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Delhi High CourtIndian Cases

Sps Engineering Ltd. vs Indian Oil Corporation Ltd. on 30 July 2004

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Delhi High Court
Sps Engineering Ltd. vs Indian Oil Corporation Ltd. on 30 July, 2004
Equivalent citations: 113(2004)DLT70, 2004(76)DRJ259
Author: Badar Durrez Ahmed
Bench: Badar Durrez Ahmed

Badar Durrez Ahmed, J.

1. By an order dated 10.04.2003, the Deputy General Manager (PJ) of the respondent Indian Oil Corporation Ltd (hereinafter referred to as ‘IOCL’) informed the petitioner (SPS Engineering Ltd) (hereinafter referred to as ‘SPSEL’) that it had been decided to place it on the ‘Holiday List’ and to debar it from entering into any contract with IOCL for a period of three years w.e.f. 10.04.2003. The petitioner (SPSEL) seeks the quashing of this order on, inter alia, the grounds that the order was passed:-

a) without giving an opportunity of personal hearing to SPSEL and;
b) when the very basis for passing such an order was in dispute and was pending before an arbitrator.
2. The sequence of events leading to the passing of the order dated 10.04.2003 is as under:-

2.1. SPSEL had been awarded the following two contracts with regard to the water system for the Paradip Refinery Project of IOCL at Paradip, Orissa:-
2.2. According to SPSEL, there was a slow-down in the works in May 2001 and the project was stalled in June, 2002. These events, according to the petitioner (SPSEL), occurred due to the IOCL’s conduct. On the other hand, it is contended on behalf of IOCL that the petitioner (SPSEL) was unable to complete the contracts and adopted dilatory tactics and did not show any seriousness in resuming the works despite repeated opportunities. This led to disputes amongst the parties. Ultimately, by a letter addressed by the General Manager of the Paradip Refinery Project of IOCL to SPSEL, the aforesaid two contracts were terminated on account of the alleged failures on the part of SPSEL as set out in detail in the letter. These disputes and the termination of the contract, as will become apparent from what is stated hereinbelow, are the subject matter of a pending arbitration.
2.3 IOCL issued a show cause notice dated 17.01.2003 to the petitioner requiring it to show cause in writing within 15 days as to why it should not be placed on the “Holiday List” and be debarred from entering into contracts with IOCL/be not de-listed from the list of approved vendors/contractors of IOCL for the following reasons, which had been elaborated in the IOCL’s termination letter dated 29.10.2002:-
2) Failure to perform the contract 2.4 To this show cause notice dated 17.01.2003, the petitioner (SPSEL) submitted a reply on 18.01.2003 and denied that it had committed any breach of contract or that it had failed to perform the contract. It also denied that it had ever abandoned the site or the contract. In other words, all the purported reasons cited in the show cause notice for placing the petitioner (SPSEL) in the “Holiday List” and from debarring it from entering into any contracts with IOCL, etc., were categorically denied by the petitioner (SPSEL). On the contrary, it was alleged in the reply that the contract could not be performed because IOCL had abandoned the same (which was what was allegedly reported in the newspapers also) in view of the conditions prevailing locally in Orissa where the project was undertaken by the IOCL. It was further alleged that in several newspapers it was notified to the public that a large number of projects had been shelved, including the Paradip Refinery Project of IOCL and that the same had been stalled on 25.06.2002. Accordingly, the petitioner alleged that the project had been abandoned by IOCL and not because of any failure on the part of the petitioner (SPSEL). It was further stated in the reply dated 18.01.2003 that if the matter were to be referred to arbitration, and which it ought to be, all the facts would be clarified and settled. In the said letter, it was categorically stated as under:-
2.5 IOCL, after receipt of the reply dated 18.01.2003, issued a further show cause notice on 23.01.2003. In this show cause notice, an additional allegation was also levelled on the petitioner to the effect that it had sub-contracted part of the work to one Sarkhel Construction Ltd and thereby committed breach of the contract as no prior approval was taken from the Engineer-in-charge for the same. It was alleged that Sarkhel Construction Ltd had further sub-contracted the work. The petitioner was requprerogative of IOCL and would be decided by a committee formed for the purpose. It was further stated that this was a non-contractual matter and could not be referred to arbitration.
2.6. The petitioner (SPSEL) sent in its reply on 28.01.2003. In this reply, the petitioner (SPSEL) categorically stated that its application for sub-contracting part of the work to Sarkhel Construction Ltd had been duly filed by it and was within the knowledge of IOCL and had never been rejected by it. It denied that there was any further sub-contracting by Sarkhel Construction Ltd. Therefore, this ground was not available for placing the petitioner in the “Holiday List”. It also reiterated its earliar contention that it never failed to perform the contract nor did it commit any breaches and that the termination of the contract itself was illegal. Importantly, in this reply dated 28.01.2003, the petitioner categorically and clearly requested IOCL to give it an opportunity of personal hearing to enable it to place the full facts with documents for the consideration of IOCL before any further action was taken in the matter. As would be seen from the facts narrated below, this opportunity of personal hearing was, admittedly, not given to the petitioner.
