Delhi High Court: The present appeal was filed by appellant, Oasis Projects Ltd. under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 (‘the Act’) seeking setting aside of the order dated 19-7-2023 (‘impugned order’), wherein the Sole Arbitrator declined the prayer for suspension of the debarment of appellant under Section 17 of the Act. Appellant also sought removal of the declaration of appellant as a non-performer from respondent’s website and abey the debarment of appellant as per the letter dated 9-12-2022. Prathiba M. Singh, J.*, noted that in the present case, a Show Cause Notice for non-performance and termination did not give a clear understanding of debarment and the punishment that appellant would face. The Court set aside the impugned order and held that appellant should not be treated as a “non-performer” or a “debarred entity” and the said declaration on respondent’s website should also be removed.
Background
Appellant was a company engaged in the business of civil construction specializing in the construction of Highways with Asphalt-Concrete, bridges, and passes. Respondent invited bids for “Balance work for four-laning of NH — 39 Dimapur- Kohima Road from Design Km 152.490 to Km 166.700 [Package III]” in Nagaland. Thereafter, vide Letter of Acceptance dated 16-7-2021, appellant was awarded the bid and appellant and respondent entered into an Engineering, Procurement and Construction Agreement (‘EPC Agreement’) dated 30-7-2021 for a period of one year i.e., till 31-8-2022.
Appellant stated that it faced immense hardships in executing the work due to issues in obtaining Right of Way (‘ROW’) and the said issue occurred because compensation was not provided to the landowners. Appellant submitted that illegal mining was being conducted on the lands forming part of the ROW and they received threats and extortion letters from several local groups which further derailed the work. The opposition from local groups coupled with all the landslides that took place, and other factors constituted ‘Force Majeure’ as per clause 21.5 of the EPC, which led to delays in execution of the project.
Respondent issued a Show Cause Notice dated 12-5-2022 declaring appellant as a ‘non-performer’ due to slow progress and poor planning of work. On 17-8-2022, appellant terminated the Contract under Clause 21.7 of the EPC Agreement and thereafter, respondent issued a Suspension Notice dated 19-8-2022 under clauses 11.17 (Suspension of unsafe Construction Works) and 22.1 (Suspension under Contractor Default) of the EPC Agreement. The suspension was revoked on 25-8-2022 and later, respondent declared the appellant as a ‘non-performer’ on its website. Further, respondent terminated the EPC on 9-12-2022.
Meanwhile appellant filed arbitration proceedings seeking appointment of an arbitrator and stating that conciliation was not mandatory in nature and was directory in nature and that the parties could proceed with arbitration. Vide order dated 7-2-2023, this Court appointed a Sole Arbitrator and in the said proceedings, appellant moved an application challenging and seeking stay of the debarment of two years which was imposed upon appellant, as an automatic consequence of termination. The Sole Arbitrator on 19-7-2023, rejected the prayer for stay of debarment, observing that without detailed examination and evidence being recorded it would be difficult to reach a conclusion regarding the validity of the termination and the consequential debarment. The present appeal was thus filed by appellant challenging the order dated 19-7-2023 passed by the Sole Arbitrator.
Analysis, Law, and Decision
The Court noted that appellant was the first party which terminated the contract on 17-8-2022 and respondent’s termination was subsequently done on 9-12-2022. Respondent also invoked the bank guarantees, but there was no single letter on record mentioning that the consequences of termination would be deemed debarment. The Court also took note of clause 23.1 which revealed that deemed debarment would happen only when there was a termination due to contractor default. The Court opined that there was an obligation on respondent to inform appellant of the debarment. Further, no notice was issued to appellant and no hearing was held. The notice that was served initially on 12-5-2022 was only regarding non-performance of contract and thereafter, after the termination by appellant on 17-8-2022, respondent issued another notice on 16-11-2022 regarding termination of the already terminated EPC Agreement.
