Contractual Libility of Government

CONTRACTUAL LIBILITY OF GOVERNMENT 2013
CHANAKYA NATIONAL LAW UNIVERSITY, PATNA 1

INTRODUCTION
In modern state, whatever be the form of government, the individual is affected in his everyday
life and in the exercise of his civil rights by acts of the State and its officials in various spheres
and in different ways. Some of these acts are done by the State as the sovereign while others are
done by the State in trading and other capacities in the same manner as a private individual does.
Hence, the subject of government contracts has assumed great importance in the modern times. In
the modern era of a welfare state, governments economic activities are expanding and the
government is increasingly assuming the role of the dispenser of a large number of benefits.
Today a large number of individuals and business organisations enjoy largess in the form of
government contracts, licenses, quotas, mineral rights, jobs, etc. This raises the possibility of
exercise of power by a government to dispense largess in an arbitrary manner. Therefore, there is
a necessity to develop some norms to regulate and protect individual interest in such wealth and
thus structure and discipline the government discretion to confer such benefits.
A contract is an agreement enforceable by law, which offers personal rights, and imposes personal
obligations, which the law protects and enforces against the parties to the agreement. The general
law of contract is based on the conception, which the parties have, by an agreement, created legal
rights and obligations, which are purely personal in their nature and are only enforceable by
action against the party in default. Section 2(h) of the Indian Contract Act,1872 defines a
contract as An agreement enforceable by law. The word agreement has been defined in
Section 2(e) of the Act as every promise and every set of promises, forming consideration for
each other. A contract to which The Central Government or a State Government is a party is
called a Government Contract.
Government contracts have been accorded 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 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.



The subject of government contracts has assumed great importance in the modern times. Today
the state is a source of wealth. In the modern era of a welfare state, governments economic
activities are expanding and the government is increasingly assuming the role of the dispenser of
a large number of benefits. Today a large number of individuals and business organizations
enjoy largess in the form of government contracts, licenses, quotas, mineral rights, jobs, etc. This
raises the possibility of exercise of power by a government to dispense largess in an arbitrary
manner. It is axiomatic that the government or any of its agencies ought not to be allowed to act
arbitrarily and confer benefits on whomsoever they want. Therefore there is a necessity to
develop some norms to regulate and protect individual interest in such wealth and thus structure
and discipline the government discretion to confer such benefits.
Contract-Meaning of the term
A contract is an agreement enforceable by law which offers personal rights, and imposes
personal obligations, which the law protects and enforces against the parties to the agreement.
The general law of contract is based on the conception, which the parties have, by an agreement,
created legal rights and obligations, which are purely personal in their nature and are only
enforceable by action against the party in default.
Section 2(h) of the Indian Contract Act, 1872 defines a contract as An agreement enforceable
by law. The word agreement has been defined in Section 2(e) of the Act as every promise and
every set of promises, forming consideration for each other
Government Contract is to which The Central Government or a State Government is a party is
called a Government Contract.



HISTORICAL BACKGROUND
Position in Britain:
According to Common Law, before 1947, the Crown could not be sued in a court on a contract.
This privilege was traceable to the days of feudalism when a lord could not be sued in his own
courts. Another maxim which was pressed into service was that the King can do no wrong. A
subject could, however, seek redress against the Crown through a petition of right in which he set
out his claim, and if the royal fiat was granted, the action could then be tried in the court. The
royal fiat was granted as a matter of course and not as a matter of right, and there was no remedy
if the fiat was refused. 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 being, however, excepted
1
.
Under the English Common Law the maxim was The King can do no wrong and therefore, the
King was not liable for the wrongs of its servants. But, in England the position of old Common
law maxim has been changed by the Crown Proceedings Act, 1947. Earlier, the King could not
be sued in tort either for wrong actually authorised by it or committed by its servants, in the
course of their employment. With the increasing functions of State, the Crown Proceedings Act
had been passed, now the Crown is liable for a tort committed by its servants just like a private
individual. Similarly, in America, the Federal Torts Claims Act, 1946 provides the principles,
which substantially decides the question of liability of State.
Position in India:
In ancient India, under the Hindu jurisprudence, it was an undisputed principle that no one is
exempted from the operation of law. This liability to equal punishment extended even to the
king, relative of the king, a judge or an ordinary citizen. The rule of law was considered supreme
and binding on everyone alike. The important functions of the king were concerned with
protection of people, punishment of crimes and maintenance of dharma or social order.

1
M.P.Jain; Indian Constitutional Law; 5th Ed; p1801


In the medieval Indian history the personal liability of officers for their wrongs was more vogues
with evidences showing equality between the ruler and the ruled subject. Only when the king
considered it proper to undertake the burden of public officer, it was then the state treasury used
to pay the compensation. Dharma was considered the administrative law binding the king as well
as the subjects. Both in Hindu law and Muslim law, the rulers themselves administered justice as
far as possible and the rest was done by the exceptionally learned and honest judges. The most
significant recent trend has been an assertion on the part of the court that it has a power to grant
compensation. The principle of personal liability of public servants for wrongs done to citizens is
already a part of Indian law based on English case laws.
Pre-Constitution situation in India related to the contractual liability of government through
judicial decisions in which a consideration of the pre-constitution cases of the Governments
liability begins with the judgment of the Supreme Court of Calcutta in the case. P. & O. Steam
Navigation Co. v. Secretary of State .The principle of this case holds that if any act was done in
the exercise of sovereign functions, the East India Company or the State would not be liable. It
drew quite a clear distinction between the sovereign and non-sovereign functions of the state. As
the facts of the case go, a servant of the plaintiff-company was proceeding on a highway in
Calcutta, driving a carriage which was drawn by a pair of horses belonging to the plaintiff. He
met with an accident, caused by negligence of the servants of the Government. For the loss
caused by the accident, the plaintiff claimed damages against the Secretary of State for India.
The Supreme Court observed that the doctrine that the King can done wrong, was applicable to
the East India Company
2
. The company would have been liable in such cases and the Secretary
of State was thereafter also liable. This arose out of the section 65, Government of India Act,
1858, which equated the liability of the Secretary of State for India wit h that of the East India
Company. Distinguishing between sovereign and non-sovereign functions it was held that if it
were committed by a public servant in the discharge of sovereign functions, no action would lie
against the Government e.g. if the tort was committed while carrying on hostilities or seizing
enemy property as prize.

