Supreme Court Quashes Debarment and Penalty for Transformer Supplier: Isolators and Isolators vs. Madhya Pradesh Vidyut Vitran Co. Ltd. (2023)

Introduction

Date of the Judgment: 18 April 2023
Citation: 2023 INSC 390
Judges: Dinesh Maheshwari, J. and Sanjay Kumar, J.
Can a government entity debar a supplier and impose a penalty without proper notice and consideration of all the facts? The Supreme Court of India recently addressed this question in a case involving a transformer supplier and a state electricity distribution company. The court ruled that the debarment and penalty were illegal due to lack of proper notice and failure to consider all circumstances. The judgment was delivered by a two-judge bench of Justices Dinesh Maheshwari and Sanjay Kumar, with Justice Maheshwari authoring the opinion.

Case Background

Isolators and Isolators, a proprietorship firm, has been manufacturing and repairing transformers for 30 years, primarily supplying to distribution companies (Discoms). The dispute arose from two tenders, TS-494 and TS-532, floated by Madhya Pradesh Madhya Kshetra Vidyut Vitran Company Limited (MPMKVVCL). For TS-494, the company was to supply 586 distribution transformers (DTR) Level-I, with a delivery schedule of six months from the third month of the purchase order issued on 30.06.2017. However, the appellant received the purchase order through email on 13.09.2017 and physically on 15.09.2017. The appellant requested a modification of the delivery schedule and adjustment of rates due to the delay and the implementation of Goods and Services Tax (GST) on 01.07.2017. The respondents issued a revised order incorporating GST on 02.01.2018, but the request for rescheduling of supplies was ignored. The appellant was then issued a notice on 13.02.2018 alleging delay in supply. Despite making multiple requests to reschedule, the appellant proceeded with supply of 300 transformers, but the respondents imposed penalties of over Rs. 11 lakh. For TS-532, the appellant received a purchase order on 03.03.2018 for 593 level-II transformers. The appellant submitted drawings for approval on 19.04.2018, which were approved on 09.05.2018. A stage inspection was conducted on 04.06.2018, and clearance was granted on 05.06.2018. On the night of 20th and 21st August 2018, a storm caused the roof of the appellant’s plant to collapse, destroying most of the raw material. 50 transformers were saved and supplied on 01.09.2018. On 18.09.2019, the respondent deferred the balance deliveries of 593 transformers under TS-532. On 19.11.2019, the respondent cancelled the supply of the remaining 286 Level-1 transformers under TS-494. On 21.11.2019, the respondent cancelled the supply of the remaining transformers under TS-532.

Timeline:

Course of Proceedings

Initially, the respondent issued an order on 13.02.2020, debarring the appellant from participating in future tenders for three years. The appellant challenged this order before the High Court of Madhya Pradesh, which set aside the order on 08.07.2020, and directed the respondents to pass a fresh order after giving the appellant a hearing. Following this, the respondent conducted a video-conferencing hearing on 20.07.2020 and issued a fresh order on 30.07.2020, maintaining the debarment for three years. Additionally, a penalty of Rs. 27,98,960/- was imposed on 17.08.2020. The appellant again approached the High Court, which partly allowed the writ petition on 23.04.2021, modifying the debarment period to be effective from 13.02.2020, instead of 30.07.2020. A review petition against this order was dismissed on 13.12.2021.

Legal Framework

The legal framework for this case is primarily based on the terms and conditions of the purchase orders issued by MPMKVVCL. The relevant clauses include:

• Clause 12 of TS-494: “delivery and supply of material of Annexure-II”, read with clause 28 “cancellation of rate contract of Annexure -II” which allowed the competent authority to cancel the purchase order for 286 unsupplied 25 KVA DTRs with imposition of penalty.
• Clause 04 of Annexure-IV of TS-532: “Delivery of material”, read with clause 17 “Cancellation/Termination of Purchase order of Annexure -III”, which allowed the competent authority to cancel the purchase order for 593 unsupplied 25 KVA DTRs with imposition of penalty.
• Clause 17 of Annexure-III: General Terms and Conditions, which states: “The Purchaser may upon written notice of default, terminate/cancel the purchase order/contract in whole or for a part quantity with recovery of liquidate damages at the rate of 10% of ex-works price(s) of stores not delivered by them or liability on account of risk and cost, whichever is higher in the circumstances detailed hereunder:- 17.1. If in the opinion of the Purchaser, the supplier fails to deliver the material within the time specified or during the period for which extension has been granted by the Purchaser. 17.4. In pursuance to clause no. 17.1, 17.2 &17.3 above, Purchaser may debar the supplier/contractor for further business with Purchaser for a declared period on breach of the Purchase Order.”
• Clause 4 of the contract: Allowed for a penalty of ½% to 10% for delay in delivery.

