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This article is written by Darshit Vora, from SVKM Narsee Monjee Institute of Management Studies. It is a case analysis which involves the principle of Natural justice. M/S Daffodills Pharmacy  Ltd vs. The State of UP involves the concept of proper opportunity to be heard before blacklisting the Company.  

Introduction 

This case revolves around the principle of “Audi Alteram Partem” which means that there should be a fair play of Justice. A pharmaceutical company has filed a petition against the decision of the principal secretary for the stoppage of the purchase of local medicines. This judgment of M/S Daffodills Pharmacy  Ltd vs. The State of UP (2019), is a landmark in nature as it restricts the power of the administration to comply with rules mentioned in the Statutory provisions and proper opportunity should be provided to the affected parties to present their arguments before passing any order against anyone.  

About the Company 

Daffodills is a pharmaceutical company that has been in India since 1985. It is a manufacturer as well as an exporter of pharmaceutical products. The Company is registered in Ahmedabad. It is a private limited company that has been in this field for more than 34 years.  

Facts of the Case

Daffodills had participated in the tender process which was organized by the state of UP to allow the interested parties to bid who were willing to supply various pharmaceutical products. The successful bidder was supposed to supply medicines to various hospitals across UP. Daffodills was one of the successful bidders. Daffodills was asked to match the bid of Tamil Nadu Service Corporation Ltd before 29.05.2015. At the time of bid submission, the bidder was supposed to give an affidavit stating that there was no CBI Case, Vigilant Case, or a Court Case pending against the company. The Company was also supposed to show necessary documents to show that the tender is true. If the documents were found to be fake then a criminal case can be instituted against the directors, or the stakeholder in the relevant laws. The documents listed above were furnished by Daffodills; the documents were healed to be fake and therefore a letter was issued to the principal secretary to the government of UP, stating that an FIR has been lodged against Daffodills, the CBI Inquiry would be conducted on this issue. The offices under the department of health were debarred from making any local purchase from the Daffodills until the pre governmental order. If any local hospitals purchase medicines from Daffodills without the approval of the government, then, strict action can be taken against them. Daffodils considered it as an erroneous ground and filed a writ petition under Article 227 in the High Court of Uttar Pradesh. 

The issue involved in the case 

  • The only issue for which a writ petition was filed in the High Court of Uttar Pradesh was against the decision taken by the principal secretary of the Government of UP to stop the local purchase of medicines from Daffodills. 
  • No proper opportunity was given to Daffodills for presenting claims against the decision of blacklisting. 

Observations made by the High Court 

  • In matters of contractual disputes relating to policy decisions, the scope and jurisdiction of Article 226 are limited. 
  • The action of the State government was not unreasonable or contrary to the public interest. 
  • The claim of Natural Justice was ignored by the Court saying that there are no StraitJacket Formulae. 
  • Failure of Daffodills to comply with the procedures lead state agencies to take this action. 

The judgment of the High Court 

The performance of the company doesn’t meet the statutory requirements of the contract and the state agencies have the right to regulate actions taken by the Company which is against the public interest, therefore, the decision taken by the State agencies was upheld by the High Court. The decision of the High Court was appealed to the Supreme Court. 

Arguments of the petitioner in the Supreme Court 

  • The High Court while passing the decision overlooked the salient fact that Surender Chawdary, against whom the case was filed, resigned as a director in 2012. 
  • The state agencies, before passing any order of debarring the company from selling medicines, should have availed an opportunity of being heard to the company (Daffodills)

Arguments on behalf of the State 

  • Surender Chaudhary was acting in the capacity of the director and was booked under various offences by the CBI. 
  • The clause mentioned a criminal case against the firm, board of directors, or individual directors. Daffodills failed to comply with the provisions.  
  • The order passed by the principal secretary to stop the local purchase of medicines from Daffodills was not a debarring order. 

Observations of the Supreme Court

  • The order made by the State to debar the local purchase of Pharmaceutical products from Daffodills is  not for a definite period, unlike various other blacklisting orders. 
  • There is no clear information till now that are there any formal charges framed against the previous director of the Company, Sunder Chowdary.
  • It is necessary to execute debarring orders. The necessary opportunity of hearing and representation should be given to the parties. It was rightly mentioned in the case of Raghunath Thakur vs State of Bihar and Ors (1988), blacklisting has the effect of preventing a person from privileges and advantage from entering into a lawful relation with the government. Blacklisting creates a disability according to the principles of fair play, fair opportunity should be given to the person against the proposed action. 
  • The High Court has made an error in passing the judgment. The court refused to pass the judgment on the wrongful rejection of tender for Daffodills on the ground of limited scope of inquiry. However, it ignored the fact that the action of the state violated the principle of Natural Justice. 
  • The High Court should have instead quashed the decision taken by the State of UP. 

The decision of the Supreme Court

The decision taken by the principal secretary of debarring local purchase of medicines from Daffodills was quashed and the judgment passed by the High Court was set aside.   