2


This doctrine of immunity, for acts done in the exercise of sovereign functions, was applied by
the Calcutta High Court in Nobin Chander Dey v. Secretary of State
3
. The plaintiff in this case
contended that the Government had made a contract with him for the issue of a licence for the
sale of ganja and had committed breach of the contract. The High Court held that upon the
evidence, no breach of contract had been proved. Secondly even if there was a contract, the act
had been done in exercise of sovereign power and was thus not actionable.
Secretary of State v. Hari Bhanji
4
: In this case, the Madras High Court held that State immunity
was confined to acts of State. In the P & O Case, the ruling did not go beyond acts of State, while
giving illustrations of situations where the immunity was available.
It was defined that Acts of State, are acts done in the exercise of sovereign power, where the act
complained of is professedly done under the sanction of municipal law, and in exercise of
powers conferred by law. The mere fact that it is done by the sovereign powers and is not an act
which could possibly be done by a private individual does not oust the jurisdiction of the civil
court.
The Madras judgment in Hari Bhanji holds that the Government may not be liable for acts
connected with public safety, even though they are not acts of State. This view was re-iterated in
Ross v. Secretary of State
5
. The Allahabad High Court took a similar view in Kishanchand v.
Secretary of State
6
.
However, in Secretary of Secretary of State v. Cockraft
7
, making or repairing a military road was
held to be a sovereign function and the Government was held not liable, for the negligence of its
servants in the stacking of gravel on a road resulting in a carriage accident that injured the
plaintiff.
Other such cases as in the Bombay case of Rao v. Advani
8
, it was held that the Madras view in
the Hari Bhanji case was correct. The Bombay case was not one of a claim to damages, but
related to a petition for certiorari to quash a Government order for the requisitioning of property,

3
I.L.R. 1 Cal. 11
4
ILR (1882) 5 Madras 273
5
[1913] 37 Mad. 55
6
ILR (1974) II Delhi 637
7
AIR 1915 Mad. 993
8
AIR 1949 Cal. 385


as proper notice had not been given. On appeal, the Supreme Court, in the case of State of
Bombay v. Khushaldas Advani
9
, reversed the High Court, holding that natural justice was not
required to be observed, before requisitioning any property.

9
AIR 1950 SC 222


INDIA IN PRESENT SENARIO
The words had not this Constitution been enacted in Article 300(1) indicate that the basis of
sueability of the state in India is historical. In order to appreciate the significance of these words,
we must trace the history of the Indian Administration from the time of the East India Company,
when the Court was of the view that even though the East India Company has sovereign powers,
if it contracts in civil capacity and if it breaks its contract it would be held answerable. Later the
Government of India Acts (Section 30 of Act of 1915 and Section175 of Act of 1935) expressly
empowered the Government to enter into contracts with private individuals and the
corresponding provision in the Constitution is Article 299(1). In all these Acts it was provided
that the person making the contract on behalf of the Government would not be personally liable in
respect thereof.
The Indian Contract Act, 1872 does not prescribe any form for entering into contracts. A contract
may be oral or in writing. It may be expressed or be implied from the circumstances of the case
and the conduct of the parties. But the position is different in respect of Government Contracts.
A contract entered into by or with the Central or State Government has to fulfill certain
formalities as prescribed by Article 299 of the Indian Constitution.

Contracts and Government contracts
It is true that in respect of Government Contracts the provisions of Article 299(1) must be
complied with, but that does not mean that the provisions of the Indian Contract Act have been
superseded.
In the case of State of Bihar v Majeed
10
,
The Honble Supreme court 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

10
AIR 1954 SC 786


contractual liability of the Central or State Government is same as that of any individual under
the ordinary law of contract..
As regards 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
11
.
Though there is hardly any distinction between a contract between private parties and
Government contract so far as enforceability and interpretation are concerned yet some special
privileges are accorded to the Government in the shape of special treatment under statutes of
limitation
12
.
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.
Formation of Government Contracts
The executive power of the Union of India and the States to carry on any trade or business,
acquire, hold and dispose property and make contracts is affirmed by Article 298 of the
Constitution of India. If the formal requirements required by article 299 are complied with, the
contract can be enforced against the Union or the States
13
.

11
Ram Lal v State of Punjab , AIR 1966 Punj 436
12
Navrattanmal v State of Rajasthan , AIR 1961 SC 1704
13
Pollock &Mulla; Indian Contract & Specific Relief Acts; 12th Ed; p312


RELEVENT PROVISION AND UNDERLYING PRINCIPLE
Article 299 provides:
(1) All contracts made in the exercise of executive power of the union or 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 person and in such manner as he
may direct or authorize.
(2) Neither the President nor the Governor shall be personally liable in respect of any contract or
assurance made or executed for the purpose of any enactment relating to Government of India
hereto before in force , nor shall any such contract or assurance on behalf of any of them be
personally liable in respect thereof.
Thus Article 299 lays down three conditions which the contracts made in the exercise of the
executive power of the Center or a State must fulfill to be valid
The contract must be expressed to be made by the president or the Governor as the case may be;
These contracts made in the exercise of the executive power are to be executed on behalf of the
President/Governor as the case may be;
The execution must be by such person and in such manner as the President or the Governor of
the case as the case may be, may direct or authorize.
The expression executed does not by itself contemplate execution of a formal contract by the
executing parties. A tender for the purchase of goods in pursuance of a tender notice, notification
or statement inviting tenders issued by or on behalf of the President or the Governor, as the case
may be, and acceptance in writing which is expressed to be made in the name of the President or
Governor and is executed on his behalf by a person authorized in that behalf would fulfill the
requirements of Article 299(1). If these requirements are fulfilled, a valid contract may result
from the correspondence.
14

