CONTRACTUAL OBLIGATION OF THE

GOVERNMENT UNDER THE CONSTITUTION OF

INDIA

SUBMITTED BY- ISHA TRIPATHI

B.A. LL.B. STUDENT (1st Year)

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1. ABSTRACT

“In the present modern world where most of the Democratic state has assumed the
function of the Welfare State which lead to the change of the policy of the state from
Laissez Faire to Dispenser of Services and benefits, which in turn requires necessary
intervention of the state and active role of the state by providing employment, free health
services, Government subsidized Educational Institutions, licenses, Rights to exploit natural
resources, Construction of roads etc. All of these activities require State to take services of
Private Individuals or Organizations and consequently state has to enter in to contract with
them.”

The concept of liability of state for breach of contract is not new in India. Today large
number of individuals is entrusted by the Government for various purposes in the form of
Government contracts which raises a possibility of Government functioning in an arbitrary
manner and the need was felt to regulate and protect the interests of an individual wealth.
The main reason this issue arises here is to determine whether the individual whose rights
are affected or who suffers injury by the Acts of the State is entitled to remedy by the state.

There are Constitutional provisions in India which talks about contractual liability of
the state. The Supreme Court in R D Shetty v International Airport Authority of India
case has also laid down certain prepositions with respect to government contracts.

2. INTRODUCTION

Meaning of Contract:
A Contract is a legally binding agreement, between two or more parties that
recognises and governs the rights and duties of the parties doing the contract. The
agreement can be oral or written. There must be an offer, a consideration and an
acceptance to make the contract VALID.
According to Section 2(h) of Indian Contract Act 1872 ‘An agreement enforceable
by law is a contract.’ The word Agreement has been defined in Section 2(e) of the Indian
Contract Act as ‘Every promise and every set of promises, forming the consideration
for each other, is an agreement.’ Meaning of State:

According to Part III Article 12 of the Constitution of India, “the State” includes the
government and Parliament of India and the Government and the Legislature of each
of the States and all local or other authorities within the territory of India or under the
control of the Government of India.

Government Contract: A contract to which The Central Government or a State

Government is a party is called a 'Government Contract'.
Position in Britain:

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 According to Common Law, before 1947, the Crown could not be sued in a court on
a contract. A subject could, however, seek redress against the Crown through a petition of
right in which he set out his claim.
The Crown Proceedings Act 1947, abolished this procedure and permitted suits
being brought against the Crown in the ordinary courts to enforce contractual liability, a few
types of contracts, however being excepted.1 Position in India:

The Indian Contract Act, 1872 does not prescribe any specific form for entering into a
Government Contact. According to the Act a Contract can be oral or written. Moreover it
says a Contract can be either expressed or implied depending on the circumstances and
conduct of parties.
But the Contract entered with State or Central Government has to fulfil certain
formalities as prescribed by Article 299 of the Indian Constitution.

Difference between ‘Contract’ and ‘Government Contract’:

While entering into a Government Contract, it is mandatory to comply with the
provisions of Article 299 of the Indian Constitution. But this does not mean that provisions of
the Indian Contract Act should be neglected.
In the case of State of Bihar v Majeed1, it was held that:
"It may be noted that like other contracts, a Government Contract is also governed
by the Indian Contract Act, yet it is distinct a thing apart. In addition to the requirements of
the Indian Contract Act such as offer, acceptance and consideration, a Government
Contract has to comply with the provisions of Article 299. Thus subject to the formalities
prescribed by Article 299 the contractual liability of the Central or State Government is
same as that of any individual under the ordinary law of contract."
While referring to the analysis of the Contract, there is no difference between a
Government Contract and a Private Party Contract.
However some privileges are also accorded to Government in respect of its ability to
impose liabilities with preliminary recourse to the courts. This probably is because of
doctrines of executive necessity and public interest.

1 M.P.Jain; Indian Constitutional Law;5th Ed;Page1801

Implied Contract with the Government:

1 AIR 1954 SC 786

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 According to Article 299(1) of the Indian Constitution, there can be no implied contract
between Government and another person. If there will be an implied contract than it would
make Article 299(1) useless.
It was held by the Hon'ble Supreme Court in the case of K.P.Chowdhary V. State of
Madhya Pradesh2 that:
"In view of the provisions of Article 299(1) there is no scope for any implied contract.
Thus no contract can be implied under this Article. If the contract between the Government
and a person is not incompliance with Article 299(1), it would be no contract at all 3and
would not be enforceable as a contract either by the Government or by the person."
The Court justified this strict view by saying that if Implied Contract between
Government and other parties were allowed, then this would make Article 299 a dead letter.
However Hundreds of government officers daily enter into a variety of contracts, often of
a petty nature, with private parties. At times, contracts are entered through correspondence
or even orally because from administrative point of view it would be extremely inconvenient,
if each and every Government contract must be affected by massive legal documents
formulated in a particular manner.

Effects of a Valid Contract with Government:

Article 299(2) of the Constitution of India, provides that neither the President nor the
Governor shall be held liable in respect of any contract or assurance executed for the
purposes of the Constitution of India or for the purposes of any enactment relating to the
Government of India. As soon as a contract is carries out with the Government in
accordance with Article 299 of the Constitution, the whole law of contract as comprised in
the Indian Contract Act comes into progress. :
A contract of service with Government is not mentioned under Article 299 of the
Constitution. After a person is taken to do service under the Government, his rights and
obligation are governed by the statutory rules framed by the Government and not by the
contract of the parties.
Service Contract with the Government do not come within the scope of Article 299. They
are subject to “pleasure”. They are not contracts in usual sense of the term as they can be
determined at will despite an express condition to the contrary.
In India the remedy for the branch of a contract with Government is simply a suit for
damages. The writ of mandamus could not be issued for the enforcement of contractual
obligations. But the Supreme Court in its pronouncement in Gujarat State Financial
Corporation v. Lotus Hotels, has taken a new stand and held that the Writ of Mandamus

