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Unraveling The Legal Web: State Liability In Indian Contracts

A contract is an agreement between two or more parties that is enforceable by law. Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. The term "agreement" is defined in Section 2(e) of the Act as every promise and every set of promises, forming consideration for each other.

Contracts executed by the government for various purposes, such as construction, management, manpower supply, maintenance and repairs, and IT-based projects, are known as government contracts. When the central government or state government is involved in a contract, it is referred to as a government contract. The party responsible for executing the contract on behalf of the government is called a contractor.

However, a contract in which the Central Government or a State Government is a party is specifically referred to as a "Government Contract".

Scope of contractual liability of government of India
The generally accepted view regarding the contractual liability of the Government, as established in State of Bihar v. Sonabati, is that it is equivalent to that of a private individual. Article 299 of the Constitution confirms this, leaving no room for doubt. While Article 299(2) provides immunity to the President, Governor, or any person executing a contract on their behalf, this immunity is strictly personal and does not extend to the government itself in the event of contractual liability arising from a contract executed for the purposes of the Constitution or any enactment relating to the Government of India in force.

Constitutional provisions of government contracts:
Article 298 of the Constitution clearly lays down the power of the Central and state governments to carry out any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose. It is the executive power of the Union and the states.

Article 299(1) prescribes the mode or manner of execution of such contracts. It reads: "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 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 authorize."

Thus according to Article 299 the requirements of valid government contracts which need to be fulfilled are:
  • All the contracts must be expressed to be made by the President in the case of the Central Government and the Governor in the case of state governments.
  • All the government contracts must be executed on behalf of the President of India or the Governor of the states, depending on the situation.
  • All the contracts must be executed by the President or the Governor depending on the situation. The use of the word "executed" in the Article means that the government contract must be in writing. An oral agreement between the government and the other party would not be valid for the purposes of Article 299.
  1. Article 299(1) is mandatory:
    The Constitution's Article 299(1) is considered to be based on public policy and for the protection of the general public by the courts. The Supreme Court has taken a strict view of this article in several cases, stating that its terms are mandatory and cannot be waived or dispensed with. As a result, any contract that does not meet the conditions stipulated in Article 299(1) is nullified and void and cannot be enforced by any of the contracting parties.

    The government cannot be sued or held liable for damages for breach of such a contract, nor can it enforce such a contract against the other contracting party. In the K.P. Chowdhary v. State of Madhya Pradesh case, the Supreme Court ruled that no contract existed between the bidder and the state government because Article 299(1) is in mandatory terms, and no implied contract can be formed between the government and the appellant.
  2. Written Contract:
    For a contract to be valid under Article 299(1), it must be in writing and executed by a duly authorized person. The requirement for a formal written contract is not a mere formality but a substantial requirement of law. Therefore, an oral contract is not binding on the Government.In the case of Union of India v. A.L. Rallia Ram, the Supreme Court held that in the absence of any specific direction by the Governor-General, a valid contract may result from correspondence between the parties, as long as the provisions of Section 175(3) of the Government of India Act, 1935 (which were in pari materia with Article 299(l) of the Constitution of India) were complied with.
  3. Execution by authorized person:
    The subsequent requirement is that a contract can be executed on behalf of the Government by an individual duly authorized by the President or the Governor, as applicable. In the event that the contract is signed by an officer who lacks the authorization of the President or Governor, the aforementioned contract does not hold any legal weight and cannot be enforced against the Government.

    In the case of Union of India v. N.K. (P) Ltd., the Director was granted the authority to enter into a contract on behalf of the President. However, the contract was executed by the Secretary of the Railway Board. The Supreme Court ruled that the contract was entered into by an officer who lacked the necessary authorization, rendering it invalid and non-binding.
  4. Expression in the name of President (Governor):
    It is a requirement that any contract made by an officer authorized by the Government must be expressed in the name of the President or the Governor, as applicable. Failure to do so renders the contract unenforceable against the Government, even if made by an authorized officer.

    In the case of Karamshi Jethabhai v. State of Bombay, the Supreme Court ruled that an agreement for the supply of canal water to a cane farm was void as it was not entered into in the name of the Governor, despite being made by the Superintending Engineer. This decision was based on the provisions of Section 175(3) of the Government of India Act, 1935.

Effect of A Valid Contract with Government
Service contracts with the Government are not covered by Article 299 and are subject to the discretion of the Government. These contracts are not considered typical contracts as they can be terminated at will, even if there is an express condition stating otherwise.

In India, the remedy for a breach of contract with the Government is limited to a lawsuit for damages. Previously, the writ of mandamus could not be used to enforce contractual obligations. However, the Supreme Court, in the case of Gujarat State Financial Corporation v. Lotus Hotels, has taken a new stance and ruled that the writ of mandamus can be issued against the Government or its instrumentality to enforce contractual obligations. The Court stated that it is no longer acceptable for the Government to breach a solemn undertaking on which the other party has relied, and then argue that the aggrieved party can only seek damages and cannot compel specific performance of the contract through mandamus.

The doctrine of judicial review now extends to contracts entered into by the State or its instrumentality with any individual. Prior to the case of Ramana Dayaram Shetty v. International Airport Authority, the Court favored the view that the Government has the freedom to choose any person for a contract, and if one person is chosen over another, the aggrieved party cannot claim protection under Article 14 of the Constitution, which guarantees equality before the law, as the choice of the person to fulfill a contract was considered within the Government's discretion.

Quasi-Contractual Liability
The President and the Governor are not personally liable for any contracts or assurances made for the purposes of the Constitution or any government-related enactments, as stated in Article 299(2). However, once a contract is executed with the Government in accordance with Article 299, the Indian Contract Act comes into effect, governing the entire law of contract.

Consequently, the application of private contract law to public contracts may lead to instances of injustice. It is important to note that service contracts with the Government fall outside the scope of Article 299(1) of the Constitution.

According to Section 175(3) of the Government of India Act, 1935, these provisions are mandatory, and failure to comply renders the contract unenforceable in a court of law for any of the contracting parties. In order to protect innocent individuals, courts have applied Section 70 of the Indian Contract Act, 1872, holding the Government accountable for compensating the other party based on quasi-contractual liability. Section 70 stipulates that if goods are delivered and accepted or work is voluntarily enjoyed, the liability to pay compensation arises.

Therefore, a claim for compensation under Section 70 is not based on an existing contract between the parties, but on the fact that one party has performed an action for the other, which has been voluntarily accepted.

This provision prevents unjust enrichment. However, before invoking Section 70, the following conditions must be met:
  • The person must have lawfully performed an action or delivered something to another person.
  • The intention behind the action must not be gratuitous.
  • 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.

In order for a government contract to be considered valid, it is essential that all the requirements outlined in Article 299 are fulfilled. These requirements include having a written contract that is authorized and executed by the appropriate individual, whether it be the President or the Governor.

By adhering to the provisions stated in Article 299, a government contract can attain validity and enforce ability. It is important to note that every action undertaken by the Government carries a public element and should be guided by reason and the public interest. Furthermore, any contract that contradicts the provisions of the constitution is deemed void. Additionally, if any exercise of power is carried out for ulterior motives, it will be deemed invalid.

Award Winning Article Is Written By: Ms.Manpreet Kaur
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