Automatic Debarment Following Contract Termination Is Arbitrary: Jharkhand High Court

The Jharkhand High Court has dismantled the practice of automatic blacklisting of contractors, ruling that the determination of a contract does not grant state instrumentalities a license to bypass the principles of natural justice for debarment. A Bench comprising Chief Justice M.S. Sonak and Justice Rajesh Shankar held that since blacklisting leads to the 'civil death' of a contractor, it requires an independent application of mind and a specific show-cause notice, irrespective of contractual termination.

In this case, the Petitioner, a proprietorship firm, challenged an order by RITES Ltd. which declared it a 'Poor Performer' and placed it on the 'Negative List of Contractors' for two years following the termination of an electrical works contract. The Petitioner contended that while the contract was terminated due to alleged delays, the subsequent debarment was mechanical and lacked the procedural fairness mandated under Constitution of India, 1950 and Article 226 of the Constitution.

Court Rejects 'Mechanical' Debarment Process

The Court observed that the respondents acted mechanically, treating the debarment as an inescapable consequence of Clause 3(b) of the General Conditions of Contract (GCC). The Court noted that even if a contractor has breached a contract, blacklisting is only warranted if the conduct is 'deviant or aberrant.'

Referring to the legal framework, the Court noted that Erusian Equipment & Chemicals Ltd. Vs. State of W.B. & Another ( "(1975) 1 SCC 70": 1974 CaseBase(SC) 301), UMC Technologies (P) Ltd. Vs. Food Corpn. of India & Another ( "(2021) 2 SCC 551": 2020 CaseBase(SC) 650), and Techno Prints Vs. Chhattisgarh Textbook Corporation and Another established that a fair hearing is a prerequisite for blacklisting. The Court further relied on A.K.G Construction and Developers Pvt. Ltd. Vs. State of Jharkhand & others to emphasize that termination and blacklisting operate in different dimensions past performance and future eligibility and thus require independent exercise of power.

The Court, in its reasoning, observed: "A decision of blacklisting is not automatic and certainly not a logical consequence of a decision of termination. Even after the department decides to terminate the contract, there is still a choice of exercising the power of blacklisting. These decisions operate in two dimensions - past and subsisting for termination and future for blacklisting. In view of the serious consequences, it is necessary for the department to issue a specific notice proposing blacklisting of a contractor and call for an explanation as to why an order of blacklisting should not be passed."

Maintainability and Exclusive Jurisdiction Clauses

The Respondents argued the petition was not maintainable as the contract fixed 'Kolkata' as the exclusive jurisdiction. However, the Bench cited Maharashtra Chess Association Vs. Union of India & Others ( "(2020) 13 SCC 285": 2019 CaseBase(SC) 1695), noting that a privately negotiated document cannot compel a High Court to abdicate its responsibility under Article 226 of the Constitution. Furthermore, applying the principle from Godrej Projects Development Ltd. Vs. Anil Karlekar & Others ( "(2025) 4 SCC 259": 2025 CaseBase(SC) 238), the Court held that in contracts with unequal bargaining power, unfair clauses should not be strictly enforced against the weaker party.

The Court has the following directions:

"The impugned letter dated 22.04.2026 to the extent of placing the petitioner in the ‘Negative List of Contractors’ for a period of two years from 22.04.2026 to 21.04.2028 and debarring it from participating in the tenders to be invited by the respondent no. 1 for the said period, is hereby quashed and set aside. So far as, the other actions of the respondents relating to the said contract including that of the petitioner being declared as a ‘Poor Performer’ is concerned, the same do not warrant interference by this Court under its extraordinary writ jurisdiction. The petitioner is however at liberty to challenge the same in accordance with law. The respondents will also have the liberty, if so advised, to initiate fresh proceeding for debarment against the petitioner and pass appropriate order after following due process of law."

Background

The petitioner was awarded a contract by RITES Ltd. (acting for NUPPL) for railway siding electrification works in 2024. The project faced delays, which the petitioner attributed to site unavailability and other hindrances. RITES issued warnings and eventually terminated the contract on March 16, 2026, alleging poor progress. Subsequently, on April 22, 2026, RITES declared the petitioner a 'Poor Performer' and blacklisted it for two years. The petitioner moved the High Court, primarily challenging the debarment as a violation of natural justice. While the Court refused to interfere with the 'Poor Performer' classification (leaving it for alternate legal remedies), it quashed the debarment for lack of a specific show-cause notice.

Case Details:
Case No.: W.P. (C) No. 2527 of 2026
Neutral Citation: 2026:JHHC:26889-DB
Case Title: M/s SK Electricals v. RITES Ltd. & Others
Appearances:
For the Petitioner(s): Mr. Indrajit Sinha, Advocate; Mr. Vipul Poddar, Advocate; Mr. Pradyumna Poddar, Advocate; Ms. Sugandha Jaiswal Poddar, Advocate
For the Respondent(s): Mr. Srijit Choudhary, Advocate; Ms. Tanya Rai, Advocate

Source: 2026 CaseBase(JHKD) 2743