2.7. In this letter of 28.01.2003, the petitioner further submitted that the decision on the issue of placing the petitioner on the “Holiday List” ought to be taken only after the arbitration proceedings were completed and the actual facts are brought out. This is a submission which was reiterated before me by the learned counsel for the petitioner who submitted that IOCL ought to have held its horses till the arbitrator decided the matter and came to the conclusion as to who was responsible for the staling of the project. If the arbitrator came to the conclusion that the petitioner had breached the contract, then clearly IOCL would be entitled to place the petitioner in the “Holiday List”. However, if the conclusion was otherwise, it would not be open to IOCL to place the petitioner in the “Holiday List” and to debar it from entering into contracts with IOCL. This, however, is countered by the learned counsel for the respondent (IOCL) by submitting that placing a contractor in the “Holiday List” is the prerogative of IOCL and is wholly unconnected with the disputes qua the contracts which are pending before the arbitrator. I shall examine these arguments later.
2.8. At this juncture, it must be pointed out that prior to the issuance of the show cause notice by IOCL, a proposal for putting the petitioner (SPSEL) on the “Holiday List” was put up for approval on 09.01.2003 which was ultimately approved by the GM (PDRP-Site) on 16.01.2003. In the proposal it was mentioned that the contracts had to be terminated due to the alleged default or failure on the part of the SPSEL in fulfillling the obligations under the contracts. It was particularly stated therein as under:-
(sic)cts with Indian Oil Corporation Ltd/ de-list from the list of approved Vendors/ Contractors of Indian Oil Corporation Ltd. for the following reasons which is in conformity with the approved guidelines laid down for Holiday Listing/ de-listing of Vendors/Contractors:
1) Commitment of breach of Contract
2) Failure to perform the contract
3) Abandonment of Site/Contract However, before taking a final decision on the same, the following course of actions based on the approved guidelines for Holiday Listing are proposed:-
1) To issue a Show cause notice to the party to give a fair opportunity of hearing the party. The draft show cause notice to be issued by IOCL’s authorized signatory to the party is enclosed as Annexure-I.
2)Formation of a three member committee comprising of representatives from Execution/ User Deptt., Finance Deptt. and tendering Deptt. to examine the reply of the party, if any, to the Show cause notice and recommend suitable action to the approving authority. In formulating its recommendation, the Committee shall take into account the overall effect on the Corporation of placing the party on holiday list. The committee shall be formed subsequently, after expiry of the time period given for reply to (sic) From this proposal, it is abundantly clear that the question of putting SPSEL on the “Holiday List” related in its entirety to the alleged breaches/failures/abandonment in relation to the contracts in question. In other words, it was inextricably connected and tied up with the subject matter of the contracts in question.
2.9. In the meanwhile, despite the petitioner’s repeated requests, IOCL was declining to refer all the disputes to the arbitrator. This led to the petitioner filing an Arbitration Application No.35/2003 in this Court seeking the reference of all the disputes amongst the parties to arbitration before the sole arbitrator (Justice P.K. Bahri Retd.). The arbitration clause had been invoked by the petitioner much prior to the issuance of the first show cause notice dated 17.01.2003. By an order dated 17.0(sic).2003, the said Arbitration Application No.35/2003 was disposed of by a learned single Judge of this Court as under:-

(sic)ghts of the opposite party (IOC) to make appropriate submissions to the learned Sole Arbitrator under Section 16 of the Arbitration and Conciliation Act, 1996 or other appropriate provisions of law, for contending that any part of the disputes which have been so referred by this Court in the exercise of its purely administrative function of making the reference, are not arbitrable/not referable for adjudication by the Sole Arbitrator in terms of the arbitration clause as contained in clause of the General Conditions of Contract, between the parties.
The competent authority in the respondent organisation to accordingly refer all the claims of the petitioner (as per Annexure A8 at page 33 of the paper book), and counter claims of the respondent, if any, (and also subject to contentions/objections of the petitioner) to Justice P.K. Bahri, Retired Judge of this court, who will adjudicate the same as Sole Arbitrator as expeditiously as possible.