2 AIR 1967 SC 203: (1966)3 SCR 919

3 Void Agreement

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 can be issued against the Government or its instrumentality for the enforcement of
contractual obligations.
RATIFICATION;
The current position is if any contract is entered by the Government that does not
comply with Article 299 then the contract shall be VOID and it cannot be ratified.
The Supreme Court had made it very clear that all the Government contracts must
follow Article 299, if not than the contract will be declared VOID and it cannot be ratified and
cannot be executed even by implementing the Doctrine of Estoppel. In such condition the
question of estoppel does not arise. The part to such contract cannot be estoppel from
questioning the validity of the contract because there cannot be estoppel against the
mandatory requirement of Article 299.
The Government cannot exercise its power arbitrarily or in an unprincipled manner. In
this case Justice Bhagwati has said:
“ Every activity of the Government has a public element in it and it must therefore, be
informed with reason and guided by public interest: Government cannot act arbitrarily and
without reason and if it does, its action due consideration of legitimate expectation of
affected party are Court has held that the right to refuse the lowest or any other tender is
always available to the Government but the principles laid down in article 14 of the
Constitution have to be kept in view while accepting or refusing a tender. The right to
choose cannot be considered to be an arbitrary power. Of Course, if the said power is
exercised for any collateral purpose the exercise of that power will be struck down.”
ARTICLE 14 OF THE INDIAN CONSTITUTION:
States that,
“The State shall not deny to any person equality before the law or the equal protection of
the laws within the territory of India.”

3. FORMATION OF GOVERNMENT CONTRACT

Article 298 of the Constitution of India states that
“The executive power of the Union and of each State shall extend to the carrying on
of any trade or business and to the acquisition, holding and disposal of property and making
of contracts for any purpose”.
If the formal requirements of Article 299 are satisfied than, the contract can be
enforced against the Union or the States.4 Article 299 states:
(1) All contracts made in the exercise of the executive power of the Union or of a State
shall be expressed to be made by the President, or by the Governor of the State, as
the case may be, and all such contracts and all assurances of property made in the

4 Pollock & Mulla, Indian Contract & Specific Relief Acts, 12th Ed, Page 31

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 exercise of that power shall be executed on behalf of the President or the Governor
by such persons and in such manner as he may direct or authorise.

(2) Neither the President nor the Governor shall be personally liable in respect of any
contract or assurance made or executed for the purposes of this Constitution, or for
the purposes of any enactment relating to the Government of India heretofore in
force, nor shall any person making or executing any such contract or assurance on
behalf of any of them be personally liable in respect thereof.

RATIONALE BEHIND ARTICLE 299:

(1) Contracts by Government raise some problems which do not or cannot possibly arise in
the case of contracts entered into by private persons.

(2) There should be a definite procedure according to which contract must be made by the
agents, in order to bind the Government; otherwise public funds may be consumed by
clandestine contracts made by many public servant.

(3) It has been provided that State cannot be burdened with liability for contracts which are
not shown on their face that these contracts are made on behalf of the State.5

Government Contracts in India:

1. The Apex court stated the same and said that
"It may be noted that like other contracts, a Government Contract is also governed by the
Indian Contract Act, yet it is distinct a thing apart. In addition to the requirements of the
Indian Contract Act such as offer, acceptance and consideration, a Government Contract
has to comply with the provisions of Article 299. Thus subject to the formalities prescribed
by Article 299 the contractual liability of the Central or State Government is same as that of
any individual under the ordinary law of contract."

2. The Court further stated that with regard to the interpretation of contract, there is no
distinction between the contracts to which one of the parties is the Government and
between the two private parties. Though there is no major difference between a normal
contract and government contract, certain special privileges are accorded to the
government in way of treatment under statutes of limitation.

3. Working on the maxim “nulla tempus occuritregi”, meaning no time affects the crown,
Limitation act provides for longer period of limitation of suits on or behalf of the State.
Privileges as to ability to impose liability and primary recourse to the court have also been
accorded to the Government probably due to executive necessity and public interest.

5 Bhikraj Jaipuria V. Union of India AIR 1962 SC 113: 1962(2) SCR 880

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4. FORMALITY OF CONTRACTS ON BEHALF OF GOVERNMENTS

(1) The words “expressed to be made” and the word “executed” suggest that there should be a
deed for a formal written contract executed by a person duly authorised under this Article. A
contract by correspondence or an oral contract is accordingly, not binding upon the
Government. If the agreement is not written, there always remain a risk of the other party
abandoning the contact or a dispute may arise about the terms and conditions of the
agreement. A written contract avoids uncertainty and leaves no room for risks relating to the
terms and conditions of a contract.6 The contract also fails if the person who executes it is
not authorised in that behalf under the present Article, by President or Governor, as the
case may be.

(2) It is evident that in order to comply with the requirements of the Article, the contract:
• Must be executed by a person duly authorised by the President, or Governor, as
the case may be.
• Must be executed ‘on behalf of the’ President or Governor, as the case may be.
• Must be ‘expressed to be made by’ the President (or Governor) as the case may
be, i.e., in the name of President (or Governor).

(3) A contract by tender and acceptance may be valid if the acceptance is by the duly
authorised person and on behalf of the President. When there is no proof of such
authorisation, an acceptance of tender by telegram cannot constitute a contract under this
Article.

(4) On the other hand, no contract can be ‘implied’ under this Article, example: from the fact
that the petitioner successfully bid at a public auction held by the Government.

(5) Government can reject the highest tender.

(6) Subject to the present provision other provisions of the general law of contract are
applicable to Government contracts, and terms of the contract cannot be changed by
invoking Article 14 of the Constitution.

