LEGAL ISSUE: Whether an indefinite blacklisting order for a minor misbranding error, without a specific show cause notice, is valid.
CASE TYPE: Contract Law/ Writ Jurisdiction
Case Name: Vetindia Pharmaceuticals Limited vs. State of Uttar Pradesh and Another
Judgment Date: 6 November 2020
Introduction
Date of the Judgment: 6 November 2020
Citation: (2020) INSC 464
Judges: R.F. Nariman, Navin Sinha, Krishna Murari, JJ.
Can a company be indefinitely blacklisted for a minor labeling error on a drug, even if the drug’s composition and brand name are correct? The Supreme Court of India recently addressed this issue, highlighting the importance of fair procedure and proportionate penalties in government contracts. This case revolves around a blacklisting order issued against Vetindia Pharmaceuticals for a minor misbranding issue, which the court found to be unjust and disproportionate. The bench comprised of Justices R.F. Nariman, Navin Sinha, and Krishna Murari, with the judgment authored by Justice Navin Sinha.
Case Background
Vetindia Pharmaceuticals Limited, a licensed drug manufacturer, was embroiled in a dispute after one of its supplied medicines was found to be misbranded. The medicine, “OXY-125,” was correctly labeled with its brand name and composition (“Oxytetracycline HCL IP Vet 125 mg”). However, the generic term “HCL” was inadvertently omitted on the label, which read “OXYTETRACYCLINE INJ. I.P. VET” instead of “OXYTETRACYCLINE HCL INJ. I.P. VET”. This error was deemed a case of misbranding by the State Analyst.
In 2007, M/s Palak Pharmaceuticals Private Limited, who had procured the medicine from Vetindia, supplied it to the State of Uttar Pradesh under a tender notice dated 04.10.2006. Following a report by the State Analyst dated 10.10.2008, the Animal Husbandry Department of Uttar Pradesh issued a blacklisting order against Vetindia on 08.09.2009, citing the misbranding as a violation of the tender clauses. Vetindia contested the order, stating that they had not directly supplied the medicine to the state under the tender and that the misbranding was an inadvertent printing error.
Despite Vetindia’s clarifications, the blacklisting order remained in effect, preventing the company from participating in government tenders. This led to Vetindia’s rejection from a tender in Rajasthan on 05.07.2019. The company then filed a writ petition challenging the blacklisting order, which was initially dismissed by the High Court on grounds of delay.
Timeline:
| Date | Event |
|---|---|
| 2007 | M/s Palak Pharmaceuticals Private Limited obtained supplies from Vetindia and supplied it to the State of Uttar Pradesh under a tender notice dated 04.10.2006. |
| 04.10.2006 | Tender notice issued by the State of Uttar Pradesh. |
| 10.10.2008 | State Analyst report declared the batch supplied by the appellant to be of substandard quality (misbranded). |
| 21.10.2008 | Show cause notice issued to Vetindia by the Office of Director, Animal Husbandry Department of the State of Uttar Pradesh. |
| 15.11.2008 | Vetindia submitted its explanation to the show cause notice, stating the misbranding was an inadvertent error. |
| 08.09.2009 | Blacklisting order issued against Vetindia by the Office of Director, Animal Husbandry Department of the State of Uttar Pradesh. |
| 19.05.2011 | Vetindia requested the respondents for allowing it to participate in further tenders for 2011-2012. |
| 01.05.2019 | Vetindia requested to withdraw the blacklisting order dated 08.09.2009. |
| 03.05.2019 | The respondents rejected the request of the appellant and sought additional information. |
| 04.05.2019 | Vetindia submitted the additional information. |
| 05.07.2019 | Vetindia was debarred from consideration by the State of Rajasthan due to the blacklisting order. |
| 24.07.2019 | Vetindia instituted a writ petition against the blacklisting order. |
| 06.11.2020 | Supreme Court allowed the appeal and set aside the blacklisting order. |
Course of Proceedings
The High Court dismissed Vetindia’s writ petition solely on the grounds of a ten-year delay in challenging the blacklisting order. The High Court did not consider the merits of the case, nor did it address the arguments made by Vetindia regarding the violation of natural justice and the indefinite nature of the blacklisting.