2.10. From the nothings on the said proposal dated 09.01.2003 (a copy whereof was placed on record by the learned counsel for IOCL), it appears that it was decided to form a committee to examine the issue of “Holiday Listing” of the petitioner (SPSEL). This proposal for setting up the committee was put up on 27.03.2003 and was approved by the GM (DPRP-Site) on the same day.

2.11 Also placed on record is a copy of the report of this committee dated 08.04.2003. The said report consists of 7 paragraphs. Paras 1-6 only narrate the allegations, the termination of the contracts, the proposal for placing SPSEL on the Holiday List, the issuance of show cause notices and the factum of the replies having been received. Only paragraph 7 comprises of the conclusions. It was found by the committee that SPSEL committed breach of contract, failed to perform the contract and abandoned the site/contract and sub-contracted the job to Sarkhel Construction Ltd. On basis of these purported findings, the committee concluded as under:-

(sic)d down for Holiday Listing/ de-listing of Vendors/Contractors. Hence, the committee after taking into consideration all facts and the overall effect on the Corporation also recommends to put the party i.e. M/s SPSEL on holiday list for a period of 3 (Three) years effective from the date of intimation of placement of the party on “holiday List”.
2.12. This report was approved by the GM(PDRP-Site) on 09.04.2003 itself and accordingly, on 10.04.2003 the impugned letter/order was issued. Also placed on record is a non-official memo of the same dated, i.e., 10.04.2003 to the following effect:-

The following contractor has been put in the Holiday List for 3 (Three) years w.e.f. 10.04.2003 in view of the repeated failure of the contractor to honour contractual obligations and also as the contractor is not at all reliable and incapable of meeting their commitments.
M/s SPS Engineering Limited, 301-310, Navketan, Central Avenue, Chembur, Mumbai–400 071.
3. The decision to place the petitioner (SPSEL) on the “Holiday List” is challenged on the grounds that:-

a) this decision is violative of the principles of natural justice in so far as no personal hearing was granted to SPSEL despite the categorical and clear request made by it in its reply dated 28.01.2003;
b) the impugned order dated 10.04.2003 as well as the purported report of the said Committee dated 09.04.2003 does not give any reasons for arriving at the conclusions that the petitioner had committed breach of contract, failed to perform the contract, abandoned the site of the contract and had sub-contracted the job; and
c) all the issues on which the committee and IOCL has come to a premature conclusion are yet to be adjudicated upon by the arbitrator before whom the disputes of the petitioner in their entirety are pending as indicated by the order of this Court dated 17.03.2003 in AA No.35.2003.
5. On behalf of the respondents (IOCL), it was contended that there was no violation of any principle of natural justice. It has been argued that all that is required is that an opportunity of hearing be given. It is not at all necessary to grant a personal hearing. The requirement of hearing would be completely met if a show cause notice is issued and an opportunity to reply to the show cause notice is granted, a reply is received Along with the documents and a decision is taken considering the reply and documents submitted. Reliance was placed by the learned counsel on the decision of the Supreme Court in the case of Grosons Pharmaceuticals (P) Ltd v. State of U.P. : . He also referred to the discussion at Page 441 of the 5th Edition of the well-known book entitled ” Administrative Law” by H.W.R. Wade. All these references were made in the context of the argument that a personal hearing is not necessary in all the cases and that even where a personal hearing is not granted but, an opportunity is given all the same to reply to the allegations against a party, then that party cannot make a grievance that the principle of “audi alteram partem” has not been complied with.

6. I shall now examine the law on the issue of personal hearing.

(Sic)y on executive function by making a law or without making a law. The exercise of such powers and functions in trade by the State is subject to Part III of the Constitution. Article 14 speaks of equality before the law and equal protection of the laws. Equality of opportunity should apply to matters of public contracts. The State has the right to trade. The State has the duty to observe equality. An ordinary individual can choose not to deal with any person. The Government cannot choose to exclude persons by discrimination. The order of blacklisting has the effect of depriving a person of equality of opportunity in the matter of public contract. A person who is on the approved list is unable to enter into advantageous relations with the Government because of the order of blacklisting. A person who has been dealing with the Government in the matter of sale and purchase of materials has a legitimate interest or expectation. When the State acts to the prejudice of a person it has to be supported by legal (underlining added) 6.2 In Raghunath Thakur (supra), the Supreme Court held as under (paragraph 4) :-

