In M/s AKG Construction and Developers Private Limited v. State of Jharkhand & Ors., the Hon’ble Supreme Court of India has held that blacklisting of a contractor is not an automatic consequence of termination of a contract and requires an independent application of mind along with adherence to the principles of natural justice.
The dispute arose from a contract awarded to the Appellant for construction of an elevated service reservoir by the Respondent Department in March 2023.
In June 2024, the top dome of the under-construction structure collapsed. The Appellant attributed the collapse to an unforeseen cyclone and offered to reconstruct the structure at its own cost. However, inquiry reports indicated deficiencies in construction and deviation from approved designs.
Thereafter, the Respondent issued a show-cause notice and passed an order dated 23.08.2024 terminating the contract, forfeiting the security deposit, cancelling registration, and blacklisting the Appellant for a period of five years.
Aggrieved thereby, the Appellant approached the Hon’ble Jharkhand High Court, which upheld the impugned action. Aggrieved thereby, the Appellant approached the Hon’ble Supreme Court of India.
The Hon’ble Supreme Court of India, upon examination, observed as follows:
Blacklisting is a distinct and independent action and cannot be treated as a consequence of termination of contract.
An order of blacklisting entails serious civil consequences and debars a contractor from future engagements.
Issuance of a specific show-cause notice indicating the proposed action of blacklisting is mandatory.
The notice must provide a clear opportunity to the contractor to respond.
Blacklisting cannot be imposed mechanically without independent application of mind.
The Hon’ble Court further observed that the show-cause notice in the present case did not indicate any proposal for blacklisting and failed to satisfy the requirements of law.
Accordingly, the Hon’ble Supreme Court of India upheld the termination of the contract. However, the order of blacklisting was set aside as being arbitrary and violative of the principles of natural justice.
The judgment reiterates that blacklisting, being a serious and stigmatic action, must be preceded by due process and cannot follow automatically upon termination of a contract.