Arguments

Appellant’s Submissions:

• The show-cause notice dated 26.11.2019 was only about debarment, not penalty.
• The penalty imposed was the maximum (10%) without justification.
• The High Court only considered debarment and not the penalty.
• The appellant is a manufacturer of transformers and the respondent is their only customer, making it a single purchase market.
• The appellant had been supplying transformers since 1989 without issues.
• The delay in execution was due to reasons explained by the appellant, including a delay in receiving the purchase order and a storm that damaged the plant.
• The appellant had supplied 300 out of 586 transformers under TS-494 and all 63 KVA transformers under TS-532.
• The respondents deferred delivery on 18.09.2019 and did not communicate any withdrawal of this deferment.
• Relied upon Gorkha Security Services v. Government (NCT of Delhi) and Ors. : (2014) 9 SCC 105 and UMC Technologies Private Limited v. Food Corporation of India and Anr .: (2021) 2 SCC 551 to argue that the show-cause notice must indicate the proposed action, which was missing for the penalty.

Respondent’s Submissions:

• The appellant did not comply with the terms and conditions of the contract.
• The notice dated 13.02.2018 was followed by communications about dispatch instructions.
• The appellant failed to fulfill the terms of TS-494, leading to cancellation on 19.11.2019.
• The appellant was informed of the right to defer, reduce, or reschedule supply as per the requirement.
• The appellant failed to make requisite supplies despite requests, leading to deferment of supply on 18.09.2019 and subsequent cancellation.
• The cancellation order dated 21.11.2019 was never challenged.
• The penalty was imposed per the terms of the contract.
• The order dated 13.02.2020 was passed after giving full opportunity to the appellant.
• Relied upon Raghunath Thakur v. State of Bihar and Ors. : (1989) 1 SCC 229; M/s Erusian Equipment and Chemicals Ltd. v. State of West Bengal and Anr. : (1975) 1 SCC 70; and an order dated 13.12.2019 passed in Civil Appeal No. 9417 of 2019- M/s Daffodills Pharmaceuticals Ltd. and Anr. v. State of U.P. and Anr.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the order of debarment and imposition of penalty were justified.
2. Whether the show-cause notice dated 26.11.2019 was adequate and in compliance with principles of natural justice.
3. Whether the High Court properly considered the challenge to both the debarment and penalty orders.
4. Whether the communication dated 18.09.2019 deferring the supply had any impact on the validity of the orders passed against the appellant.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• UMC Technologies Private Limited v. Food Corporation of India and Anr. : (2021) 2 SCC 551:* The court relied on this case to emphasize the need for a specific show-cause notice and adherence to natural justice principles before debarment.
• Gorkha Security Services v. Government (NCT of Delhi) and Ors. : (2014) 9 SCC 105:* The court used this case to highlight the severe consequences of blacklisting and the necessity of a show-cause notice.
• Erusian Equipment & Chemicals Ltd. v. State of W.B. , (1975) 1 SCC 70:* The court cited this case to show that blacklisting has civil consequences and requires an objective satisfaction of the authority.
• Raghunath Thakur v. State of Bihar , (1989) 1 SCC 229:* The court referred to this case to underline that an order having civil consequences should be passed after following the principles of natural justice.
• A.P. State Financial Corporation v. C.M. Ashok Raju and Ors. : (1994) 5 SCC 359:* The court used this case to justify the maintainability of the appeal despite the earlier withdrawal.

The Court observed that the show-cause notice dated 26.11.2019, only mentioned debarment and not the imposition of a penalty. The Court stated that “Looking to the terms of contract, quantification of the amount of penalty (if at all the penalty is considered leviable) could not have been carried out without affording adequate opportunity of response to the appellant.” The court also noted that the authority imposed the maximum penalty without specifying why. The court stated, “Even the order debarring the appellant for a period of 3 years for default in making the requisite supplies carries its own shortcomings. As noticed, the appellant had indeed made substantial supplies against the purchase orders in question.” The court also stated, “It is at once apparent that the respondents have not been able to rebut the contention urged in this regard on behalf of the appellant.”

The Supreme Court held that the debarment order and penalty imposed on the appellant were not justified. The court found that the show-cause notice was inadequate as it did not mention the proposed penalty. The court also noted that the High Court failed to consider the penalty aspect and the impact of the deferment communication. The court set aside the High Court’s orders and quashed the debarment and penalty orders, directing a refund of any recovered penalty amount with interest.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the procedural lapses and the failure to consider the appellant’s circumstances. The court emphasized the importance of fair procedure and adherence to principles of natural justice. The court was also swayed by the fact that the respondent had deferred the supply, which was not taken into consideration.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning

Issue 1: Whether the order of debarment and imposition of penalty were justified?

Conclusion

The Supreme Court’s decision in Isolators and Isolators vs. Madhya Pradesh Vidyut Vitran Co. Ltd. underscores the importance of procedural fairness and adherence to the principles of natural justice in contract law and public procurement. The court’s emphasis on providing a specific show-cause notice for penalties and considering all relevant circumstances before imposing debarment is a significant reminder for government entities. This judgment clarifies that authorities cannot impose penalties or debar suppliers without proper notice and justification. It also highlights the need for a balanced approach where the actions of both parties are considered when determining liability for breach of contract. The case serves as a critical precedent for ensuring transparency and fairness in government contracts and protecting the rights of suppliers.