14
State of Madhya Pradesh v Firm Gopi Chand Sarju Prasad , AIR 1972 MP 43


It has been held by the Honble Supreme Court in the case of Bhikaraj Jaipuria v Union of
India
15

it is clear from the words expressed to be made and executed that there must be a formal
written contract. The provisions of Article 299(1) are mandatory in character and any
contravention thereof nullifies the contract and makes it void. The provisions of Article 299(1)
have not been enacted for the sake of mere form but they have been enacted for safeguarding the
Government against the unauthorized contracts. The provisions are embodied in the constitution
on the ground of public policy on the ground of protection of general public and these formalities
cannot be waived or dispensed with.
Where a contract is made by tender and acceptance, the acceptance must be made by a duly
authorized person and on behalf of the President, and a valid contract may result from
correspondence
16
.
A contract complying with the Article can be enforced by or against the government. It is subject
to the general provisions of the contract law ,and its terms cannot be changed by resorting to
Article 14 of the constitution . A contract not complying with any of the conditions of Article
299(1) of the Constitution is not binding on or enforceable by the Government , and is absolutely
void , though not so for collateral purposes , and cannot be ratified. No damages can be claimed
for breach unless the contract is complete under this article
17
.
The provisions have been embodied to protect the general public as represented by the
government. The terms of the Article have therefore been held to be mandatory and not merely
directory. This means that a contract not couched in the particular form stipulated by Article
299(1) cannot be enforced at the instance of any of the contracting parties. Neither the
government can be sued and held liable for the breach of such a contract nor can the government
enforce such a contract against the other contracting party
18
.

Implied Contract with the Government

15
AIR 1962 SC 113
16
Union of India v Rallia Ram, AIR 1963 SC 1685
17
State of Uttar Pradesh v Kishori Lal , AIR 1980 SC 680
18
Chatturbhuj v Moreshwar, AIR 1954 SC 236


In view of Article 299(1) there can be no implied contract between the government and another
person, the reason being that if such implied contracts between the government and another
person were allowed, they would in effect make Article 299(1) useless, for then a person who
had a contract with the government which was not executed at all in the manner provided under
Article 299(1) could get away by saying that an implied contract may be inferred on the facts and
the circumstances of the particular case
19
.
It was held by the Honble Supreme Court in the case of K.P.Chowdhary v State of Madhya
Pradesh
20
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 and 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 contracts between the government
and other persons were allowed, they would in effect, make Article 299(1) a dead letter, for then
a person who had a contract with the government which was not executed at all in the manner
provided under Article 299(1) could get away by pleading that an implied contract be inferred
from the facts and circumstances of the case.
However, the Courts have also realized that insistence on too rigid observance of all the
conditions stipulated in Article 299 may not always be practicable. 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. It would be extremely
inconvenient from an administrative point of view if it were insisted that each and every contract
must be effected by a ponderous legal document couched in a particular form
21
.

The judicial attitude to Article 299 has sought to balance two motivations:

19
D.D. Basu, Comentry on the Constitution of India, Calcutta, 1989, p1459
20
AIR 1967 SC 203
21


On the one hand, to protect the Government from unauthorized contracts,on the other hand, to
safeguard the interests of unsuspecting and unwary parties who enter into contracts with
government officials without fulfilling all the formalities laid down in the Constitution.
A strict compliance with these conditions may be inequitable to private parties, and at the same
time, make government operations extremely difficult and inconvenient in practice.
Consequently, in the context of the facts of some cases, the courts have somewhat mitigated the
rigours of the formalities contained in Article 299(1), and have enforced contracts even when
there have not been full, but substantial, compliance with the requirements of Article 299(1). In
effect, it may be true to say that the judicial view has oscillated between the liberal and rigid
interpretation of Article 299
22
.
A contract to be valid under Article 299(1) has to be in writing. It does not, however, mean that
there should always be a formal legal document between the Government and the other
contracting party for the purpose. A valid contract could emerge through correspondence, or
through offer and acceptance, if all conditions of Article 299(1) are fulfilled.
Under Article 299(1), a contract can be entered into on behalf of the Government by a person
authorized for the purpose by the President, or the Governor, as the case may be. The authority to
execute the contract on behalf of the government may be granted by rules, formal notifications,
or special orders; such authority may also be given in respect of a particular contract or contracts
by the President/Governor to an officer other than the one notified under the rules. Article 299(1)
does not prescribe any particular mode in which authority must be conferred; authorization may
be conferred ad hoc on any person.
23

Principles Underlying Government Contracts:
1. Reasonableness, fairness
The principle of reasonableness and rationality which is legally as well as philosophically an
essential element of equality or non-arbitrariness is projected by Article 14 and it must
characterize every State Action , whether it be under the authority of law or in exercise of