The provisions have been embodied to protect general public as represented by the
government. The terms and conditions of the Article are mandatory and not merely
directory. This means if the contract is not enforced according to Article 299 of Constitution
than neither the Government can be sued or held liable for the breach of contract nor can
the government enforce such contract against the contracting parties.

6 R. Balakrishna Pillai V. State of Kerela, (2003) 9 SCC 700, 722(para 32): AIR 2004 SC 1012

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5. CONTRACTUAL LIABILITY

Liability: means the state of being legally responsible for loss or debt.

Contractual Liability: Contractual Liability is the liability of state for the acts done by the
state in exercise of its power as a Sovereign as well as in other capacities in the same
manner as an individual does.

NATURE OF LIABILTY- Contractual liability of a state has public character and therefore
Public law is applicable in matters of Government Contract. Government cannot and should
not violate constitutional provisions in general and fundamental rights in particular Article 14
of the Indian Constitution, while awarding government contracts or else public law i.e.
remedy under Article 32 or Article 226 of the Indian Constitution, as the case may be will be
there to rescue the Fundamental rights of the Individual. In addition to this Government has
to observe underlying basic general principles also in contractual matters.

6. LEGAL DEVELOPMENT OF CONTRACTUAL LIABILITY IN INDIA:

Pre- Constitutional Framework:

Before the commencement of the constitution of India main legal provisions with regard to
the liability of the state in Government contract may be found under the Government of
India Act 1858, 1919 and 1935 Act. These Acts dealt with the subject matter. They are as
follows:
Government of India Act 1858: provided , “The Secretary of State in Council shall and
may sue and be sued as well in India as in England by the name of the Secretary of State
in Council as a body corporate ; and all persons and bodies politic shall and may have and
take the same suits, remedies, and proceedings, legal and equitable, against the Secretary
of State in Council of India as they could have done against the said Company; and the
property and effects hereby vested in Her Majesty for the purposes of the Government of
India, or acquired for the said – purposes, shall be subject and liable to the same judgments
and executions as they would while vested in the said Company have been liable to in
respect of debts and liabilities lawfully contracted and incurred by the said Company.”
Government of India Act, 1919: Section 30 of the Government of India Act 1919, provided
as follows:
(1) The Government General in council and any local government may, on behalf and in the
name of the secretary of state in council make any contract for the purposes of this Act.
(2) every assurance and contract made for the purposes of sub-section (1) of this section
shall be executed by such person and in such manner as the Governor-General in council
by resolution directs or authorizes and if so executed may be enforced by or against the
secretary of state in council for the time being.”
Again in 1935 British Government passed Government of India Act 1935, Section
175 (3) & (4) of which dealt with the Power of the Executive to make contracts.

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 Government of India Act, 1935: Section 175 (Power to Acquire Property and to Make
Contracts, etc) provides as follows:-

(1) The executive authority of the Federation and of a Province shall extend, subject to any Act
of the appropriates Legislature, to the grant, sale, disposition or mortgage of any property
vested in His Majesty for the purposes of the government of the Federation or of the
Province, as the case may be, and to the purchase or acquisition of property on behalf of
His Majesty for those purposes respectively, and to the making of contracts:
Provided that any land or building used as an official residence of the Governor General or
a Governor shall not be sold, nor any change made in the purposes for which it is being
used, except with the concurrence, in his discretion, of the Governor-General or the
Governor, as the case may be].
(2) All property acquired for the purposes of the Federation or of a Province [or of the exercise
of the functions of the Crown in its relations with Indian State], as the case may be, shall
vest in His Majesty for those purposes.

(3) Subject to the provisions of this Act with respect to the Federal Railway Authority, all
contracts made in the exercise of the executive authority of the Federation or of a Province
shall be, expressed to be made by the Governor-General, or by the Governor of the
Province, as the case may be, and all such contracts and all assurances of property made
in the exercise of that authority shall be executed on behalf of the Governor-General or
Governor by such persons and in such manner as he may direct or authorize.

(4) Neither the Governor-General, nor the Governor of a Province, no the Secretary of State
shall be personally liable in respect of any contract or assurance made or executed for the
purposes of this Act, or for the purposes of the Government of India Act or of any Act
repealed thereby, nor shall any person making or executing any such contract or assurance
on behalf of any of them be personally liable in respect thereof.

Post-Constitutional Framework:
Article 294, 298, 299 and 300 of the Indian Constitution, 1950 altogether provides a
complete picture of present constitutional legal framework of contractual liability of state in
India:

(1) Article 294 makes provision for the succession by the Union Government and the states to
property, assets, rights, liabilities and obligations vested in the former governments.
(2) Article 298 lays down that for the purpose of carrying out the function of the state,
government can enter into contract.
(3) Article 299 is mandatory in nature and provides essential formalities which a Government
contract ought to be complied with.
(4) Article 300 provides the manner in which suits and proceedings against or by the
government may be instituted.

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 7. CONSTITUTIONAL PROVISIONS

Contractual liability of the Union of India and States is identified by the Constitution
itself. Article 298 signifies that the executive power of the Union and of each State shall
extend to the carrying on of any trade or business and the acquisition, holding and disposal
of property and the making of contracts for any purpose.

Article 299(1) applies only to a contract made in exercise of the execute power of the
Union or of a State7 and would not include-

a) When contract is made by a specified statutory authority, in exercise of his powers

conferred by a statute.
b) Where a compromise is entered into by parties during the pendency of a suit even if one
of those parties was the Government or a Government officer.

In the case of K.P. Chowdhary V. State of Madhya Pradesh9, for forest contracts,
the appellant signed the sale notice agreeing to abide by the terms of the notice. One of the
terms was that if the bidder failed to complete the formalities after the acceptance of the bid,
his earnest money would be forfeited, the contract re-auctioned at his risk and any
deficiency occurring was to be recoverable from him as areas of land revenue. In the
meantime, a dispute arose between the bidder and the forest department regarding the
marking of the trees auctioned. As the dispute was not settled to the satisfaction of the
bidder, he refused to complete the contract.