l consequence for the future business of the person concerned in any event. Even if the rules do not express so, it is an elementary principle of natural justice that parties affected by any order should have right of being heard and making representation 6.3 In the case of Canara Bank (supra) the Supreme Court held (at page 569):-
Justice is based substantially on natural ideals and human values. The administration of justice is to be freed from the narrow and restricted considerations which are usually associated with a formulated law involving linguistic technicalities and gramm 6.4 Thus, before a person is blacklisted or put on a “Holiday List”, natural justice requires that such person be given an opportunity to place his case or to meet the charges against him. The said opportunity need not necessarily be by personal hearing.
It can be by written representation. Whether the said opportunity should be by written representation or by personal hearing depends upon the facts of each case and ordinarily it is in the discretion of the authority which passes or makes an order having civil consequences [See: M.P. Industries Ltd. v. Union of India: ; Carborundum Universal Ltd. v. Central Board of Direct Taxes: 1989 Supp (2) SCC 462 (at page 465 ); Union of India v. Jesus Sales Corpn: (at p.75); Grosons Pharmaceuticals (P) Ltd. v. State of U.P.: (at page 606)].

7. Therefore, while it may be argued that a personal hearing is not at all necessary and that if the petitioner has been given an opportunity to reply to the allegations against it, the principle of the audi alteram partem has been fairly complied with, still, one must examine the question of opportunity of hearing in the perspective of the facts of each case. In Shrikrishnadas Tikara v. State Govt. of M.P.: (at page 745), the Supreme Court observed:-

Therefore, the issue really is as to whether the denial of opportunity of personal hearing entails that the petitioner has been dealt with unfairly. Here, it is seen that the very allegations which were being made the subject matter of the show cause notices have merely been rephrased to read as conclusions of the said Committee. I have examined the report of the Committee dated 09.04.2003 and it does strike me as if the Committee merely converted the allegations into conclusions and made no serious at of the replies given by the petitioner. Perhaps the petitioner’s replies may have been accepted and perhaps, not. All that is in the realm of what might have happened. What has, in fact happened is that the petitioner was not personally heard and its written replies have not been adequately dealt with. It does appear to me that the petitioner has been dealt with unfairly. It must be made clear that I am not examining the question on merits but only whether principles of natural justice have been complied with. I dare say, they have not. It is an altogether different issue that even if the opportunity of personal hearing had been given, the respondents might have come to the same conclusion.
8. The other aspect that is of material importance is that the entire basis for placing the petitioner in the “Holiday List” is founded upon the allegations qua the performance or non-performance with regard to the contracts which were awarded to the petitioner. Therefore, it is not proper or correct on the part of IOCL even to suggest that placement in the “Holiday List” is entirely a non-contractual matter unrelated with the contracts awarded to the petitioner. I fail to see how the very allegations, on the basis of which the petitioner has been placed on the “Holiday List”, will not figure in the deliberations before the arbitrator, who would be considering the disputes between the parties in their entirety as directed by a learned Single Judge of this Court in his order dated 17.03.2003. Furthermore, the Committee that was constituted comprised entirely of officers of IOCL. In these circumstances, it would have been proper and appropriate for IOCL to have held its hands and waited for an adjudication by the arbitrator on the entire question of commission of breaches, etc., including the termination of the contracts. The determination by the arbitrator would have settled all these issues. As pointed out above, if the arbitrator held against the petitioner, and found it to be in default, then IOCL would be entitled to place the petitioner in the “Holiday List”. In such an eventuality, IOCL could not be faulted. I am in agreement with the contention of the learned counsel for the petitioner that the subject matter of arbitration and the question of placement in the Holiday List are intertwined and cannot be put into separate compartments. The records of the case itself reveal that the placement of the petitioner in the holiday List is not on account of reasons outside the contractual obligations of the parties.

9. Thus, I find that although, theoretically, it may be argued that a personal hearing was not necessary and that the non-grant of a personal hearing is not fatal, the manner in which the order of placing the petitioner on the “Holiday List” was passed, clearly displays that it was not based on reasons and upon proper application of mind unfettered by any kind of bias. When the entire matter was pending before the arbitrator, there was no need and, indeed, the respondent (IOCL) ought not to have proceeded with the issue of placing the petitioner on the “Holiday List” with the undue haste that it displayed and without giving the petitioner the personal hearing which it sought. (sic)ator. It is for the respondents to choose which path they would like to follow.

With these observations, the writ petition is allowed. There shall be no orders as to costs.