Blacklisting Unsustainable Absent Egregious Conduct or Final Determination of Dispute

The Hon’ble Punjab and Haryana High Court, in the case M/s Floral Electrical Pvt. Ltd. v. Haryana Vidyut Prasaran Nigam Ltd. & Anr., (2025:PHHC:047032-DB), dated April 1, 2025, set aside the petitioner’s blacklisting on the ground that such a drastic and punitive measure cannot be sustained where the alleged contractual breach is subject to bona fide dispute and pending adjudication before an arbitral tribunal. The Court held that in the absence of a concluded finding of default and without strict adherence to the principles of natural justice, the invocation of blacklisting was arbitrary and disproportionate.

The controversy arose out of a contract awarded by Haryana Vidyut Prasaran Nigam Limited (HVPNL) for the construction of a 132 kV substation at Hansi, Haryana. The contract was granted on a turnkey basis to a joint venture comprising M/s Gupta Industries as lead partner and M/s Floral Electrical Private Limited as joint venture partner. Following delays in execution, despite extensions being granted up to August 30, 2022, HVPNL issued notices citing slow progress and failure to meet key milestones. On May 24, 2024, the contract was terminated, the performance and advance guarantees were forfeited, and the joint venture was debarred for a period of one year.

The Court observed that the law regarding blacklisting is settled and has been consistently interpreted as a serious, punitive measure attracting strict scrutiny. Reliance was placed on authoritative pronouncements of the Hon’ble Supreme Court, such as the cases of Erusian Equipment & Chemicals Ltd. vs. State of West Bengal & Anr. [(1975) 1 SCC 70], dated November 11, 1974, and M/s Techno Prints vs. Chhattisgarh Textbook Corporation and Another [Civil Appeal arising out of SLP (C) No. 10042/2023], dated February 12, 2025, that have clarified that blacklisting cannot be imposed merely upon allegations of breach of contract where the conduct of the party is neither dishonest nor egregious. It was reiterated that blacklisting has severe commercial and reputational consequences and effectively amounts to civil death, necessitating the strictest adherence to procedural safeguards.

The Court underscored that the contract in question contained an arbitration clause, which had in fact been invoked, and that the dispute was pending adjudication before a duly appointed arbitrator. In such circumstances, the Court held that it was inappropriate for HVPNL to impose the extreme measure of blacklisting during the pendency of arbitration, particularly when the question of whether the delay constituted a breach and the extent thereof remained sub judice. The imposition of the penalty was found to be not only premature but also violative of the very dispute resolution mechanism agreed upon by the parties.

It was further held that the impugned action suffered from procedural infirmity, as there was no material to demonstrate that the debarment was preceded by a fair and meaningful opportunity of hearing, as required by law. The failure to observe audi alteram partem in matters having such serious consequences was noted to render the administrative action arbitrary and contrary to well-settled principles of natural justice.

The Court concluded that the conduct complained of could not, in the absence of a definitive finding pursuant to a fair adjudicatory process, be regarded as so grossly deviant as to attract the most severe administrative penalty. It was emphasised that proportionality must be the guiding principle and that the invocation of blacklisting must be commensurate with the nature and gravity of the default. A preemptive conclusion of guilt, particularly in the face of an operative arbitral reference, was antithetical to both fairness and reasonableness.

Accordingly, the High Court allowed the writ petition and quashed the impugned order of blacklisting.

The decision reinforces that blacklisting, as a grave civil consequence, must be reserved for demonstrably egregious conduct. Where contractual breaches are disputed and pending adjudication, such punitive action is neither justified nor legally tenable.