Legal Framework
The case primarily revolves around the interpretation and application of the following legal provisions:
- The Drugs and Cosmetics Act, 1940: This Act regulates the import, manufacture, distribution, and sale of drugs and cosmetics.
-
Section 9 of the Drugs and Cosmetics Act, 1940: Defines “misbranded drugs”. According to the judgment, the relevant part of the provision states:
“A drug shall be deemed to be misbranded – (a) If it is so coloured, coated, powdered or polished that damage is concealed or if it is made to appear of better or greater therapeutic value than it really is; or (b) if it is not labelled in the prescribed manner; or (c) if the label or container or anything accompanying the drug bears any statement, design or device which makes any false claim for the drug or which is false or misleading in any particular.”
- Sections 23, 25, 26 and 27 of the Drugs and Cosmetics Act, 1940: These sections deal with the procedure for taking samples, analysis, and penalties for contravention of the Act.
- Clauses 8.12 and 8.23 of the Tender of 2006-07: These clauses were invoked by the respondents for blacklisting the appellant for supplying misbranded medicine.
Arguments
Appellant’s Submissions:
- The appellant, Vetindia Pharmaceuticals, argued that the misbranding was a minor, inadvertent printing error and that the product was neither substandard nor spurious.
- Vetindia emphasized that they did not directly supply the medicine to the respondent under the tender in question.
- The show cause notice dated 21.10.2008 did not mention the possibility of blacklisting, thus violating the principles of natural justice.
- The blacklisting order was indefinite and disproportionate, causing significant prejudice to the company.
- The appellant relied on Gorkha Security Services vs. Government (NCT of Delhi) & Ors., (2014) 9 SCC 105, to argue that the show cause notice was deficient.
- The appellant also cited M/s Daffodills Pharmaceuticals Ltd. & Anr. vs. State of U.P. & Anr., 2019 (17) SCALE 758, where the Supreme Court opined that a debarment of approximately four years was sufficient.
Respondent’s Submissions:
- The respondents, the State of Uttar Pradesh, contended that the writ petition was rightly dismissed due to a ten-year delay.
- They argued that the misbranding violated Section 9 of the Drugs and Cosmetics Act, 1940, and the tender conditions.
- The respondents claimed that the show cause notice was adequate and that any latent defect did not prejudice the appellant.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Misbranding |
|
Appellant |
| Supply of Medicine |
|
Appellant |
| Show Cause Notice |
|
Appellant |
| Blacklisting Order |
|
Appellant |
| Delay in Filing Writ Petition |
|
Respondent |
| Violation of Law |
|
Respondent |
| Adequacy of Show Cause Notice |
|
Respondent |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section, however, the issues can be inferred from the judgment. The primary issues before the Supreme Court were:
- Whether the High Court was justified in dismissing the writ petition on the sole ground of delay, without considering the merits of the case.
- Whether the blacklisting order was valid, given that the show cause notice did not explicitly mention blacklisting and that the appellant did not directly supply the medicine under the tender in question.