22
ibid
23
State of Bihar v Karam Chand Thapur, AIR 1962 SC 110


executive power without making of law. The state cannot , therefore , act arbitrarily in entering
into relationship, contractual or otherwise with a third party, but its action must conform to some
standard or norm which is rational an non-discriminatory. The action of the Executive
Government should be informed with reason and should be free from arbitrariness.
It is indeed unthinkable that in a democracy governed by the rule of law the executive
Government or any of its officers should possess arbitrary power over the interests of the
individual. Every action of the executive Government must be informed with reason and should
be free from arbitrariness. That is the very essence of the rule of law and its bare minimal
requirement. And to the application of this principle it makes no difference whether the exercise
of the power involves affection of some right or denial of some privilege
24
.
Actions of the State and its instrumentality are bound to be fair and reasonable. The actions are
liable to be tested on the touchstone of Article 14 of the Constitution of India. The State and its
instrumentality cannot be allowed to function in an arbitrary manner even in the matter of
entering into contracts. The decision of the State either in entering into the contract or refusing to
enter into the contract must be fair and reasonable. It cannot be allowed to pick and choose the
persons and entrust the contract according to its whims and fancies. Like all its actions, the
action even in the contractual field is bound to be fair. It is settled law that the rights and
obligations arising out of the contract after entering into the same is regulated by terms and
conditions of the contract itself
25
.
The requirement of fairness implies that even administrative authority must act in good faith;
and without bias; apply its mind to all relevant considerations and must not be swayed by
irrelevant considerations; must not act arbitrarily or capriciously and must not come to a
conclusion which is perverse or is such that no reasonable body of persons properly informed
could arrive at. The principle of reasonableness would be applicable even in the matter of
exercise of executive power without making law. It is settled principle of law that the court
would strike down an administrative action which violates any foregoing conditions
26
.

24
Ramana Dayaram Shetty v International Airport Authority of India, (1979)3 SCC 489
25
Y.Konda Reddy v State of A.P., AIR 1997 AP 121
26
M/s. Pyrites, Phosphates & Chemicals Ltd. v. Bihar Electricity Board, AIR 1996 1568


The duty to act fairly is sought to be imported into the contract to modify and alter its terms and
to create an obligation upon the State which is not there in the contract. 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. Just as principles of natural justice ensure fair decision where the function is quasi-
judicial, the doctrine of fairness is evolved to amend, alter or vary the express terms of the
contract between the parties. This is so, even if the contract is governed by statutory provisions
27
.
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
28
.
1. Public Interest
Tate owned or public owned property is not to be dealt with at the absolute discretion of the
executive. Certain percepts and principles have to be observed. public interest is the paramount
consideration. There may be situations where there are compelling reasons necessitating the
departure from the rule, but there the reasons for the departure must be rational and should not be
suggestive of discrimination. Appearance of public justice is as important as doing justice.
Nothing should be done which gives an appearance of bias, jobbery or nepotism.
The consideration to weigh in allotting a public contract are and have to be different than in case
of a private contract as it involves expenditure from the public exchequer. The action of the
public authorities thus have to be in conformity with the standards and norms which are not
arbitrary, irrational or unreasonable. And whenever the authority departs from such standard or
norms, the Courts intervene to uphold and safeguard the equality clause as enshrined in Article
14 of the Constitution and strike down actions which are found arbitrary, unreasonable and
unfair and prone to cause a loss to the public exchequer and injury to public interest. still be
liable to quashment for being unfair, unreasonable, discriminatory and violative of the guarantee
contained in Article 14.
2. Equality, non-arbitrariness

27
Assistence Excise Commissioner v Issar Peter, AIR 1994 SCW 2616
28
M/s. Hindustan Sugar Mills v State of Rajasthan, AIR 1981 SC 1681


From a positivistic point of view, equality is antithetic to arbitrariness. In fact, equality and
arbitrariness are sworn enemies; one belonging to the rule of law in a republic, while the other, to
the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it
is unequal both according to political logic and constitutional law and is violative of Article 14.
the principle of reasonableness, which legally as well as philosophically, is an essential element
of equality or non-arbitrariness pervades Article 14 like a brooding omni-presence and the
procedure contemplated by Article 21 must answer the test of reasonableness in order to be in
conformity with Article 14.
29

3. Contractual Liability
Article 299(2) immunizes the President, or the Governor, or the person executing any contract on
his behalf, from any personal liability in respect of any contract executed for the purposes of the
Constitution, or for the purposes of any enactment relating to Government of India in force. This
immunity is purely personal and does not immunize the government, as such, from a contractual
liability arising under a contract which fulfills the requirements under Article 299(1).
The governmental liability is practically the same as that of a private person, subject, of course,
to any contract to the contrary
30
.
In order to protect the innocent parties, the courts have held that if government derives any
benefit under an agreement not fulfilling the requisites of Article 299(1), the Government may be
held liable to compensate the other contracting party under S.70 of the Act, on the basis of quasi-
contractual liabilities, to the extent of the benefit received. The reason is that it is not just and
equitable for the government to retain any benefit it has received under an agreement which does
not bind it. Article 299(1) is not nullified if compensation is allowed to the plaintiffs for work
actually done or services rendered on a reasonable basis and not on the basis of the terms of the
contract
31
.
Section 70 lays down three conditions namely:
1. a person should lawfully do something for another person or deliver something to him;

29
Maneka Gandhi v Union of India, AIR 1978 SC 597
30
State of Bihar v Abdul Majid, AIR 1954 SC 245
31
J.N. Pandey Constitutional Law of India, Allahabad : Central Law Agency,2003, p467


2. in doing so, he must not intend to act gratuitously;
3. the other person for whom something is done or to whom something is delivered must enjoy
the benefit thereof.
The Courts have adopted this view on practicable considerations. Modern government is a vast
organization. Officers have to enter into a variety of petty contracts, many a time orally or
through correspondence without strictly complying to the provisions under Article 299. In such a
case, if what has been done is for the benefit of the government for its use and enjoyment, and is
otherwise legitimate and proper, Section 70 of the Act should step in and support a claim for
compensation made by the contracting parties notwithstanding the fact that the contract in
question has not been made as per the requirements of Article 299.If Section 70 was to be held in
applicable, it would lead to extremely unreasonable circumstances and may even hamper the
working of government. Like ordinary citizens even the government should be subject to the
provisions of Section 70
32
.
Similarly, if under a contract with a government, a person has obtained any benefit, he can be
sued for the dues under Section 70 of the Act though the contract did not confirm to Article 299.
if the Government has made any void contracts it can recover the same under Section 65 of the
Act.
It needs to be emphasized that Section 70, Contract Act, does not deal with the rights and
liabilities of parties accruing from that from relations which resemble those created by contracts.
Thus, in cases falling under Section 70 , the person doing something for another cannot sue for
specific performance of the contract nor can he ask for damages for breach of the contract for a
simple reason that no valid contract exists between the parties. All that Section 70 provides is
that if the goods delivered are accepted, or the work done is voluntarily enjoyed, then the liability
to enjoy compensation for the said work or goods arises. Section 70 deals with cases where a
person does a thing not intending to act gratuitously and the other enjoys it.
Section 70, in no way detracts from the binding character of Article 299(1). The cause of action
for the respondents claim under Section 70 is not any breach of contract by the government. In