In this case, the admitted position was that a contract complying with Article The
High Court dismissed the petition as it took the view that an implied contract has arisen as a
result of the appellant’s accepting the conditions of auction and that such an implied
contract was not hit by Article 299(1) which applied only to written contracts.
On appeal, the Supreme Court reversed the High Court decision. The Apex Court
thus ruled that there was no contract between the bidder and state government. The Court
reasoned that Article 299(1) being in “mandatory terms”, no implied contract could be
spelled out between the government and appellant.
Thus since K.P. Chowdhary’s Case the view has come to be accepted that Article
299(1) is mandatory and that a contract not complying with formalities of Article
299(1) is no contract at all and so is unenforceable in a court of law.

Effects of non-compliance with the requirements of Article 299:

The provisions of Article 299 are mandatory the parties to contract must comply with
it. They are inserted to protect Government against unauthorised contracts. If any contract
is unauthorised or in excess of its authority, the Government must be protected from being
burdened with liability to avoid public funds being wasted. Therefore if any of the provision

7 Lalji Khimji V. State of Gujarat, (1993) Supp. (3) SCC 567 (para 9): 1993 (1) SCR 366
9 AIR 1967 SC 203
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 is not fulfilled, than the contract is not in accordance with law and the same is not
enforceable by or against the Government.

Supreme Court observed that in case of non-compliance with the provisions of

Article 299(1), a suit could not be filed against the Government as the contract was not
enforceable, but the Government could accept the liability by ratifying it.

But in Mulamchand V. State of M.P.8, the Supreme Court held that if the contract
is not in accordance with the Constitutional Provisions, in the eye of the law, there was no
contract at all and the question of ratification did not arise. Therefore, even the provisions
of Section 230(3) of the Indian Contract Act, 1872 would not apply to such a contract and
it could not be enforced against the government officer in his personal capacity.

Completion of the Contract:

(1) Until a contract, complying with the requirements of Article 299 is drawn up, there can be no
completed contract to give rise to contractual obligations under the contract, but this will not
prevent the enforcement of statutory rights and duties which exist apart from the contract or
equitable considerations, if any. But no damages for breach of contract should be available
until there has been a complete contract.

(2) As long as the contract is incomplete, it is open to the Government to change its policy and,
in absence of statutory obligation to complete the contract, to cancel and refuse provisions.
Personal immunity of officers for Government Contract: Excepting the present clause,
there is no provision which exempt the officials from personal liability during the contract for
acts done or claimed to be done in exercise of their official duties. The present clause of
English law exempt officials as well as Executive heads from personal liability for the
contracts made or executed ‘for the purpose of the Constitution’, or under any of the
Government of India Acts. It is to be noted that immunity will be given to officers only and
when the provisions of the contract comply with Article 299.

Non-Applicability of Article 299: This Article has no application to contracts executed in

exercise of statutory power. Where an agreement is not referable to Article 299 it cannot
be invalidated for not satisfying the essential requirements of Article 299.

8 (1968) 3 SCR 214

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8. DOCTRINE OF PROMISSORY ESTOPPEL

(1) After some wavering it is clear that doctrine of promissory estoppel is available against
the Government as against the private party, even though there has been no contract
according to the provisions of Article 299. Non- execution of the contract in terms of
Article 299 of the Constitution does not hinder in the applicability of the doctrine of
promissory estoppel against the government9.

(2) It means that if the Government or some other public body or its officials makes a
representation or a promise and an individual acts upon such a promise and alters his
position, Government or the public body make good that promise10 and shall not be
allowed to fall back upon the formal defect in the contract. Acting upon the promise is
enough to invoke the doctrine, actual harm or injury need not be proved by the promise.

(3) But since the doctrine of promissory estoppel is an equitable doctrine, it would be
subject to limitations to which all equitable rights and obligation are subject:

• It would be open for the Government to show that the officer or agent who made the
representation acted beyond the scope of his authority and the person dealing with
him is supposed to have noticed the limitations of the authority of a public servant
with whom he is dealing.11
• It would be open to public authority to prove that there were special considerations
which compelled him to not be able to comply with obligations under the doctrine, in
the public interest.
• The doctrine cannot be invoked to prevent the Government from acting in discharge
of its duty under the law.
• Where the contract describes itself as ‘provisional’ and specify that Government is
not bound to complete it (for example: in case of settlement by public auction), there
is nothing to prevent the Government to change the policy and to cancel the
provisional contract before the contract is finally accepted.
• He who seeks equity must do equity. Hence, the doctrine cannot be invoked where it
is found to be inequitable or unjust to enforce it.12
• The representation must be clear and distinct, and not temporary or uncertain.

CASE LAW: In Union of India V. Anglo Afghan Agencies, the historic case, ‘Export
Promotion Scheme was published by the Textile Commissioner. It was provided in the said
scheme that the exporters will be entitled to import raw material up to 100 percent of the

9 Food Corporation of India V. Babulal Agarwal, (2004) 2 SCC 712, 719-21 (para 7): AIR 2004 SC 2926
10 Union of India V. Indo- Afghan Agencies, AIR 1968 SC 718: 1968 (2) SCR 366
11 Jitu Ram Shiv Kumar V. State of Haryana, AIR 1980 SC 128 (1305): (1981) 1 SCC 11
12 Delhi Cloth and General Mills Ltd. V. Union of India, AIR 1987 SC 2414 (paras 18, 24-27): (1988) 1 SCC 86

12
value of goods the exports. Relying on this representation, the petitioner exported goods
worth about rupees 5 lakhs. The Textile commissioner did not grant the import certificate for

the full amount of goods exported. No opportunity of being heard was given to the
petitioner. The Supreme Court held that the Government was bound to carry out the
obligations undertaken in the Scheme. Even though the scheme was merely executive in
nature and even though the promise was not recorded in the form of formal contract as
required by the article 299(1) of the Constitution, still it was open to a party who had acted
on a representation made by the Government to claim that the Government was bound to
carry out the promise made by it.

