Discretion in defence procurement broad but not unlimited: Delhi High Court

The court noted, “There has to be a semblance of fairness, non-arbitrariness and compliance of principles of natural justice even in such cases and the guidelines would have to be read as such.”

The observations came on a plea by Defsys Solutions Private Limited against an order of the Defence Ministry on December 9, 2022, suspending it from any business dealings with the Centre for a “period of one year, or until further orders”.

The ministry’s order said that it was was informed by CBI about an ongoing probe against Defsys in relation to the AgustaWestland VVIP helicopter case.

The competent authority, in view of the Ministry of Defence 2016 “Guidelines for Penalties in Business Dealings with Entities” (which deals with suspension of business dealings on various grounds including nation security) had thereafter suspended Defsys.

On the Guidelines and the documents accompanying Justice Singh said that it gives “unbridled power to the authorities in the case of suspension of an entity”.

Justice Singh further said that principles of natural justice ought to be complied with generally and “only when national security concerns overweigh the duty of fairness that the said procedure can be given a go by”. In each case where the principles of natural justice are not followed, there has to be a justification and “merely citing national security considerations is not enough”, it added.

With respect to the 2016 guidelines the HC said that suspension is a “subset within debarment/banning” and is an urgent/interim or immediate measure which precedes banning. “Thus, indefinite suspension without resort to the safeguards prescribed for banning would not be permissible,” the HC ruled.

With respect to Defsys the HC said that there is till date no clarity on the nature of allegations, investigation and time period of the investigation “as no reasons are spelt out”. The HC said it if its presumed that investigations against Defsys started in 2013 along with AgustaWestland then it is not clear why the CBI gave an intimation to MoD “for the first time only in December, 2021” nine years after the beginning of Agusta Westland investigation.

Justice Singh thereafter directed the authorities to issue a show cause notice within two weeks from the order setting out the reasons for suspension and also to provide relevant material to the company about the same.
While disposing of the petition, the High Court also said that an opportunity to reply or hearing should be provided to Defsys and a reasoned order must be passed in the matter within three months.

Defsys–which among other things manufactures air borne and land systems used by on-board military platforms, said that no show cause notice was issued and no hearing or reasons were given in the suspension order; it also said that ‘national security’ cannot be used to deprive it of a notice or hearing.

The Centre however said that as per the 2016 guidelines competent authority may suspend business dealings with an entity when intimation is received regarding initiation of criminal investigation or enquiry against the entity; hence show cause notice is not required.

The HC also additionally laid down the steps to be followed with respect to the 2016 guidelines which includes that in cases of suspension of an entity show-cause notice is to be issued to the entity within a reasonable period after suspension orders are issued, preferably within a six month period. Such a show-cause ought to set out the grounds and any material which may form its basis ought to be communicated, the court said.