- Whether the blacklisting order was disproportionate, given the nature of the misbranding error.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the High Court was justified in dismissing the writ petition on the sole ground of delay? | No. | The Supreme Court held that the High Court erred in dismissing the writ petition solely on the grounds of delay without considering the merits of the case. The Court stated that the delay was adequately explained and that the blacklisting order was in violation of principles of natural justice. |
| Whether the blacklisting order was valid, given that the show cause notice did not explicitly mention blacklisting and that the appellant did not directly supply the medicine under the tender in question? | No. | The Court found that the show cause notice was deficient as it did not mention the possibility of blacklisting. The Court also noted that the appellant did not directly supply the medicine under the tender, making the blacklisting order fundamentally flawed. |
| Whether the blacklisting order was disproportionate, given the nature of the misbranding error? | Yes. | The Court opined that the blacklisting order was disproportionate to the minor misbranding error and that such orders should not be indefinite. The Court referred to previous judgments where it had held that blacklisting beyond 3-5 years was disproportionate. |
Authorities
The Supreme Court relied on the following authorities:
| Authority | Court | How it was used | Legal Point |
|---|---|---|---|
| M/s. Erusian Equipment & Chemicals Ltd. vs. State of West Bengal and another, (1975) 1 SCC 70 | Supreme Court of India | Followed | There cannot be arbitrary blacklisting in violation of the principles of natural justice. |
| Joseph Vilangandan vs. The Executive Engineer, (PWD), Ernakulam and others, (1978) 3 SCC 36 | Supreme Court of India | Followed | A show cause notice must clearly intimate that debarment from future contracts is under consideration. |
| Gorkha Security Services vs. Government (NCT of Delhi) & Ors., (2014) 9 SCC 105 | Supreme Court of India | Followed | A show cause notice must explicitly state that blacklisting is being contemplated. |
| Kulja Industries Limited vs. Chief General Manager, Western Telecom Project Bharat Sanchar Nigam Limited and others, (2014) 14 SCC 731 | Supreme Court of India | Followed | The period of blacklisting should be determined based on the gravity of the offense and guidelines should be formulated to ensure transparency. |
| Basanti Prasad vs. Bihar School Examination Board and others, (2009) 6 SCC 791 | Supreme Court of India | Followed | Writ courts can condone delays if properly explained and no third party rights are affected. |
| Moon Mills Ltd. vs. Industrial Court, AIR 1967 SC 1450 | Supreme Court of India | Referred | Delay is a discretionary rule and not a mandatory requirement. |
| Maharashtra SRTC vs. Balwant Regular Motor Service, AIR 1969 SC 329 | Supreme Court of India | Referred | Delay is a discretionary rule and not a mandatory requirement. |
| State of M.P. and Others vs. Nandlal Jaiswal and others, (1986) 4 SCC 566 | Supreme Court of India | Referred | Delay is a discretionary rule and not a mandatory requirement. |
| M/s Daffodills Pharmaceuticals Ltd. & Anr. vs. State of U.P. & Anr., 2019 (17) SCALE 758 | Supreme Court of India | Followed | Blacklisting beyond 3-5 years is disproportionate. |
Judgment
| Submission by Parties | How it was treated by the Court |
|---|---|
| The misbranding was a minor, inadvertent printing error and that the product was neither substandard nor spurious. | The Court accepted this argument, noting that the error was indeed minor and the product was not substandard or spurious. |
| Vetindia did not directly supply the medicine to the respondent under the tender in question. | The Court agreed that the appellant did not directly supply the medicine, which made the blacklisting order flawed. |
| The show cause notice dated 21.10.2008 did not mention the possibility of blacklisting. | The Court concurred that the show cause notice was deficient as it did not explicitly mention blacklisting. |
| The blacklisting order was indefinite and disproportionate, causing significant prejudice to the company. | The Court held that the blacklisting order was indeed indefinite and disproportionate. |
| The writ petition was rightly dismissed due to a ten-year delay. | The Court rejected this argument, stating that the delay was adequately explained and the High Court should have considered the merits of the case. |
| The misbranding violated Section 9 of the Drugs and Cosmetics Act, 1940, and the tender conditions. | The Court acknowledged the misbranding but emphasized that the procedure under the Drugs Act was not followed and that the blacklisting was disproportionate. |
| The show cause notice was adequate and that any latent defect did not prejudice the appellant. | The Court disagreed, holding that the show cause notice was inadequate as it did not mention the possibility of blacklisting, which prejudiced the appellant. |
How each authority was viewed by the Court?
- The Court relied on M/s. Erusian Equipment & Chemicals Ltd. vs. State of West Bengal and another, (1975) 1 SCC 70, to emphasize that blacklisting cannot be arbitrary and must adhere to the principles of natural justice.
- The Court followed Joseph Vilangandan vs. The Executive Engineer, (PWD), Ernakulam and others, (1978) 3 SCC 36, to highlight the requirement that a show cause notice must clearly indicate that debarment from future contracts is under consideration.