Waiver:
To constitute waiver, there must be an intentional giving up of a known right or voluntary
relinquishment or abandonment of a known existing legal right or conduct of such as
warrants an inference of the abandonment of a known right or privilege. In the instant case,
the circular itself stipulated the Corporation (A.P. SRTC) making an offer to the contractors
for taking benefit of the policy decision and admittedly, it never made such an offer to the
contractor/ respondent. Since there was a failure on the part of the Corporation to extend
the benefit of the circular to him, it could not be permitted to take shelter behind its own
wrong. It was held that the trial court and the High Court had rightly directed the amount
paid by him under the interim order passed by the High Court to be refunded to the extent it
was in excess of the amount which he would have been liable to pay to the Corporation
under the terms of its circular.13

9. DOCTRINE OF PUBLIC ACCOUNTABILITY

The concept of public accountability is a matter of vital public concern. All the three
organs of the government- legislature, executive and judiciary are subject to public
accountability.

Doctrine of Public accountability is a settled law that all discretionary powers must be
exercised reasonably and in larger public interest. In various cases, the Supreme Court has
applied this principle by granting appropriate relief to aggrieved parties or by directing the
defaulter to pay damages, compensation or costs to the person who has suffered.

Very recently in Arvind Datttaraya vs State of Maharashtra, the Supreme Court

set aside an order of transfer of a public officer observing that the action was not taken in
public interests but was a case of victimization of an honest officer. “it is most unfortunate
that the Government demoralize the officers who discharge their honestly and
diligently and brings the persons indulging in black marketing and contra banding
liquor.”

Personal Liability: A breach of duty gives rise in public law to liability which is known as

13A.P. SRTC V. S. Jayaram, (2004) 13 SCC 792, 794-95 (paras 5 and 6): (2006) 3 RAJ 174, relying on
Basheshar Nath V. CIT, AIR 1959 SC 149

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“misfeasance in public office”. Exercise of power by minister and public officers must be for
public goods and to achieve welfare of public at large. Wherever there is abuse of power by
an individual, he can be held liable.

In Common Cause A Registered Society vs Union of India: the petroleum Minister made
allotment of petrol pumps arbitrarily in favour of his relatives and friends. Quashing the
action, the Supreme Court directed the Minister to pay fifty lakh rupees as exemplary
damages to public exchequer and fifty thousand rupees towards costs.

Judicial Accountability: The doctrine of public accountability applies to judiciary as well.

An essential requirement of justice is that it should be dispensed as quickly as possible. It
has been rightly said: “Justice delayed is justice is justice denied.” Delay in disposal of
cases can be recommended. Whereas comments and criticism of judicial functioning on
matters of principles, healthy aids for interpretation and improvement, the functioning of the
court in relation to a particular proceeding is not permissible.

10. QUASI-CONTRACTUAL LIABILITY

Provisions of Article 299 of the Indian Constitution [Section 175(3) of the

Government Act, 1935] is mandatory, if they are not followed the contract is not enforceable
in the court of law.
In these circumstances in order to protect the innocent people, courts have applied
the provisions of Section 70 of the Indian Contract, 1872 and held Government to
compensate the other party on the basis of Quasi Contractual Liability. Section 70 provides
that if the goods delivered are accepted or if the work done is voluntarily enjoyed, then the
liability to pay the compensation for accepted goods or for the work done arises.

Thus when the claim is made by one against one person under Section 70 that it is
not on the basis of the on-going contract but on the basis of work been done by one party
and other party voluntarily accepts it. Thus, Section 70 of the Contract Act prevents ‘unjust
enrichment.’

Before Section 70 of the Contract Act is invoked, the following conditions must be
fulfilled:
• A person must have lawfully done something for another person or deliver something to
him.
• He must not have intended to do such act gratuitously.
• The other person must have accepted the act or enjoyed the benefit.
If these three conditions are fulfilled the section enjoins on the person receiving
benefit to pay compensation to the other party.

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11. PRINCIPLES UNDERLYING CONTRACTUAL LIABILITY OF THE STATE

The following are the basic principles that State should keep in mind while entering into a
contract:

(1) Reasonable and Fairness: Actions of the State and its instrumentality are bound to be
reasonable and fair. The actions are liable to be tested on the principles of Article 14 of the
Indian Constitution. The State and its instrumentality cannot function in an arbitrary manner
even in the matters of entering into a contract. The reason behind the State entering into a
contract or refusing the contract should be fair and reasonable. It cannot be allowed to pick
and choose the person to do the contract according to its desire and inclination. The rights
and obligation arising after entering into a contract is regulated by the terms and conditions
itself, this is a settled law.

The requirement of 'fairness' implies that even administrative authority must act in
good faith; and without biasness; apply its mind to all relevant considerations and must not
be dominated by irrelevant considerations; must not act arbitrarily or carelessly and must
not come to a conclusion which is corrupt or is such that no reasonable body of persons
properly informed could arrive at.

The Doctrine of fairness or the duty to act fairly and reasonably is a doctrine
developed in the administrative law field to ensure the Rule of Law and to prevent failure of
justice where the action is administrative in nature. In a democratic society governed by the
rule of law, it is the duty of the State to do what is fair and just to the citizen and the State
should not seek to defeat the legitimate claim of the citizen by adopting a legalistic attitude
but should do what fairness and justice demand.

