to which The Central Government or a State Government is a party is
called a "Government Contract". Such contracts have also been accorded Constitutional
recognition. Under Article 298, the Constitution of India clearly lays down that the executive
power of the Union and of each state includes within its ambit "the carrying on of any trade
or business and to the acquisition, holding and disposal of property and the making of
contracts for any purpose." In India, Government contracts and the related aspects are
governed by Article 299 of the Constitution of India which makes it mandatory for the
government to make a contract in writing and generally forbids implied contracts. Further,
a contract in contravention to the said article is void.

It is to be noted that before 1979, the Government enjoyed unfettered discretion in the matter
of awarding contracts to whomsoever it wished. The courts followed the general principle
that the government was free to enter into a contract with anyone it liked. Hence, when one
person was chosen as opposed to the others, the aggrieved party could not claim the
protection of Article 14, which guarantees equality to all persons, because the choice of the
person to fulfil a particular contract was left to the government.
The judicial attitude to Article 299 has sought to balance two motivations:

Primarily, to protect the Government from unauthorised contracts; and

To shield the interests of unsuspecting and unwary parties who enter into contracts
with government officials without fulfilling all the formalities laid down in the
Constitution.

As per the language of Article 299(1), a contract can be entered into on behalf of the
Government by a person aurhorised for the purpose by the President, or the Governor, as the
case may be. The authority to carry out the contract on behalf of the government may be
granted by way of rules, formal notifications, or special orders; such authority may also be
given in respect of a particular contract or contracts by the President/Governor to an officer
other than the one notified under the rules. Article 299(1) does not prescribe any particular
manner in which authority ought to be conferred; authorization may be conferred ad hoc on
any person.
PRINCIPLES UNDERLYING CONTRACTUAL LIABILITY OF STATE
(i)

Reasonableness and Fairness: The principle of equanimity and rationality which is

legally as well as philosophically an integral aspect of equality or nonarbitrariness is envisaged by Article 14 and it must be embodied in every State
Action , whether it be under the authority of law or in exercise of executive power

(ii)

without making of law.

Public Interest: This is of paramount importance. here may be situations where
there are persuasive reasons necessitating the departure from the rule, but there the
reasons for the deviation must be rational and should not be suggestive of
discrimination. Every action of the public authority or of the person acting in
public interest should be guided by public interest. Nothing should be done which

(iii)

may be a reflection of personal biases, jobbery or nepotism.

Contractual Liability: Article 299(2) provides the benefit of immunity to the
President, or the Governor, or the person executing any contract on his behalf,

from any personal liability in respect of any contract executed or any enactment
for the purposes of the Constitution. This immunity is purely personal and does
not immunise the government, as such, from a contractual liability arising under a
contract which fulfills the requirements under Article 299(1).
The State cannot, therefore, act arbitrarily in entering into relationship, contractual or
otherwise with a third party, but its action must conform to some standard or norm which
is rational an non- discriminatory. The action of the Executive Government should be
informed with reason and should be free from arbitrariness. The test of liability of the
State should not be the origin of the functions but the nature of the activity carried on by
the State. In the FCI. v. Kamdhenu Cattle Feed Industries 7 case, it was laid down that the
State and all its instrumentalities have to adhere to Article 14 of the Constitution of which
non-arbitrariness is a significant component and this entails the duty to act fairly, and to
adopt a procedure which is fairplay in action. The reason why the aforementioned
oscillation of views has been discussed is to draw attention to the rights available to
parties against the government before entering into a contract with the latter. Since, a precontractual right also includes right against blacklisting by government, wherein the
government restrains a person/company from entering into a contract with itself, the
judgments would prove to be helpful in the discussion of the subsequent topics. Judicial
review can be a sufficient tool to determine the ambit of contractual liability of the State.

7 Food Corporation of India v. M/s. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601.

BLACKLISTING IN DIFFERENT SPHERES

Blacklisting is a step which is predominant in different associations such as in a debtorcreditor relationship, wherein names of delinquent debtors are printed and disseminated to
other lenders to indicate that persons whose names are printed are unreliable. It is even
common in employee-employer relationships in which, the employer leaks derogatory
information about the employee, thereby hindering the latter from getting employment.
Even in the corporate realm, blacklisting comes into the picture in situations where the
government disallows or debars a company from carrying on its business for a specific
period of time.
Effects of blacklisting on companies
Since the endeavour of the paper is only to scrutinize the blacklisting of companies by
Government of India, hence the effort will be to scrutinize the concept of blacklisting
narrowly, thereby focusing only on blacklisting of corporations and various other aspects
related thereto. By its very description, blacklisting is a purposeful conduct intended to
punish the victim. It is emphasized that blacklisting of companies can have adverse
impact on their growth and development. This is because blacklisting leads to tarnishing
of an entitys image and mostly disables the companies from borrowing funds from banks
and financial institutions. Even the Supreme Court has commented on the effects of
blacklisting in M/s. Erusian Equipment & Chemicals Limited v. Union of India and Ors.
wherein it stated that 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. This well accepted principle has been reiterated in a number of cases.
Blacklisting has an adverse impact on companies, by forbidding them from entering into
lucrative contracts.

BIBLIOGRAPHY

Rao, Swati, Contractual Liability Of The State In India: An Analysis,

http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=a4122e98-7362-

4e05-87ce-bed7af3b9b2f&txtsearch=Subject:%20contract
Uniform Guidelines for Blacklisting of Manufacturers, Suppliers, Distributors,

Contractors and Consultants, http://www.dpwh.gov.ph/pdf/blacklisting.pdf

Israel Military Industries Loses Indian Blacklist Challenge,

http://www.stratpost.com/israel-military-industries-loses-indian-blacklist-challenge
Consumer Protection from Unfair Trade Regulations, December 2010,

http://www.out-law.com/page-9050
Standard Code : Blacklisting, http://punjabgovt.gov.in/