- The Court applied the principles laid down in Gorkha Security Services vs. Government (NCT of Delhi) & Ors., (2014) 9 SCC 105, stating that the show cause notice should have explicitly mentioned the possibility of blacklisting.
- The Court referred to Kulja Industries Limited vs. Chief General Manager, Western Telecom Project Bharat Sanchar Nigam Limited and others, (2014) 14 SCC 731, to emphasize the need for guidelines for determining the period of blacklisting based on the gravity of the offense.
- The Court cited Basanti Prasad vs. Bihar School Examination Board and others, (2009) 6 SCC 791, to highlight that writ courts can condone delays if properly explained and no third-party rights are affected.
- The Court also referred to Moon Mills Ltd. vs. Industrial Court, AIR 1967 SC 1450, Maharashtra SRTC vs. Balwant Regular Motor Service, AIR 1969 SC 329 and State of M.P. and Others vs. Nandlal Jaiswal and others, (1986) 4 SCC 566 to reiterate that delay is a discretionary rule and not a mandatory requirement.
- The Court followed M/s Daffodills Pharmaceuticals Ltd. & Anr. vs. State of U.P. & Anr., 2019 (17) SCALE 758, to highlight that blacklisting beyond 3-5 years is disproportionate.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Violation of Natural Justice: The Court emphasized that the show cause notice did not explicitly mention the possibility of blacklisting, which is a violation of natural justice. The Court noted that the notice only mentioned “appropriate action” without specifying blacklisting, which was not sufficient to put the appellant on notice.
- Disproportionate Penalty: The Court found the indefinite blacklisting to be a disproportionate penalty for a minor misbranding error. The Court noted that the medicine was not substandard or spurious, and the misbranding was due to an inadvertent printing error.
- Lack of Direct Supply: The Court highlighted that the appellant did not directly supply the medicine under the tender in question, which made the blacklisting order fundamentally flawed.
- Explanation of Delay: The Court held that the delay in filing the writ petition was adequately explained, as the appellant had been pursuing the matter with the authorities and was subsequently debarred by the Rajasthan Government, which led to the filing of the petition.
- Prejudice to the Appellant: The Court recognized that the blacklisting order had caused significant prejudice to the appellant, preventing it from participating in government tenders and potentially leading to the “civil death” of the organization.
| Sentiment | Percentage |
|---|---|
| Violation of Natural Justice | 30% |
| Disproportionate Penalty | 30% |
| Lack of Direct Supply | 20% |
| Explanation of Delay | 10% |
| Prejudice to the Appellant | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
The court’s reasoning was based on a combination of factual analysis and legal principles. The court considered that the misbranding was a minor error (fact) and that the blacklisting order was disproportionate (fact). The court also relied on the principles of natural justice and the requirement for a specific show cause notice (law).
The Supreme Court considered the alternative interpretation that the show cause notice was sufficient as it mentioned “appropriate action” but rejected it. The Court emphasized that the notice should have specifically mentioned blacklisting to ensure that the appellant had a fair opportunity to respond.
The Court’s decision was clear: the blacklisting order was invalid from the beginning due to the flawed show cause notice and the lack of direct supply by the appellant. The Court also found the order to be disproportionate and indefinite.
The majority opinion was delivered by Justice Navin Sinha, with Justices R.F. Nariman and Krishna Murari concurring. There were no dissenting opinions.
The Supreme Court’s decision has significant implications for future cases involving blacklisting. It reinforces the principle that government authorities must act fairly and proportionately when imposing penalties. The court’s emphasis on the need for a specific show cause notice and the consideration of the nature of the violation will serve as a guiding principle in similar cases.
The court’s decision also highlights that blacklisting orders should not be indefinite and must be based on a thorough examination of the facts and the law.
The Court did not introduce any new doctrines or legal principles but reaffirmed the existing principles of natural justice, proportionality, and the need for a specific show cause notice in blacklisting cases.