(2) Public Interest: The concept of public interest is of utmost importance. There are some
circumstances during which it is necessary to depart from public interest but these
circumstances must have a reasonable cause. Every public authority is required to work in
public interest.
State should not do anything that shows biasness from their side. The State must
exercise its powers for public interest and public benefits.
The consideration required in public contract need to be different from private
contract. The actions of the public authorities thus have to be in conformity with the
standards and norms which are not arbitrary, irrational or unreasonable. Whenever the
authority departs from such standard or norms, the Courts intervene to uphold and
safeguard the equality clause as preserved in Article 14 of the Constitution and strike down
actions which are found arbitrary, unreasonable and unfair and likely cause a loss to the
public officer and injury to public interest. Therefore, even when an award of contract may
not be causing any loss to the public officer noticeably, it may still be liable to be void for

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 being unfair, unreasonable, discriminatory and for violation of the guarantee contained in
Article 14.

(3) Equality and non- arbitrariness: According to a positivist, equality contradicts

arbitrariness. When an act is arbitrary it is implicit that it is unequal and violate Article 14.
The principle of reasonableness which is an essential element of equality and
nonarbitrariness affects Article 14 strongly.

12. APPLICABILITY OF LAW IN MATTERS OF GOVERNMENT CONTRACT

1. Government contracts, unless challenged on the ground of non-compliance with Article

298 of the Indian constitution or on the ground that they are corrupt by the discrimination
or unfavourable terms for the state, are governed by the private law and cannot be
subject to public law. When the state or its instrumentality is engaged in ordinary
commercial transactions, the law of contract would be applicable. A person aggrieved by
any of the terms of the contract is not entitled to seek redress under Article 226 of the
Indian Constitution.14 It is because of the reason that seriously disputed questions or
rival claims of the parties with regard to the breach of the contract are to be investigated
and determined on the basis of evidence which may be led by the parties in properly
instituted suit, rather than by a court exercising prerogative of issuing writs. 15

2. Likewise, in Banchanidhi Rath V. The state of Orissa16, the court observed that, if a
right is claimed in terms of a contract such a right cannot be enforced in a writ petition.

3. Where parties to a contract have agreed to settle their disputes by arbitration and if
there is an agreement in that regard, the court would not allow recourse to any other
remedy without implementing for remedy by way of arbitration unless, of course, both
the parties to the dispute agree on another mode of dispute resolution. Where there is
dispute of question of facts, the writ petition under Article 32 or 226 of the Indian
Constitution is neither an occasion, nor an appropriate remedy.

4. In B.D.A. v. Ajai Pal Singh17, where a development authority undertook construction of

dwelling houses and in its brochure gave estimate of the cost but warned that costs
might increase or decrease, it was held that the increase in the costs could not be
challenged under article 226 as being unreasonable or arbitrary.

5. However, public law comes in picture where the terms of the contract vest arbitrary
power in the state20.

14 SP Sathe, Administrative Law (seventh edition, Lexis Nexis, 2007) p.no.-612.

15 State of Bihar V. Jain Plastics & Chemicals Ltd.,AIR 2002 SC 206.
16 AIR 1972 SC 843
17 Bareilly Development Authority v. Ajai Pal Singh (1989) 2 SCC 116, AIR 1989 SC 1076.
20 Karnataka v. Rameshwar rice mills, Thirthathali AIR 1987SC 1359.

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13. WRITS IN MATTER OF GOVERNMENT CONTRACT

1. When it comes to exercise of contractual powers by governmental authorities, the function

of the courts is to prevent arbitrariness and favouritism and to ensure that the power is
exercised in public interest and not for a collateral purpose. This has been a question of
debate whether one could resort to the writ jurisdiction for imposing contractual obligations
on a public authority. The implementation and interpretation of a clause in a contract cannot
be the subject matter of a writ petition.

2. No question arises regarding the violation of Article 14 or any of the other constitutional
provision, when the government acts within the contractual field. The Supreme Court ruled
that a party could not claim under Article 226 enforcement of contractual obligation and
recover damages.

3. But then in Shrilekha Vidyarthi vs State of Uttar Pradesh, the view started to change.
The court observed that Art. 14 strikes at arbitrariness in governmental action and ensures
fairness and equality of treatment.

4. A writ petition is maintainable to challenge action by a public administrator when it is

exercising statutory or administrative power even within the frame of contractual
relationship between the authority and the person concerned.

5. There is now a growing body of cases where writ petitions have been held maintainable
where contract has had statutory flavour, or where some question of public law is involved.

14. CONTRACTUAL LIABILITY OF STATE IN INDIA

The liability of Government for the breach of contract was recognized even before
commencement of this Constitution. When the East India Company was established mainly
for the purpose of commercial activities in India it was said that the fact that East India
Company exercised the sovereign functions it cannot be said that they could be immune
from being sued in its own courts of the company.
The liability of the Government has been recognized in the number of statutes also.
Thus the provisions were made in the Government of India Acts of 1833, 1858, 1915 and
193518.
In P. & O. Steam Navigation Co. V Secy. Of State19: it was held by the Supreme
Court that no action would lie against the state where the contract was entered into in
exercise of sovereign functions of the state.

