Power of Debarment Not to be Exercised Arbitrarily

The High Court of Delhi held on October 20, 2023, held in the case of Highways Engineering Consultant v. National Highways and Infrastructure Development Corporation Limited (NHIDCL) and Ors., that the action of debarring and blacklisting the petitioner in a contract that has otherwise been duly performed by the Petitioner to the satisfaction of Respondent was arbitrary. The court reiterated that debarment and blacklisting should be resorted to by an employer in egregious cases of fraud and gross misconduct; however, continuing to avail the performance of the contract on one hand and debarring on the other hand were inconsistent actions and could not stand together.

In the instant case, the Petitioner was a consulting firm providing independent engineering and supervision services for infrastructure development. The Respondent National Highways and Infrastructure Development Corporation Limited (hereinafter “NHIDCL”) had availed the Petitioner’s services for supervision of the construction and upgradation of road undertaken by third-party contractors. The project had significant importance with respect to national security.

The entire work stipulated under the EPC Contracts was delayed by the EPC Contractors which resulted in the extension of the Petitioner’s contractual term. The letters granting the extension to the Petitioner were unqualified and did not contain any adverse reference to the performance of services. Despite that, the petitioner was issued a show cause notice by the respondent claiming lack of supervision by key personnel, replacement of 70% of key personnel, failure to discharge duty and lack of reporting. It was stated that the Petitioner was in breach of the terms of the contract and was called upon to explain in writing as to why it should not be declared as a “non-performer” or be terminated from the consultancy services for supervision of the project. The petitioner duly filed a response disputing the allegations, however the respondent being unsatisfied with the same declared the Petitioner a non-performer and barred it from participating in any bid for National Highway Projects for a period of one year. The present petition was brought challenging this order of the respondents.

The petitioner contended that the respondent had only granted a cursory personal hearing and no meaningful opportunity was granted. The petitioner also disputed the allegation of non-deployment of personnel and stated that maximum strength was always maintained, even when there were difficulties because of the COVID-19 pandemic. Further, there was no dispute regarding the replacement of personnel since the said replacement was approved by the Respondent. The petitioner contended that it has been made a scapegoat for the failures of the EPC Contractors who had the primary responsibility of carrying out the construction work and that the delay in the completion of the project was not due to any acts or omissions of the petitioner.

The respondents contended that a personal hearing was granted to the petitioner and therefore the impugned order was passed in consonance with the principles of natural justice and was just and reasonable since there was a continuing default on the part of the petitioner in discharging their obligations under the contract. The respondent further stated that the project was of national importance. The petitioner not providing the requisite and stable manpower resulted in a lack of supervision of the work carried out by the EPC Contractors which affected the quality of the work and caused delay. The Respondent also contends the show cause notice was issued to the petitioner in pursuance of twelve prior letters highlighting the default in deployment of key personnel. In addition, the Petitioner failed to vet the designs/drawings submitted by the EPC Contractors which caused delay in the completion of the project. Regarding proportionality, the respondent argued that while the policy allowed for debarment upto 2 years, the impugned order only debarred the petitioner for 1 year, considering the doctrine of proportionality.

The High Court observed that the allegation that the petitioner was responsible for the delay in the completion of the project was not substantiated by the records. While the first extension of time was granted in view of the COVID-19 pandemic, even in the second letter of extension of time, the respondents did not substantiate the allegation that the petitioner was responsible for the delay caused. The court further noted that it cannot be overlooked that despite the primary responsibility being that of the EPC Contractors, the respondents had not initiated any action for debarment against them for poor quality of work or its execution. This inaction against the EPC Contractors, in the court’s opinion, leads to the presumption that a lack of quality in workmanship did not warrant debarment proceedings. The court noted that, applying the same test, the respondents could not selectively initiate debarment proceedings against the petitioner who only had a supervisory role and not the primary role.

The court further opined that the power for debarring cannot be resorted to when the grounds for invoking the said power are only a breach or violation of the condition of a contract, which had been compensated by the defaulting party in damages as stipulated under the contract, and where the default had not resulted in any non-performance of the agreement.