The Court analyzed the arguments for and against the blacklisting order, ultimately rejecting the respondent’s arguments and holding that the order was invalid due to procedural and substantive flaws.
The Supreme Court quoted the following from the judgment:
- “The appellant is a licensed drug manufacturer. The drugs in question have been found to be misbranded and not spurious or adulterated.”
- “The show cause notice did not state that action by blacklisting was to be taken, or was under contemplation. It only mentioned appropriate action in accordance with the rules of the Tender.”
- “An order of blacklisting operates to the prejudice of a commercial person not only in praesenti but also puts a taint which attaches far beyond and may well spell the death knell of the organisation/institution for all times to come described as a civil death.”
Key Takeaways
- Government authorities must ensure that show cause notices clearly state the proposed penalty, especially in cases of blacklisting.
- Blacklisting orders should not be indefinite and should be proportionate to the violation.
- Minor errors, such as inadvertent printing mistakes, should not result in severe penalties like indefinite blacklisting.
- Courts can condone delays in filing writ petitions if the delay is adequately explained and no third-party rights are affected.
- Authorities must follow the procedure prescribed under relevant statutes, like the Drugs Act, when taking action against manufacturers.
Directions
The Supreme Court set aside the impugned order of the High Court and the blacklisting order dated 08.09.2009 of the respondents. The appeal was allowed.
Development of Law
The ratio decidendi of this case is that a blacklisting order is invalid if the show cause notice does not explicitly mention the possibility of blacklisting, especially when the blacklisted entity did not directly supply the goods under the tender. The Court also held that indefinite blacklisting orders are disproportionate and violate the principles of natural justice. This case reinforces the existing legal principles and does not introduce a new position of law.
Conclusion
The Supreme Court’s decision in Vetindia Pharmaceuticals vs. State of Uttar Pradesh is a significant ruling that protects businesses from arbitrary and disproportionate blacklisting orders. The Court emphasized the importance of fair procedure, specific show cause notices, and proportionate penalties, ensuring that government authorities act justly and reasonably. This judgment serves as a reminder that even minor errors should not lead to severe and indefinite penalties, and that the principles of natural justice must always be upheld.
Category:
- Contract Law
- Blacklisting
- Tender
- Show Cause Notice
- Writ Jurisdiction
- Article 226
- Principles of Natural Justice
- Drugs and Cosmetics Act, 1940
- Section 9, Drugs and Cosmetics Act, 1940
- Misbranded Drugs
FAQ
Q: What was the main issue in the Vetindia Pharmaceuticals case?
A: The main issue was whether an indefinite blacklisting order against Vetindia Pharmaceuticals for a minor misbranding error was valid, especially when the show cause notice did not mention blacklisting.
Q: What is misbranding according to the Drugs and Cosmetics Act, 1940?
A: According to Section 9 of the Drugs and Cosmetics Act, 1940, a drug is misbranded if it is not labeled in the prescribed manner, or if the label bears any false or misleading statement.
Q: What did the Supreme Court say about the show cause notice in this case?
A: The Supreme Court held that the show cause notice was deficient because it did not explicitly mention the possibility of blacklisting, which is a violation of the principles of natural justice.
Q: What was the reason for the blacklisting order against Vetindia Pharmaceuticals?
A: Vetindia was blacklisted because a medicine they supplied was found to be misbranded, as the generic term “HCL” was missing on the label.
Q: Did Vetindia directly supply the medicine under the tender in question?
A: No, Vetindia did not directly supply the medicine to the State of Uttar Pradesh under the tender. M/s Palak Pharmaceuticals Private Limited had obtained supplies from the appellant and supplied it to the respondent.
Q: What did the Supreme Court say about the duration of blacklisting orders?
A: The Supreme Court stated that blacklisting orders should not be indefinite and should be proportionate to the violation. They also referred to previous judgments stating that blacklisting beyond 3-5 years is disproportionate.
Q: What is the significance of this judgment for businesses?
A: This judgment protects businesses from arbitrary and disproportionate blacklisting orders by emphasizing the need for fair procedure, specific show cause notices, and proportionate penalties.