32
State of West Bengal v B.K. Mandal, AIR 1962 SC 152


fact, the claim under Section 70 is based on the assumption that the contract in pursuance of
which the respondent has supplied the goods, or made the construction in question, is ineffective
and, as such, amounts to no contract at all. Thus, Section 70 does not nullify Article 299(1). In
fact, Section 70 may be treated as supplementing the provisions under Article 299(1).What
Section 70 prevents is unjust enrichment and it as much to individuals as to corporations and
governments
33
.

33
ibid


LEADING CASE LAWS
In the case of State of Bihar v Majeed
34
,
the ordinary law of contract.
In the case of Bhikaraj Jaipuria v Union of India
35

it is clear from the words expressed to be made and executed that there must be a formal
written contract. The provisions of Article 299(1) are mandatory in character and any
contravention thereof nullifies the contract and makes it void. The provisions of Article 299(1)
have not been enacted for the sake of mere form but they have been enacted for safeguarding the
Government against the unauthorized contracts. The provisions are embodied in the constitution
on the ground of public policy on the ground of protection of general public and these formalities
cannot be waived or dispensed with.
In the case of K.P.Chowdhary v State of Madhya Pradesh
36

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 and would not be enforceable
as a contract either by the Government or by the person.

34
AIR 1954 SC 786
35
(1962)2 SCR 880
36
AIR 1967 SC 203


The Court justified this strict view by saying that if implied contracts between the government
and other persons were allowed, they would in effect, make Article 299(1) a dead letter, for then
a person who had a contract with the government which was not executed at all in the manner
provided under Article 299(1) could get away by pleading that an implied contract be inferred
from the facts and circumstances of the case.
However, the Courts have also realized that insistence on too rigid observance of all the
conditions stipulated in Article 299 may not always be practicable. 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. It would be extremely
inconvenient from an administrative point of view if it were insisted that each and every contract
must be effected by a ponderous legal document couched in a particular form.
In Bhim Singh v. State of Jammu and Kashmir, the Supreme Court awarded a sum of Rs. 50,000
to the petitioner as compensation for violation of his fundamental right of personal liberty under
Art. 21 of the Constitution. The petitioner who was an MLA was illegally arrested and detained
in police custody and deliberately prevented from attending the session of the Legislative
Assembly.
In Peoples Union for Democrat Rights v. Police Commissioner
37
, Delhi Head Quarter, a labourer
was taken to the police station for doing some work. He was severely beaten when he demanded
wages and as a result he died. The Court directed the government to pay Rs. 75,000 as
compensation to the family of the deceased. Likewise, in Saheli v. Commissioner of Police
38
, the
Supreme Court in a public interest litigation directed the Delhi Administration to pay Rs. 75,000
as exemplary compensation to the mother of 9 year old child who died due to beating by the
Delhi Police Officer.
In Nilbati Behra v. State of Orissa, the petitioners son aged 22 years was arrested by police in
connection with investigation of an offence of theft in a village and kept in police custody with
his hands tied. On the next day his body was found by the side of the railway track. The mother
of the deceased sent a letter to the Court alleging custodial death of her son claiming

37
(1989) 4 SCC 730
38
AIR 1990 SC 513


compensation on the ground of violation of Art. 21 of the Constitution. The Court treated this
letter as a writ petition under Art. 32 and awarded Rs. 1.15 Lakhs as compensation to the mother
of the deceased. The Court said that proceeding under Art. 32 and Art. 226 is a remedy available
in Public Law based on strict liability for contravention of fundamental rights to which the
principle of sovereign immunity does not apply even though it may be available in Private law
based on an action based on tort.
In Rudal Shah v. State of Bihar
39
, the Court directed the State of Bihar to pay compensation of
Rs. 35,000 to the victim of tortuous acts done by government employees during sovereign
functions. The petitioner had already completed his sentence but the prison officials did not take
care to release him. He was kept in jail for 14 years after his acquittal by the Court.
In Govind Kumar v. State of Rajasthan
40
, a 4 years child had died on account of drowning in a
pond in a small village constructed by the Municipality. The pond was not surrounded by wall by
the Municipality. The boy was playing nearby the pond because he was not knowing the
consequences. The Rajasthan High Court held that the State was vicariously liable to pay interim
compensation of Rs. 40,000. It is the duty of the State and Municipality to protect area of pond in
a small village.
In Union of India v. Association of Victims of Uphar Tragedy
41
, a transformer installed by the
Delhi Vidyut Board (DVB) in the ground area of Uphar Cinema Theatre caught fire and due to
oil leakage from the burning transformer, the fire spread causing fire to illegally cars parked
there. The burning of the transformer oil, diesel and petrol from the parked vehicles and foam
and other articles stored in the parking area generated huge quantity of fumes and smokes
consisting of carbon monoxide and other poisonous gases blowing in the hall from the entry and
exist point. The worst affected part was balcony. The electricity also went off and the people
were groping in the dark to get out. There were 59 deaths in the balcony and stairwell due to
asphyxiation by inhaling the noxious fumes and smokes and 103 persons trying to get out were
injured. The High Court awarded punitive damages against the owner of Uphar Theatre, DVB,
Municipal Corporation Delhi (MCD), Fire Force and Licensing Authority. The Supreme Court

