Supreme Court: Mere Allegation of Contractual Breach Insufficient for Blacklisting

In M/S Techno Prints v. Chhattisgarh Textbook Corporation & Anr. (2025 INSC 236), the Supreme Court of India ruled that a contractor cannot be blacklisted solely based on allegations of contractual breach unless there is a clear intent to cheat or take undue advantage. The decision reinforces that blacklisting, being a severe penalty, must be based on substantive grounds rather than mere non-performance due to unforeseen circumstances.

Facts of the Case

The appellant, M/S Techno Prints, was awarded a contract for printing textbooks by the Chhattisgarh Textbook Corporation. The contract stipulated specific timelines for completion. However, due to the COVID-19 pandemic, the appellant failed to meet the deadline. Subsequently, the Corporation issued a show cause notice, citing breach of contract and proposing blacklisting the appellant for three years while forfeiting the Earnest Money Deposit (EMD).

The appellant challenged the notice before the High Court, arguing that the delay was beyond its control. The High Court dismissed the writ petition, affirming the Corporation’s authority to blacklist defaulting contractors under the tender conditions. Dissatisfied with the ruling, the appellant approached the Supreme Court.

Key Legal Issues

1. Whether a mere breach of contract justifies blacklisting a contractor.
2. Whether procedural fairness was followed in issuing the show cause notice.
3. Whether the Corporation’s actions were arbitrary or violated principles of natural justice.

Arguments by the Parties

Appellant (M/S Techno Prints):

• The delay was due to the COVID-19 pandemic, an unforeseeable event beyond its control.
• Blacklisting is an extreme punitive measure, appropriate only in cases of fraud, willful misconduct, or habitual default.
• The Corporation arbitrarily refused to consider the genuine constraints caused by the pandemic.

Respondent (Chhattisgarh Textbook Corporation):

• The contract clearly stipulated penalties, including blacklisting, for failure to meet deadlines.
• The delay caused significant financial and operational losses to the Corporation.
• The show cause notice provided the appellant an opportunity to explain its failure.

Supreme Court’s Reasoning

1. Breach of Contract vs. Blacklisting

The Court distinguished between a mere breach of contract and conduct warranting blacklisting. Citing Kulja Industries Ltd. v. BSNL (2014) AIR SC 9, it reiterated that blacklisting must be justified by habitual failure, fraud, or gross negligence. The Court emphasized that:

• Blacklisting is a severe penalty with long-term consequences on a business’s reputation and ability to secure future contracts.
• It cannot be imposed merely because a contractor fails to perform due to external factors.
• The Corporation’s actions were disproportionate given the pandemic’s widespread impact.

2. Procedural Fairness and Natural Justice

The Court found that the show cause notice failed to provide specific reasons justifying blacklisting. Referring to Erusian Equipment & Chemicals Ltd. v. State of West Bengal (1975) 1 SCC 70, it reaffirmed that blacklisting must be based on strong and independent evidence of misconduct. The notice lacked sufficient details to establish willful default or bad faith.

3. Case Law Considerations

The Court relied on The Blue Dreamz Advertising Pvt. Ltd. v. Kolkata Municipal Corporation (2024 INSC 589), where it held that:

• Blacklisting should only be imposed when necessary to protect public interest from irresponsible contractors.
• If a dispute arises purely from contractual performance issues, standard remedies like forfeiture of security deposits should be pursued instead of blacklisting.

Conclusion and Implications

The Supreme Court quashed the blacklisting notice but upheld the Corporation’s right to forfeit the EMD. It emphasized that while contractual obligations must be enforced, blacklisting is a punitive measure that requires a higher threshold of misconduct.

This ruling reinforces the principle that blacklisting cannot be an automatic consequence of non-performance. Contractors facing similar actions must ensure that the grounds for blacklisting meet legal scrutiny. Public authorities must exercise discretion, ensuring that blacklisting is reserved for cases of fraud, habitual default, or gross negligence rather than routine contract disputes.

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