18 C.K. Takwani, Lectures on Administrative Law (3rd, Eastern Book Company, Lucknow 2004) 351
19 [1861] H.C.R 5 (Bom.)

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 The Calcutta High Court observed and followed the decision of this case in Nobin v.
Secy. Of State where it was held by the High Court that the Government was not liable for

refusing to grant a licence to the plaintiff for the sale of ganja as the sale of ganja was
related to sovereign function. But the Nobin v Secy Of State’s decision was refused on the
ground that P.& O. Case was a case of torts and no question of contractual liability was
involved.
However the Government of India Act (1915 and 1935) empowered the
Government to enter into contracts with private individuals and the corresponding
provision in the Constitution is Article 299(1).
Objectives of Article 299:
1. To safeguard the interests of the Government.
2. To protect the Government against the unauthorized contracts.
Another issue that arises was that if a person enters into contract with the
Government and is entitled to certain benefits there under, he can approach a court of law.
But then the dispute arises in course of performing the contract whether the party can move
the Supreme Court under Article 32 of the Indian Constitution or the High Court
under Article 226 of the Constitution of India. It was said that if it is award and the
Government fails then it can be challenged and if the award is valid or justified thereafter
the contract is subject to contract law and that contract is in realm of private law.
It was further said that Government contract is subject to the Indian Contract act,
1872 and if in course of discharge of contract dispute arises and the public law element is
involved then it is subject to the writ jurisdiction of the court.

15. CONTRACTUAL LIABILITY OF STATE IN ‘UNITED KINGDOM’

Before 1947 i.e. before passing of Crown Proceedings Act, 1947 crown could not be sued
in contracts because of the then prevailing legal maxims ‘King can do no wrong’ and
‘crown cannot be sued in its own court’. However, as it was seen to be desirable that
crown contractors could obtain redress, they would otherwise be inhibited from taking on
such work, so a petition of right came to be used in such situations, especially after the
petitions of Right Act, 1860 simplified the process. Before the petition could be heard by the
courts, it had to be endorsed with the words fiat justicia on the advice of the Home
secretary and Attorney General i.e. prior approval of the Government was required to
initiate an action against the Government in contract then only court could hear the ‘Petition
of Right’.
Section 1 of The Crown Proceedings Act, 1947, provides as follows: “Where
any person has a claim against the Crown after the commencement of this Act, and, if this
Act had not been passed, the claim might have been enforced, subject to the grant of His
Majesty's fiat, by petition of right, or might been enforced by a proceeding provided by any
statutory provision repealed by this Act, then, subject to the provisions of this Act, the

18
claim may be enforced as of right, and without the fiat of His Majesty, by proceedings
taken against the Crown for that purpose in accordance with the provisions of this Act.'
Proceedings by way of petition of right are abolished by section 13 of the Act.”
In Brochle bank, Ltd. v. R20, the Crown denied that a petition of right was available
when the plaintiffs, instead of claiming tort for money wrongfully obtained from them by a
servant of the Crown, sought to sue for money had and received.

16. CONTRACTUAL LIABILITY OF STATE IN USA

The Constitution of USA envisaged the provision which prohibits states of USA from
making law which may impair obligation of contract by inserting the contract clause in the
constitution.
The Contract Clause appears in the United States Constitution Article I, section 10,
clause 1 reads as
“No state shall enter into any treaty, alliance, or confederation; grant letters of marquee and
reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in
payment of debts; pass any bill of attainder, ex post facto law, or law impairing the
obligation of contracts, or grant any title of nobility.”
Supreme Court of USA faced challenges in developing legal standards applicable to
Government contracts and in doing so Supreme Court has sometimes enforced
Government contracts where even private contracts in the similar situation would not have
been enforced as evident in a famous case of Fletcher v. Peck,21 wherein CJ, Marshall
held that:
“The contract clause barred the state of Georgia from rescinding land grants which the court
concluded were contracts made by a prior legislature as payment for alleged bribes.”
In USA certain powers particularly police and eminent domain powers that are
inalienable and cannot be contracted away even by express grant, further doctrine of
apparent authority cannot bind the Government for contracts entered into by its agents,
which does not favours the implication of Governmental obligations in public contracts.

17. CONTRACTUAL LIABILITY OF STATE IN AUSTRALIA

In Australia, Parliament is enabled to make laws conferring rights to proceed against

the Commonwealth or State. The Commonwealth of Australia Constitution Act 1900, by
Section 73, provided that the legislature of Australia “may make any laws conferring rights
to proceed against the Commonwealth or State in respect of matters within the limits of the
judicial power.” The formula adopted in Australia is that, the rights of the parties shall be
nearly as possible, be the same as in a suit between a subject and a subject. 22It gives a
wide scope for judicial interpretation, and it is difficult to say to what extent the State’s
liability, without distinction between sovereign and non – sovereign functions would be

20 [1925] 1 K.B. 52.

21 (1810) 10 US (6 Cranach) 87
22 Section 64, The Judiciary Act 1908

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recognized under the Australia formula. Part IX of the Judiciary Act 1908, gave right to
sue the Commonwealth both in contract and tort without petition of right.

In Baume v. Commonwealth23, it was held that,

“the Act gave the subject the same rights of action against the State as against a subject in
matters of tort as well as contract and that the Commonwealth was therefore responsible
and an action was maintainable for tortuous acts of its servants in every case in which the
gist of the cause of action was infringement of a legal right.”
The Australian Courts have held that the Crown can be made liable in both respects
for their wrongful acts or omissions. By the provisions of the Claims against the State and
Crown Suits Act 1912,
“any person having or deeming himself to have any just claim or demand whatsoever” was
authorized to bring his claim before the Court by way of petition. On any such petition the
rights of the parties were to be “as nearly as possible is the same as in an ordinary case
between subject and subject.”

18. JUDICIAL REVIEW

Judicial quest in administrative matters has to find the right balance between the
administrative discretion to decide matters contractual or political in nature, or issues of
social policy and the need to remedy any unfairness. A State need not enter into contract
with anyone, but when it does so it must do so fairly without discrimination and without
unfair procedure; and its action is subject to judicial review under Article 32 or 226 of the 54
Constitution of India.
The principles of judicial review would apply to the exercise of the contractual powers
by the Government bodies in order to prevent arbitrariness or favouritism. However there
are certain inherent limitations on the exercise of judicial power by the court in India. The
judicial power of review is exercised to rein any unbridled executive functioning. The
restraint has two contemporary significances. One is the ambit of judicial intervention; the
other covers the scope of the Court's ability to quash an administrative decision on its
merits. These restraints bear the hallmark of judicial control over administrative action.
It is not for the Court to determine whether a particular policy particular decision
taken in the fulfilment of that policy is fair. It is only concerned with the manner in which the
decisions have been taken. The extent of the duty to act fairly will vary from case to case.
The grounds upon which an administrative action is subject to control by judicial review can
be classified as:
(1.) ILLEGALITY: This means the decision-maker must understand correctly the law
that regulates his decision-making power and must give effect to it.

