Supreme Court quashes indefinite ban on pharmaceutical supplier: M/S Daffodills Pharmaceuticals Ltd. vs. State of U.P. (2019)

Date of the Judgment: 13 December 2019

Citation: Civil Appeal No. 9417 of 2019 (Arising out of Special Leave Petition (C) No. 4074 of 2018)

Judges: R. F. Nariman, J., S. Ravindra Bhat, J.

Can a state government indefinitely ban a pharmaceutical supplier based on a criminal case against a former director, without providing a hearing? The Supreme Court of India recently addressed this critical question in a case involving M/S Daffodills Pharmaceuticals Ltd. The court examined the principles of natural justice and the scope of judicial review in matters of public contracts. The bench comprised Justices R. F. Nariman and S. Ravindra Bhat, with the judgment authored by Justice S. Ravindra Bhat.

Case Background

M/S Daffodills Pharmaceuticals Ltd. (hereafter “Daffodills”), a pharmaceutical supplier, participated in a tender process initiated by the State of Uttar Pradesh (U.P.) to supply various pharmaceutical products to state-run hospitals. Daffodills was one of 56 bidders whose bid was accepted. As part of the tender process, Daffodills had to declare that no criminal case was pending against the firm, its Board of Directors, or individual directors. Daffodills complied with this requirement.

However, on 21 August 2015, the Principal Secretary of the Government of U.P. issued a directive to the Medical and Health Department to stop all local purchases from Daffodills. This directive was based on an FIR lodged against Daffodills, alleging offenses and a Central Bureau of Investigation (CBI) inquiry. The FIR was related to a case against Mr. Surender Chaudhary, a former director of Daffodills who had resigned in 2012.

Daffodills challenged this directive, arguing that the criminal case was against a former director who had no connection with the company since 2012. Daffodills also contended that the directive amounted to blacklisting without a prior hearing, violating principles of natural justice.

Timeline

Course of Proceedings

The Allahabad High Court, in its order, referenced a previous direction in Writ Petition No. 3611 (MB)/ 2011, which inquired into the implementation of the National Rural Health Mission. Following this, the CBI registered a case and filed a charge sheet against Surender Chaudhary, the former director of Daffodills, and other co-accused.

The High Court acknowledged Daffodills’ argument that Surender Chaudhary was no longer a director and that Daffodills was not given a hearing before the order was passed. However, the High Court held that in contractual disputes related to policy decisions, the scope of judicial review under Article 226 is limited. The High Court opined that the principles of natural justice could not be applied rigidly and that Daffodills’ failure to comply with contract terms justified the State’s action.

Legal Framework

The case revolves around the principles of natural justice, specifically the right to be heard before an adverse action is taken. The Supreme Court considered the implications of the State’s action in light of these principles and the existing jurisprudence on blacklisting and debarring orders.

The tender document required bidders to declare that “there is no Court Case/Vigilance Case/CBI Case pending against the firm. All the documents given in the tender are true. If found false/fake the person/firms will have to be accepted by the firm. (Court case means “Criminal Case” against firm/board of Director/Directors/principal stock holder as per relevant law)“.

Arguments

Arguments by Daffodills:

• Daffodills argued that the impugned decision was erroneous because Surender Chaudhary had resigned as Director in 2012, and his involvement in a criminal case should not impact the company’s business.
• They contended that the action against the company was unwarranted and arbitrary, given that it was based on the acts of a former director.
• They argued that the order was akin to blacklisting and that it was issued without any prior notice or hearing, which is against the principles of natural justice and the rulings of the Supreme Court in cases such as Rastriya Ispat Nigam v. Verma (2006) 7 SCC 275 and Kalja Industries v. Western Telecom (2014) 14 SCC 731.

Arguments by the State of U.P.:

• The State argued that the order was not a debarring order but a direction to discontinue procurement from Daffodills.
• They contended that Surender Chaudhary was a director of Daffodills when the alleged offenses were committed, involving fictitious accounts and procurement orders.
• They argued that Clause 14 of the tender conditions clearly stated that a court case meant a “criminal case” against the firm, Board of Directors, or individual directors.
• The state also pointed out that Daffodills had filed a suit in 2014 seeking to stop the finalization of the tender and that the order of 21.08.2015 was made pursuant to court directions.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

• Whether the State’s directive to stop local purchases from Daffodills amounted to a debarring order, and if so, whether it was valid in the absence of a prior hearing.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Erusian Equipments and Chemicals Ltd. v. State of West Bengal, 1975 (1) SCC 70 – Supreme Court of India: This case was cited to support the principle that a hearing is necessary before a debarring or blacklisting order is issued.
• Raghunath Thakur v. State of Bihar & Ors, 1989 (1) SCC 229 – Supreme Court of India: This case was cited to reiterate the necessity of giving an opportunity to represent before blacklisting.
• Southern Painters v. Fertilizers & Chemicals Travancore Ltd., 1994 Supp (2) SCC 699 – Supreme Court of India: This case was cited to emphasize that deletion of a contractor’s name from an approved list requires compliance with natural justice principles.
• Grosons Pharmaceuticals (P) Ltd. v. State of U.P., (2001) 8 SCC 604 – Supreme Court of India: This case was cited as a precedent for the requirement of a hearing before blacklisting.
• B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. (2006) 11 SCC 548 – Supreme Court of India: This case was cited as a precedent for the requirement of a hearing before blacklisting.