39
AIR 1993 SC 1086
40
AIR 2009 Raj. 61
41
AIR 2012 SC 100


held that the High Court committed a serious error in making the licensing authority and the
MCD liable to pay compensation to the victims jointly and severally with the licensees and
DVB. The cause of the fire was not attributable to the licensing authority and MCD. It was not
proper to award damages against public authorities merely for some inaction in performance of
statutory duties or functions. The Courts could not award damages in performance of statutory
duties or functions unless there was malice or conscious abuse Merely because they could have
performed their duties better or more efficiently, theft could not be liable to pay compensation to
the victims of tragedy
42
.
As regards the compensation to be awarded by way of public law remedy, the court held that It
need not only be a normal palliative amount but something more. It can be by way of monetary
amounts for the wrongdoer or by way of exemplary damages, exclusive of any amount
recoverable in a civil action based on tortious liability. It was also not proper to hold that every
person who purchased a balcony ticket had an income Rs. 15,000 per month in 1997 as this was
a big amount at that time and to determine the compensation at the rate Rs. 18 lakhs in case of
persons above the age of 20 years and Rs. 19 lakhs to the persons below that age was not proper
in public law remedy. The Supreme Court, reduced it to Rs. 15 lakhs in case of persons above
the age of 20 years and Rs. 7.50 lakhs in case of persons below that age. The Court did not
disturb Rs. 1 lakh compensation to the injured persons. The victims or their relatives were given
liberty to seek high compensation if they were not satisfied with such compensation. It was also
held that it would be unsafe to use high income as the determinative factor in awarding
compensation to large group of persons by way of public law remedy.

42
(2012) SCC 853


GOVERNMENT LIBILITY
Government Contract, Mode of execution, Validity:
Where the contract not signed by a duly competent officer on behalf of the Government
undertaking, the doctrine of indoor management cannot be extended to formation of the
contract or the essential terms of the contract unless the contract with other party is duly
approved and signed on behalf of a public undertaking or the Government with its seal by an
authorised or competent officer. It would be hazardous for public undertaking or Government or
the instrumentalities to deal on contractual relation with third parties. The contract must be
signed on behalf of undertaking or the Government with its seal by y competent officer
43
.
Government Contract, Authority to Contract on Behalf of Government:
The provisions of Art. 299(1) were not inserted for the sake of mere form. They are there to
safeguard the interest of the Government against unauthorized contract. If the contract is
unauthorized or in excess of authority it is right that the Government should be safeguarded. The
officer entering into a contract on behalf of the Government can always safeguard himself by
having recourse to the proper form. There are large number of contracts which are not in the
proper form and an innocent contracting party should not suffer because of the defect in the form
and if there is no other defect or objection, the Government will always accept the responsibility.
In Chattnrhhuj Jasani, the Chairman of the Board of Administration acted on behalf of the Union
Government and he had authority to enter into contract. The only flaw was that the contracts
were not in proper form. It was held that the Government may not be bound by the contract but
such contract cannot be said to be void. However, such contracts can be ratified by the
Government especially if that was for the benefit of the Government. When the Government
officer acts in excess of the authority the Government is bound to ratify the excess. The only
consequence is that the Union of India cannot be sued for the contract by reason of Art. 299( 1)
of the Constitution.

43
State of U.P. v Rajktya Nirman Nigam, 1996 (2) SCC 667


Government Contract is Largesse:
Largesse means a privilege or a monopoly given by the state to a private agency to conduct a
welfare activity. A fair price shop or a milk booth is varieties of such largesse. Thus where the
plaintiff was appointed a distributor of certain controlled commodities, namely salt on terms and
conditions stated in the letter of appointment and one of the conditions was that she was
required to keep in stock a quantity fixed by the government, she could not recover the loss
incurred by her as a result of the decontrol of the commodity by the government.
44
In Mohd
Rajab Gujari v J&K
45
, the appellant had entered into a contract with the government for the sale
of milk and one of the conditions of the contract was that if milk became a contract was that if
milk became a controlled article during the period of agreement, the contractor shall be paid at
the controlled rate, it was held that she was entitled to get the controlled price which was higher
than the stipulated price. However, when there is an absence of any statutory authority the
government cannot alter the terms of the contract and is bound by it.
46
The power of the
government to refuse to fulfill a contractual obligation on the ground of change in policy or
legislative provision is however subject to the doctrine of estoppel. Further, if the government
has given rise to legitimate expectations, it might not be allowed to disown its liability. This will
be discussed later in the subsequent chapters.
Contracts and Writs:
It is extremely rare for disputes arising out of the performance of government contracts to be the
subject of litigation. Such disputes are usually resolved by informal negotiation between the
government and the contractor or, if this does not succeed, by arbitration.
47
An important reason
for this is that the relation between government and its contractors is often more in the nature of
a long term cooperative venture for mutual advantage than a one-off commercial deal.
48
But the
other side of this aspect can be that when contractual disputes are settled without recourse to a

44
Barada Kanta Das v Assam AIR 1956 Assam 23
45
(1974) 2 SCC 190
46
Madras v Madras Electric Tramways Co Ltd AIR 1957 Mad 169
47
Peter cane, Administrative Law, Oxford University Press, 4
th
Edition,2000
48
Within such a relationship, recourse to courts to settle disagreements will often seem inappropriate and possibly
counter- productive.


third party adjudicator, there is a danger that any inequalities of bargaining power between the
parties may distort the outcome.
In general the law governing the public authorities is same as that of private individuals but with
a special qualification. This qualification is easy to state but not that easy to apply. The reason
being public authorities have to see greater public interest and welfare of the general public in
fulfilling there obligations to the other contracting party. This is called the public policy defence.
But the sad point is that the limit and scope of this defence cannot be defined.
Restitution:
The law of restitution is the law of gains-based recovery. It is to be contrasted with the law of
compensation, which is the law of loss-based recovery. For instance, Joseph Charles breaks into
a jewellery store and steals $5000 worth of jewellery. In the process, he does $1000 worth of
damage to the stores back door and the showcases he broke. Later, Joseph Charles is arrested. If
Joseph Charles is forced to pay restitution, he must pay back his gains, $5000 (or just give back
the jewellery). If he is forced to pay compensation, he must pay $6000, which is the stores total
But the question arises as to whether government is responsible to pay back the extra amount
taken by a private individual in case the act under which it charged was held to be ultra vires
This concept is not only related to money but also covers property in the ambit. If the seizure of
property is wrongful, the owner would be entitiled to the return of the seized property, or, in the
alternative, the payment of the price thereof.
49

