Blacklisting Pharma Company For Supply Default During COVID-19 Crisis Disproportionate In Absence Of Fraud Or Misconduct: Chhattisgarh High Court

The Court held that the impugned action failed to account for the extraordinary circumstances prevailing during the public health crisis and imposed a disproportionate penalty despite the absence of any allegation of fraud, misrepresentation, supply of substandard products or conduct involving moral turpitude.

The Court was hearing a writ petition challenging an order passed by the Chhattisgarh Medical Services Corporation Limited blacklisting the petitioner's Remdesivir product for three years and forfeiting the security deposit on account of a shortfall in supplies under purchase orders issued during the COVID-19 pandemic.

A Division Bench of Chief Justice Ramesh Sinha and Justice Ravindra Kumar Agrawal observed: “The petitioner had admittedly supplied the entire quantity under the first purchase order and part quantity under the second purchase order. The default occurred during an extraordinary period marked by a devastating public health crisis affecting the entire nation. In such circumstances, the imposition of the harsh consequence of blacklisting for three years and forfeiture of security deposit, resulting in exclusion of the petitioner from future government procurement processes relating to the product, appears excessive and disproportionate to the nature of the default, particularly when there is no allegation of fraud, misrepresentation, supply of substandard products or any conduct involving moral turpitude.”

Senior Advocate Abhishek Sinha appeared on behalf of the petitioner. Shashank Thakur, Additional Advocate General, appeared for the respondents.

Background

The dispute arose out of a tender floated for the procurement of Remdesivir injections during the second wave of the COVID-19 pandemic. The tender indicated a requirement of 5,000 vials, subject to variation depending upon actual demand. The petitioner participated in the tender process, emerged as the successful bidder, and entered into a rate contract with the respondent corporation.

After the first purchase order was fully complied with, the respondent corporation issued further purchase orders substantially increasing the quantity required. Within a short period, the petitioner was called upon to supply more than 60,000 vials of Remdesivir, including purchase orders aggregating 50,000 vials on a single day.

According to the petitioner, such escalation occurred at the peak of the second wave of the pandemic when manufacturers were facing severe shortages of raw materials, supply chain disruptions, transportation difficulties and constraints arising from central allocation directives governing distribution of Remdesivir across the country.

The petitioner claimed that despite these difficulties, it supplied the entire quantity under the first purchase order and part of the subsequent order, while repeatedly informing the respondents of the practical impediments affecting further supplies.

However, a show-cause notice was issued proposing blacklisting and forfeiture of the security deposit. Following consideration of the petitioner's reply, the respondent corporation blacklisted the product for three years and forfeited the security deposit, leading to the filing of the writ petition.

Court's Observations

The Court observed that the principal issue was not whether there had been a contractual default, but whether the extreme penalty of blacklisting for three years and forfeiture of the security deposit was justified in the peculiar circumstances prevailing during the relevant period.

The Bench noted that while the tender permitted variation in quantity, such power could not be exercised divorced from the doctrine of reasonableness. The Court found it significant that a tender indicating an approximate requirement of 5,000 vials was followed, within a matter of days, by purchase orders requiring supplies in excess of 60,000 vials during the peak of a national health emergency.

According to the Court, such circumstances required a pragmatic and fair assessment before invoking penal consequences.

The Court further held that the expression "indicative quantity" could not be interpreted as conferring an unrestricted power to increase procurement requirements to any extent whatsoever and thereafter penalise a supplier for inability to satisfy such extraordinary demand.

The Bench observed that administrative actions of the State and its instrumentalities, even in contractual matters, remain subject to the constitutional requirement of fairness and non-arbitrariness under Article 14.

Referring to Erusian Equipment & Chemicals Ltd. v. State of West Bengal (1975), the Court reiterated that blacklisting has serious civil consequences because it deprives a person of the privilege and advantage of entering into lawful business relations with the Government. Reproducing the Supreme Court's observations, the Bench noted:

“Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains.”

The Court also relied upon Kulja Industries Ltd. v. Chief General Manager, Western Telecom Project BSNL (2014), wherein the Supreme Court held that although the power to blacklist is inherent in State instrumentalities, its exercise remains subject to judicial review on the touchstone of fairness, natural justice and proportionality. Referring to the decision, the Bench noted:

“The order itself being reasonable, fair and proportionate to the gravity of the offence is similarly examinable by a writ court.”

Examining the facts of the present case, the Court found that the petitioner had consistently informed the respondents regarding shortages of raw materials, supply chain disruptions, manufacturing constraints and the impact of Government of India allocation orders governing nationwide distribution of Remdesivir.

However, the impugned order did not indicate that these factors had been objectively evaluated before the decision to blacklist was taken. According to the Court, the decision appeared to proceed solely based on contractual default without considering whether the shortfall was deliberate, mala fide or attributable to circumstances beyond the petitioner's control.

The Bench held that the doctrine of proportionality required the respondents to examine whether a lesser measure would adequately achieve the intended objective. The Court found that the petitioner had partly complied with the supply obligations and that the default occurred during an unprecedented public health crisis.

In such circumstances, the extreme penalty of blacklisting coupled with forfeiture of the security deposit was disproportionate to the nature of the default.

The Court ultimately concluded that the impugned action suffered from arbitrariness because the respondents had failed to consider the extraordinary circumstances prevailing during the second wave of COVID-19, the unprecedented increase in demand beyond the indicative quantity specified in the tender and the requirement of proportionality in imposing penal consequences.

Ultimately, the Court concluded: “Where contractual non-performance is occasioned by extraordinary circumstances, imposition of blacklisting and forfeiture of security deposit, in the absence of fraud, or misconduct, is disproportionate and unsustainable, in view that order of blacklisting must satisfy the test of fairness.”

Conclusion

Allowing the writ petition, the Chhattisgarh High Court quashed the order blacklisting the petitioner's product for three years, the forfeiture of the security deposit and the consequential order rejecting the petitioner's representation.

The Court further directed the respondents to refund the security deposit deposited by the petitioner company.

Cause Title: Cipla Limited v. Chhattisgarh Medical Services Corporation Limited & Anr. (Neutral Citation: 2026:CGHC:23723-DB)

Appearances

Petitioner: Senior Advocate Abhishek Sinha with Advocates Samrath Singh Marhas and D.L. Dewangan

Respondents: Shashank Thakur, Additional Advocate General; Trivikram Nayak

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