The concept of the opportunity of hearing 

This concept of Natural Justice has evolved from the Latin principle named ‘Audi Alteram Pateram’ which means “The other side should be heard”. It was said by Edward Coke in  Cooper v. Wandsworth Board of Works (1963), that before awarding any sentence no parties must be left unheard. The opportunity of hearing also comes under the concept of fair hearing. Without complying with this principle the fundamental right of fair hearing cannot be complied with. There were judgments previously passed on the issues where the principle of Natural Justice, the right to be heard by the Court were upheld.

  • Maneka Gandhi vs Union of India (1968): 

This is the case in which the passport of the victim was seized by the authorities and she wasn’t allowed to be heard. The Victim made many claims one such being the procedure established by law should conform with the principle of Natural Justice and should not be arbitrary. In this case, the court gave a majority judgment in favour of the victim and held that Article 21 should be reasonable in conformity with Article 14 of the Indian Constitution. The law must be right, just, and fair. 

  • National Textiles Workers Union P.R. Ramakrishna (1983): 

In this case the question that was raised in the Court was whether the workers during the winding-up proceedings of the Company have the right to be heard. Justice Bhagwati, in this case, said that termination of the services of the workers without giving them the opportunity to be heard would be a violation of fair procedure. Thus, in this case, the Supreme Court held that before winding of the company the workers are entitled to be heard. 

  • State Forest Development Corporation Ltd. v.Ishwar Dutt (2019): 

In this case, the services of the chowkidar were terminated without allowing him to be heard. The Himachal Pradesh High Court held that the services terminated without giving a proper opportunity to be heard, which is a violation of the principle of Natural Justice, and therefore the appeal was dismissed. 

Similar Judgments 

Punnen Thomas vs. State of Kerala (1968)

Facts: 

In this case  the Petitioner contended against the decision of the State to delta the name of the contractor from the list of the qualified contractors. He challenged the order of blacklisting in the Kerala Court where he contended that there was no proper opportunity provided to the petitioner to present his point. 

Judgment:

The Majority opinion held that the principle of Audi Alteram Pateram cannot be applied; it would lead to the hampering of administration and increase the scope of Judicial Interference. However, Justice Mathew who was in the dissenting opinion mentioned that notice or opportunity to be heard against all notions of fairness is pivotal in a democratic government.   

The Minority decision became a majority in Eurasian Equipment & Chemical Ltd vs. State of Bengal. 

Eurasian Equipment & Chemical Ltd vs. State of Bengal(1975)

Facts: 

In the case the petitioner’s company was engaged in purchase and export of Cinchona, the tender of the Company was rejected by the State Government. The Petitioner contested that rejection of tender was not on fairground. The State government submitted charges of malpractices and misconduct and the State government wouldn’t deal with the petitioner until those charges were cleared. The State government also contended that the State cannot be compelled to negotiate any contract with any company.The State can enter into contract with any company in whom it has trust and integrity.  

Judgment:

The Supreme Court held that the action of the State Government affects the reputation of the Company. The order creates disability for the concerned person.  The State Government is supposed to comply with the principle of Natural Justice. A proper opportunity needs to be provided to represent their case before blacklisting them. 

Raghunath Thakur vs. State  of Bihar (1988)

Facts: 

In this case the State Government had blacklisted the petitioner and no proper opportunity was provided by the State to the petitioner that  was contended by the petitioner in the court.

Judgment: 

The order should be passed by the State only after complying with the principle of Natural Justice. Blacklisting order has serious implications upon future business opportunities that needs to be provided to the petitioner. 

Patel Engineering Ltd vs. Union of India (2012)

Facts:

In this case petitioner was the highest bidder in the maintenance project of the National Highway Authority of India. The petitioner was called upon to give the acceptance, who denied to confirm its acceptance. NHAI sent a show-cause notice after receiving the reply of the petitioner. They blacklisted the Company from bidding for at least one year. The Action of the State was challenged in the Court.

Judgment: 

The Supreme Court held that the petitioner had been given a reasonable opportunity by issuing a show-cause notice. There is no requirement of personal or oral hearing for the blacklisting orders.

The difference between Patel Engineering Ltd vs. Union of India and M/S Daffodills vs the State of UP is that the State, in the former case, issued a show-cause but in the latter case there was no show cause notice issued and the State didn’t comply with the principle of Natural Justice.        

Critique 

The High Court overlooked the aspect of natural justice. The Court also expressed limits in the jurisdiction of the High Court under Article 227 which creates a gap to arrive at a particular judgment. In the appeal made to the Supreme Court, the Supreme Court was  correct in quashing the order of the principal secretary, but an important aspect was ignored by the Supreme Court as well which is compensation because the local sales of the company were banned for 4 years and 3 months which would have led to huge losses to the Company. The way to ease the Company from losses already incurred was by providing a monetary compensation.   

Conclusion 

In the present case, the state failed to justify its action taken against the pharmaceutical company. Before passing the decision, the High Court didn’t comply with the provisions of natural justice. This is a significant decision passed by the Supreme Court of India which also limits the powers of the State from passing any decision that is against the Principle of Natural Justice. Time and again efforts have been made by the State to breach the fundamental rights because the principle of Audi Alteram Partem comes under Article 14 and Article 21 of the Indian Constitution. Judiciary is one of the Important pillars that have passed various decisions in the best interest of society.

References   


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