Legal Provisions Considered:

• The tender conditions requiring bidders to declare no pending criminal cases.
• Principles of Natural Justice

Authorities Considered by the Court

Judgment

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

How each authority was viewed by the Court?

The Court relied on the principles established in Erusian Equipments and Chemicals Ltd. v. State of West Bengal [1975 (1) SCC 70]* and Raghunath Thakur v. State of Bihar & Ors [1989 (1) SCC 229]*, which mandate that a hearing must be provided before any adverse action like debarring or blacklisting is taken. The court also cited Southern Painters v. Fertilizers & Chemicals Travancore Ltd. [1994 Supp (2) SCC 699]* to emphasize that deletion of a contractor’s name from an approved list requires compliance with the principles of natural justice. These cases were used to underscore the importance of fair procedure and the right to be heard before any adverse action is taken against an entity.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the violation of principles of natural justice. The Court emphasized that no one should be subjected to an adverse order without being given a minimum opportunity to be heard. The Court found that the State’s action of indefinitely banning Daffodills from local procurement, without any prior notice or hearing, was a clear violation of this principle. The Court also noted that the ban was disproportionate, as it was indefinite and linked to a criminal case against a former director, which could potentially last for an extended period. The court was also influenced by the fact that the State’s action was based on an assumption of complicity by Daffodills, without any concrete evidence or opportunity for the company to defend itself.

The Court’s reasoning was primarily driven by the legal principle of natural justice and the need for fair procedure, which weighed more than the factual aspects of the case.

Logical Reasoning

Judgment

The Supreme Court held that the State’s directive to stop local purchases from Daffodills was, in effect, an indefinite debarring order. The Court emphasized that such an order could not be issued without providing Daffodills an opportunity to be heard. The Court noted that “no one can be inflicted with an adverse order, without being afforded a minimum opportunity of hearing, and prior intimation of such a move.”

The Court observed that the indefinite nature of the ban was disproportionate, especially given that it was tied to a criminal case against a former director. The court stated, “Unlike a “normal” blacklisting order which has a finite life span (of three or maximum five years), the indefinite directive (which appears to be co-terminus with the lifetime of the criminal case) is facially far more disproportionate than a blacklisting order.”

The Court highlighted that even if the former director was involved in objectionable activities, the company itself should have been given a chance to represent its case. The court stated that, “If there is one constant lodestar that lights the judicial horizon in this country, it is this: that no one can be inflicted with an adverse order, without being afforded a minimum opportunity of hearing, and prior intimation of such a move.”

Given that the impugned order was issued over four years ago, the Court decided to grant immediate relief. The Court quashed the order of the Principal Secretary, Government of U.P., directing all departments to stop local purchases from Daffodills. The impugned judgment of the High Court was set aside, and the appeal was allowed.

There was no dissenting opinion. The judgment was delivered by a bench of two judges.

Key Takeaways

• A state government cannot indefinitely ban a supplier without providing a prior hearing.
• Principles of natural justice require that any entity facing an adverse order must be given a fair opportunity to be heard.
• An indefinite ban is disproportionate and cannot be sustained.
• Even if a former director is involved in a criminal case, the company itself must be given a hearing before any adverse action is taken.
• This judgment reinforces the importance of procedural fairness in public procurement.

Directions

The Supreme Court quashed the order of the Principal Secretary, Government of U.P., directing all concerned departments to desist from resorting to local purchase from the appellant.

Development of Law

The ratio decidendi of this case is that any order that has the effect of blacklisting or debarring an entity must be preceded by a hearing. This case reaffirms the importance of natural justice and procedural fairness in public procurement. The Supreme Court clarified that an indefinite ban is disproportionate and cannot be sustained, setting a precedent for future cases involving similar issues.

Conclusion

The Supreme Court’s decision in M/S Daffodills Pharmaceuticals Ltd. vs. State of U.P. underscores the critical importance of adhering to the principles of natural justice in public procurement. The court’s ruling that an indefinite ban on a supplier without a prior hearing is invalid reinforces the need for procedural fairness and transparency in government actions. This judgment serves as a crucial reminder that even in cases involving allegations of wrongdoing, the right to be heard must be upheld.