The Court stated that “debarment and blacklisting is in the nature of civil death” for any person or entity and the inability to conduct business with respondent, which was one of the major entities involved in the construction of highways etc., would cause substantial monetary and commercial loss to appellant. Moreover, even in terms of the MoRTH circular dated 6-10-2021, issuing of a notice was mandatory in nature in cases of non- performance or debarring/penalizing a contractor/concessionaire. The Court thus opined that in the present case, a notice pertaining to non- performance and termination did not inherently imply association with the prospect of debarment, and thus there should have been a separate Show Cause Notice issued to the concerned entity/person with respect to debarment.
The Court relied on Kulja Industries Ltd. v. Western Telecom Project BSNL, (2014) 14 SCC 731, wherein the Supreme Court held that in cases of debarment or blacklisting, compliance of principles of natural justice was of utmost importance and the principles of fairness and proportionality would also have to be considered.
The Court further relied on Gorkha Security Services v. Govt. (NCT of Delhi), (2014) 9 SCC 105, wherein the Supreme Court observed that in a Show Cause Notice, it was mandatory to mention the act of blacklisting or there should be a clear inference to this effect, as the purpose of Show Cause Notice was to give a proper hearing to the parties by following the principles of natural justice. The Court noted that in the present case, a proper Show Cause Notice was not given which could give the clear inference that termination would lead to debarment.
The Court further relied on UMC Technologies Pvt. Ltd. v. Food Corpn. of India, (2021) 2 SCC 551, wherein it was held that any notice for blacklisting or debarment had to clearly specify the reasons and the intention. The same should be particularized and be unambiguous in nature, as blacklisting had civil consequences for future business prospects, and had a domino effect, which could effectively lead to the civil death. The Court opined that the purpose of issuing a Show Cause Notice was to make the contracting party understand the gravity of the case being set up against it, and the punishment that they might face. The Court noted that in the present case, a Show Cause Notice for non-performance and termination did not give a clear understanding of debarment and the punishment that appellant would face.
The Court also relied on ACE Integrated Solutions Ltd. v. Food Corporation of India, 2019 SCC Online Del 8422, wherein it was held that debarment/blacklisting and termination could not be merged together, and debarment could not be an automatic consequence or a necessary sequitur to the termination of contract. The Court also relied on AL Sudais Haj & Umrah Services v. UOI, 2023 SCC OnLine Del 476, wherein it was held that mere use of the word “automatically”, did not infer that the penalty of debarment or forfeiture was to be necessarily imposed.
The Court observed that in the present case, the proceeding before the Guwahati High Court and also the order dated 1-12-2022, passed in Section 9 petition, where stay was sought from the invocation of the bank guarantee, made it clear that the reasons for refusal of relief under Section 9 was due to the pendency of litigation before the Gauhati High Court and various other local factors prevalent then. However, the situation in the present case was that the parties were already in arbitration.
The Court opined that appellant’s justification for non-performance requires to be adjudicated, thus, the impugned order deserves to be set aside. Appellant should not be treated as non-performer or a debarred entity and the said declaration on respondent’s website should also be removed as the existence of the same on the website would mean that appellant would have to reveal in all other Government contracts, the fact that it was debarred or blacklisted by respondent. Debarment and blacklisting would also thus have a domino effect and the same was not only restricted to respondent. The Court also opined that the facts did show that there were some disturbances in the local areas leading to invocation of the force majeure clause and a petition was also heard before the Guwahati High Court. These issues require detailed examination and appellant should, however, be subject to the final decision in the arbitral proceedings on the question of non-performance, breach, illegality, and validity of termination, etc.
[Oasis Projects Ltd. v. National Highway and Infrastructure Development Corpn. Ltd., 2024 SCC OnLine Del 2549, decided on 10-4-2024]
*Judgment authored by: Justice Prathiba M. Singh
Advocates who appeared in this case :
For the Appellant: Sanjoy Ghose, Senior Advocate with Bharat Chugh, Mayank Arora, Prasoon Shekhar, Advocates
For the Respondent: Malvika Trivedi, Senior Advocate; Pratishth Kaushal, Shailendra Slaria, Sujal Gupta, Raghwi Singh, Advocates; Rishinandan M. U., Manager (Technical), Anshul Agarwal, Legal Professional
Buy Arbitration and Conciliation Act, 1996 HERE
