This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its December 2011 decision in Ind-Swift Ltd. v. Union of India, the High Court of Delhi upheld the lifetime ban of a pharmaceutical company after its products failed government drug tests. The drug dissolution and disintegration tests repeatedly found that the pharmaceutical company’s drugs remained intact too long when ingested and risked being ineffective for treating patients. The company was deregistered as a government supplier and challenged the debarment, but that decision was upheld by a trial court.
The company appealed the ruling, arguing that the non-performance of tested drugs was a marginal result that did not warrant debarment, and that its rights to natural justice and due process were not respected. However, the Court rejected these arguments, concluding that the failed drug tests were serious enough to justify debarment and that the government had respected its due process duties after arriving at its decision:
We would now like to deal with the argument on the merits of the case, namely, whether the test reports indicated marginal variation warranting any such action or the variation was more than marginal falling in the category A defect and further whether it was a case of repeated failure of similar nature as the consideration of this aspect is paramount having regard to the contractual conditions. If it is marginal defect, then no action is permissible. On the other hand, if it is category A defect, then only particular batch in respect of which defect is found is to be debarred for a period of three years. If it is a category A defect, then supply of that product can be debarred for a period of three years. Only if it is a case of repeated failure of similar nature that debarment can be permanent.
It is not in dispute that even as per the respondents, two drugs failed only in dissolution test, namely, it did not conform to the time meant for dissolving the said tablet. There is no dispute about the quality of medicines, otherwise. Therefore, the first question would be as to whether the medicines failing in dissolution test would mean that it can be treated as more than marginal variation. In the additional affidavit filed by the respondents in the writ proceedings, it is specifically pointed out, and there is no denial to this, that the acceptance criteria of a dissolution test under procedure specified in the Indian Pharmacopeia (IP) has itself taken care of any marginal variation in the dissolution test. It is further explained that in case of disintegration test, the test is met if all the six tablets have disintegrated completely within the time specified in IP. If one or two tablets fail to disintegrate, the same is treated as marginal variation and the test is repeated on 12 additional tablets and the test is met if not less than 18 tablets tested disintegrate. Where only 1 or 2 tablets out of 18 failed to disintegrate, the same is treated as marginal variation and even in such a situation, the test is satisfied. Likewise, in the case of dissolution test in the first round of testing, each unit has to satisfy a value of D + 5 per cent (as per IP monograph of tablet Norfloxacin, D is not less than 70% of stated amount of Norfloxacin). In case any of the units fail to achieve the said acceptance criteria, the test is carried out on another 6 units and the acceptance criteria is modified. The acceptance criteria at the second stage is that the average of 12 units should be equal to or greater than D and no unit is less than D -15 per cent. In case a tablet fails at this stage also, further testing is carried on an additional 12 tablets. The acceptance criteria is further reduced. The acceptance criteria is that the average of 24 units is equal to or greater than D and not more than two units are less than D -15 percent and no unit is less than D -25 percent. Thus, for satisfying the test, it is enough if the overall average is achieved and even if a few tablets do not meet the criteria, the same does not ipso facto result in failure of the test/rejection.
The Court then cited the significant adverse impact the faulty drugs could have on patients and agreed with the government’s conclusion that such failures should not be downplayed as merely “marginal”:
Explaining the importance of the dissolution test, which according to the respondents cannot be undermined or downplayed, it is clarified that tablet when taken orally should first disintegrate into small pieces and then further dissolve before it can be absorbed into blood circulatory system of the patient from the elementary canal. After absorption of the medicine, it is transported via blood circulatory system to the site of action/organ or cells where the active ingredients of tablet, i.e. medicine has to act and produce the intending effect/cure of disease. Therefore, medicines from a tablet failing in disintegration or dissolution test may not be absorbed and reached their site of action and hence, become ineffective and produce no cure for the disease in the patient. Thus, the dissolution of the medicine in time becomes important as it determines the effectiveness of the tablet. The aforesaid analysis given by the respondents is convincing and thus, it cannot be said that merely because a medicine failed in dissolution test, it has to be treated as a marginal variation.
After confirming the significance of the non-performance issues, the Court confirmed that government contract administration decisions should not be second-guessed by the courts in judicial review proceedings unless those decisions were irrational, unreasonable, or arbitrary:
In Jagdish Mandal v. State of Orissa & Ors., (2007) 14 SCC 517, a decision relied upon by the appellant, the Supreme Court has laid down the parameters of judicial review and interference in the contractual matters relating to Government contracts/tenders. We are not concerned here with the case of award of tender as it is a case of debarment/blacklisting on the purported ground of defective supplies in the execution of the contract. The Supreme Court in the aforesaid judgment clarified that power of judicial review will not be invoked to protect private interest at the cost of public interest or to decide contractual disputes. Interference in contractual matters in exercise of power of judicial review is permissible only if (i) the process adopted or decision made is mala fide or intended to favour someone, or (ii) the same is so arbitrary and irrational that no responsible authority acting under law could have arrived at it, or (iii) it affected the public interest. The Court further held that cases involving blacklisting or imposition of penal consequences on a contractor stand on different footing as they may require a higher degree of fairness in action. On the touchstone of the aforesaid judgment, we have to see whether there was any material irregularity in the decision making process or the impugned decision was irrational, unreasonable or arbitrary. In view of our aforesaid discussion, we are compelled to record that we do not find it to be so.
In keeping with this non-interventionist approach, the Court also suggested that the government should consider revisiting its lifetime ban decision, but stressed that this was only a suggestion and the decision to reduce the duration of the debarment remained at the discretion of the government:
However, before parting with, we would like to deal with one submission of Mr. Patwalia which he had emphasized with much force and passion. His argument was that it was not a case justifying permanent debarment. He also mentioned that though the company had supplied the medicines to various procurement agencies (under the same batch as well) and the tests, as a mandatory requirement before indentation, were conducted by all the said procurement agencies, but the same was not approved by only Kolkata and Chennai. He further argued that the definition of “Category A” defects as laid down by the DGHS, New Delhi, itself allows a scope for marginal variation in respect of the “Disintegration/Dissolution test” to be viewed on case to case basis. No doubt, respondent has passed the order of permanent debarment as it perceives repeated failures, we are of the view that having regard to the nature of test/failures, medicines of the appellant failed three times only; the appellant professes itself to be a giant in pharmaceutical industry with more than 1000 crores of turnover per year, blacklisting for ever may have very serious repercussions. The Apex Court has emphasized that such blacklisting should normally be for specified/limited periods and not on permanent basis. The appellant was debarred in August, 2008 and has suffered this debarment order for more than three years. It would be, therefore, in the fitness of things if the respondents can reconsider the matter and take a decision for putting the ban for specific period instead of permanent ban. However, we make it clear that it is only a suggestion to the respondents and the respondents may take an appropriate view on this aspect.
As this case illustrates, government debarment decisions remain subject to legal challenge and judicial review. While the courts may ostensibly take a deferential approach to government contracting decisions, the substantive merits of those decisions, along with the process relied on by government institutions in arriving at those decisions, remain subject to judicial scrutiny and the administrative law principles of due process. Government bodies should therefore ensure that their debarment decisions are made based on valid reasons and solid procedures.