An example of a simple case of restitution is furnished by Kerala v Kt P. Govindan Exporter
50

Restitution, like other legal responses, can be triggered by any one of a variety of causative
events. These are events in the real world which trigger a legal response. Broadly speaking, an
obligation to make restitution can be triggered by two different types of causative event, one is
wrong and another is unjust enrichment Prior to the Commencement of the Constitution.

49
Bishamber dayal Chandra mohan v state of Uttar Pradesh, AIR 1982 SC 1983 at p49
45
AIR 1975 SC 152


Before the commencement of the constitution also, the liability for the breach of contract was
recognized. East India Company was established in India, essentially for commercial activities.
Also the Supreme Court of Calcutta held that the company was subjected to the jurisdiction of
the municipal courts in all matters as a private trading company.
51
Not only in this, but there are
number of other instances where such liability of the state has been recognized.
Quasi-Contractual Liability, Doctrine of Unjust Enrichment:
If the provisions of article 299(1) are not complied with, the contract stands unenforceable. In
these circumstances the court has applied the provisions of Section 70 of the Indian Contract Act
and has held that the government is liable to compensate the other contracting party on the basis
of quasi-contractual liability. What Section 70 provides is that if the goods delivered are
accepted or the work done in voluntarily enjoyed, then the liability to pay compensation for the
enjoyment of the said goods or the acceptance of the said work arises. Thus when they claim for
compensation under section 70, it is not on the basis of any subsisting contract between the
parties, but on the basis of the fact that something was done by one party for the other and the
said work so done has been voluntarily accepted by the other party. The Section 70 of the
Contract Act prevents unjust enrichment.
The doctrine applies as much to corporation and the Government as to private individuals. The
provision of Section 70 may be invoked by the aggrieved party if the following three conditions
is that a person should lawfully do something for another person or deliver something to him.
The second condition is that in doing the said thing or delivering the said thing he must not
intend to act gratuitously, and the third is that the other person for whom something is delivered
must enjoy the benefit thereof. If these three conditions are satisfied, Section 70 imposes upon
the latter person the liability to make compensation to the former in respect of, or to restore, the
things so done or delivered.

46
Moodlay v Morton, 1785 1 Bro CC 469


Remedies for breach of Contract:
If a person enters into a contract with the govt., he is entitled to certain benefits where under, he
can approach the court of law. The question however is as to whether he can file a petition under
art 32 or art 226 of the constitution of India. In R.K. Aggarwal v. State of Bihar
228
, three cases of
breach of contract were laid down. They are:-
1) Where a petitioner makes grievance or breach of promise on there part of the state in
cases where on assurance of promise made by the state he has acted to his prejudice, but
the agreement is within the meaning of Article299 of the Constitution.
2) Where the contract entered into between the person agreed and the state is in exercise of
a statutory power a under certain acts framed there under and the petitioner alleges a
breach on the part of the state.
3) Where the contract entered into between the state and the person agreed is not statutory
but purely contractual and the rights and liabilities of the parties are governed by the
terms of the contract, and the petitioner complains about breach of such contract by the
state.
In the first type of obligation article 226 can be applied by applying the doctrine of promissory
estoppels. In the second case a petition can be maintainable because the action of public
authority is challenged. As far as the third case is concerned, the rights of the parties flow from
mere terms of the contract entered into by the state and the party to such contract cannot invoke
writ jurisdiction of the Supreme Court under Article 32 or of a high court under Article 226 of
the Constitution of India.
Period of Limitation for Suits Against the Government:
Article 149 of the first schedule of the limitation act 1890 provides a longer period of limitation
for suits against the government. The limitation act 1963 contains a similar provision under
article 112. It applies to the central as well as the state government.
52
The application of this
provision is confined to those cases in which a private person could have brought the

52
The Longer limitation period was based on the maxim nulla tempus occuritregi, i.e. no time affects the crown.


suit.
53
Under section 5 of the limitation act it is stated that a suit will be allowed after the expiry
of limitation period only if the court is satisfied that there was a sufficient cause for delay.
54

Effects of Non Compliance:
Provisions of 299(1) are mandatory and not directory. They have to be complied with. They
have been inserted in order to protect the government from its unauthorized actions. Thus if this
is not fulfilled the contract is not in accordance with law and the same is not enforceable by or
against the government.
55
In Mulchand v State of MP the SC held that, if the contract was not in
accordance with the constitutional provisions, in the eye of law, there was no contract at all and
the question of ratification did not arise.
Effect of Valid Contracts:
If the provisions of article 299(1) are complied with, the contract is valid and it can be enforced
by or against the government and the same is binding on the parities.
56
Article 299(2) provides
that neither the president nor the governor shall be personally liable in respect of any contract
executed for the purpose of the constitution or for the purpose of any enactment relating to the
government of India. It also grants immunity in favour of a person making or executing any such
contract on behalf of the president or the governor from personal liability.