23 (1953) 2 All ER, 149

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 (2) IRRATIONALITY
(3) PROCEDURAL IMPROPREITY
The above are only the broad grounds but it does not rule out the addition of further
grounds in course of time. With respect to the judicial review of administrative decisions and

exercise of contractual powers by Government bodies, the Hon'ble Supreme Court has
held,
"The Government must have freedom of contract. In other words, a fair play in the joints is a
necessary concomitant for an administrative body functioning in the administrative sphere
or quasi- administrative sphere. However, the decision must not only be tested by the
application of the ‘Wednesbury principle’ of reasonableness (including its other facts) but
must be free from arbitrariness not affected by bias or actuated by mala fide. While
exercising the power of judicial review, in respect of contracts entered into on behalf of, the
Court is concerned primarily as to whether there has been any infirmity in the 'decision
making process'.”
By way of judicial review the Courts cannot examine the details of the terms of the
contract which have been entered into by the public bodies or the State. Courts have
inherent limitations on the scope of any such enquiries. But at the same time the Courts can
certainly examine whether "decision making process" was reasonably rational, not arbitrary
and violate Article 14 of the Constitution.
If the contract has been entered into without ignoring the procedure which can be
said to be basic in nature and after an objective consideration of different options available,
taking into account the interest of the State and the public, then Court cannot act as an
appellate authority by substituting its opinion. But once the procedure adopted by the
authority for the purpose of entering into the contract is held to be against the mandate of
Article 14 of the Constitution, the Court cannot ignore such action saying that the
authorities concerned should have some latitude or liberty in contractual matters and any
interference by the Court amounts to encroachment on the exclusive right of the executive
to take such decision.
The doctrine that the powers must be exercised reasonably has to be reconciled with
the no less important doctrine that the Court must not usurp the discretion of the public
authority which the Parliament has appointed to take the decision.

19. RECENT TREND IN MATTERS OF PUBLIC PROCUREMENT

1. A major development occurred in 2012 when the Supreme Court of India (Supreme Court)
cancelled the licenses of various telecom companies for 2G Spectrum. The Indian
Government had adopted a "first come, first serve" policy at archaic rates, to keep the
new licensees at par with the old licensees and to keep public costs reasonable.

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2. The policy resulted in windfall gains of billions of rupees to the licensees and incurred
losses to the public officer followed by serious charges of fraud and corruption levelled
against the telecoms Minister.

3. The Supreme Court concluded that spectrum is a natural resource and as it cannot be
defined universally, its value depends on its availability and demand and its distribution
must promote public good against private gain.

4. In a controversial move, the Supreme Court struck down all licenses granted under the first
come, first served policy and held that an auction held fairly and impartially is the best
method for the state to allocate public or natural resources.

5. The Government's view was that it cannot be bound by a defined and specific method only
for the distribution of natural resources. The case has been a stepping stone towards the
Bill to introduce a specific and exclusive procurement law in India.

20. CONCLUSION

1. A government contract has been given the constitutional recognition. The constitution,
under Article 298, clearly lays down that the executive power of the union and of each state
extends to “the carrying on of any trade or business and to the acquisition, holding and
disposal of property and the making of the contracts for any purpose. “The constitution
therefore, provides that a Government may sue or be sued by its own name. A similar
provision is found in the code of civil procedure 1908 under section 79 thereof.

2. A Government contract is a privilege or largesse. Unlike a private person who has freedom
to decide with whom to contract and on what terms to contract, the Government has to use
its power of contracting in public interest. While deciding with whom to contract, it has to
provide equal opportunities to all to complete such largesse. Government cannot anybody
arbitrarily. Further, the Government must choose the party as well as the terms so as to
maximize the public interest. There are certain fixed procedures for contracts by public
bodies. They have to invite tenders or quotations and select from amongst those who have
given tenders one who offers the best of the terms or services.

3. In Tata cellular v. India, Mohan J speaking for the bench consisting of Venkatachaliah
CJ,MM Punchhi J and himself said:
“It cannot be denied that the principles of judicial review would apply to the exercise of
contractual powers by Government bodies in order to prevent arbitrariness or favouritism.
However, it must be clearly stated that there are inherent limitations in exercise of that
power of judicial review. Government is the guardian of the finances of the state. It is
expected to protect the financial interest of the state.”

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4. It can be concluded that Government contracts are different from private party contract.
Government cannot enter into a contract according to his own free will. Government not
only need to abide by the provisions of Indian Contract Act but also the Government must
keep in mind the Articles of the Constitution of India (mainly Article 299).

21. SUGGESTIONS

1. In view of the increasing importance and the relevance of Governments contracts, Public
Procurement Bill 2012 must be referred to as the bill seeks to regulate and ensure
transparency in procurement by the central government and its entities. This will assist the
process which is beneficial for both the parties as well as the public at large. In addition, the
development of the economy will also follow as a natural consequence of the Bill.

2. In the methods of tendering such as the competitive Bidding Method is considered to be

one of the good method of granting projects without any loopholes. As such, it is a
suggestion that the government should in most of the cases to follow this procedure. It will
also ensure to infuse confidence in the public and enable public growth and economic
development.

3. Commissions may be formed for the purpose of awarding contracts at centre and state
level.

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