Public Interest Litigation, Award of Contract by Government, Maintainability:
When a writ petition is filed in the High Court challenging the award of a contract by a public
authority or the State, the court must be satisfied that there is some element of public interest
involved in entertaining such a petition. If, for example, the dispute is purely between two
tenders, the court must be very careful to see if there is any element of public interest involved in
the litigation. A mere difference in the prices offered by the two tenders may or may not be
decisive in deciding whether any public interest is involved in intervening in such a commercial
transaction. It is important to bear in mind that by Court intervention, the proposed project may

53
Such limitation would, however, not apply against the prerogative rights of the state such as the right to levy a
tax or assess the revenue on land.
54
Nav Ratanlal v State ofRajasthan, AIR 1961 SC 1704
55
K.P. Chowdhary v state of M.P., AIR 1967 SC 203
56
State of Bihar v Abdul Majid, AIR SC 245; State of Assam v K. P. Singh, AIR 1953 SC 309


be considerably delayed thus escalating the cost far more than any saying which the court would
ultimately effect in public money by deciding the dispute in favour of one tender or the other
tender. Therefore, unless the court is satisfied that there is a substantial amount of public interest,
or the transaction is entered into mala fide, the Court should not intervene under Article 226 in
disputes between two rival tenders.
When a petition is filed as a public interest litigation challenging the award of a contract by the
State or any public body to a particular tender, the Court must satisfy itself that the party which
has brought the litigation is litigating bona fide for public good. The public interest litigation
should not be merely a clock for attaining private ends of a third party or of the-party bringing
the petition. The Court can examine the previous record of public service rendered by the
organization bringing public interest litigation. Even when a public interest litigation is
entertained, the Court must be careful to weigh conflicting public interests before intervening.
Intervention by the Court may ultimately result in delay in the execution of the project. The
obvious consequence of such delay in the contemplated public service becoming available to the
public. If it is a power project which is thus delayed, the public may lose substantially because of
shortage in electricity supply and the consequent obstruction in industrial development. If the
project is for the construction of a road or an irrigation canal, the delay in transportation facility
becoming available or the delay in water supply for agriculture being available, can be a
substantial setback lo the countrys economic development. Where the decision has been taken
bona fide and a choice has been exercised on legitimate considerations and not arbitrarily, there
is no reason why the court should entertain a petition under Article 226.
Hence before entertaining a writ petition and passing any interim orders in such petitions, the
Court must carefully weigh conflicting public interest. Only when it comes to a conclusion that
there is an overwhelming public interest in entertaining the petition, the court should intervene.
Where there is an allegation of mala fide or an allegation that the contract has been entered into
for collateral purposes and the court is satisfied on the material before it that the allegation needs
further examination, the court would be entitled to entertain the petition. But even here, the court
must weigh the consequences in balance before granting interim orders.



JUDICIAL REVIEW IN GOVERNMENT CONTRACTUAL MATTERS
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 if
does so it must do so fairly without discrimination and without unfair procedure; and its action is
subject to judicial review under Article 14 of the Constitution of India
57
.
Where the Government is dealing with the public, whether by way of giving jobs or by entering
into contracts or issuing quotas or licenses or granting other forms of largess, it cannot arbitrarily
use its power of discretion and in such matters must conform to certain standards or norms which
are not arbitrary, irrational or irrelevant.
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 inherent
limitations in the exercise of that power of judicial review.
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 Courts ability to quash an administrative decision on its merits. These
restraints bear the hallmark of judicial control over administrative action. Judicial review is
concerned with not reviewing the merits of the decision in support of which the application for
judicial review is made, but the decision making process itself
58
.
It is not for the Court to determine whether a particular policy po 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
59
. The extent of the duty to act fairly will vary from case to case. Shortly put, the
grounds upon which an administrative action is subject to control by judicial review can be
classified under
1. Illegality: This means the decision-maker must understand correctly the law that regulates his
decision-making power and must give effect to it.

57
Eurasian Equipment & Chemicals Ltd v State of West Bengal,[1975]2 SCR 674
58
ibid
59
J.N. Pandey Constitutional Law of India, Allahabad : Central Law Agency,2003, p487


2. Irrationality
3. Procedural impropriety
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 Honble 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 malafides
60
.
While exercising the power of judicial review, in respect of contracts entered into on behalf of
the State, 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
violative of 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 the interest of the State and the public, then
Court cannot act as an appellate authority by substituting its opinion in respect of the selection
made for entering into such contract. 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
61
. The doctrine that
the powers must be exercised reasonably has to be reconciled with the no less important doctrine

60
Tata Cellular v Union of India, AIR 1996 SC 11
61
Sterling Computers Ltd v M/s M&N Publications Ltd, AIR 1996 SC 51


that the Court must not usurp the discretion of the public authority which the Parliament has
appointed to take the decision. Within the bounds of legal discretion is the area in which the
deciding authority has genuinely free discretion. If it passes these bounds, it acts ultra viruses.
The decisions which are extravagant or capricious cannot be legitimate. But if the decision is
within the confines of reasonableness, it is no part of the Courts function to look further into its
merits
62
.

62
H.M. Seervi, Constitutional law of India, Bombay: N.M. Tripathi, 1991, p1798


GLOBAL POSITION
BRITAIN:
According to Common Law, before 1947, the Crown could not be sued in a Court on a contract.
This privilege was traceable to the days of feudalism when a lord could not be sued in his own
courts which had arisen out of the theory of irresponsibility of the State as propounded by
Roman Law. Another maxim which was pressed into service was that the King can do no
wrong. A subject could, however, seek redress against the Crown through a petition of right in
which he set out his claim, and if the royal fiat was granted, the action could then be tried in the
Court. The royal fiat was granted as a matter of course and not as a matter of right, and there was
no remedy if the fiat was refused.

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
being, however, excepted. It follows, therefore, that regular proceedings now lie against the
Crown for breach of contract, in those cases in which the petition of right earlier lay.

UNITED STATES OF AMERICA:
In the United States, the principle of immunity of the State as a sovereign power was imported
from England. This led the Congress to enact the Federal Tort Claims Act, 1946, to abrogate,
largely, the immunity of the Federal Government from Tortious liability, subject to specified
exceptions. The application of this Act has been further liberalised by the Judiciary in various
cases like Hathley v. U.Section
63
, Rayonier v. U.Section
64
, India Towing Co. v. U.Section
65
etc.

63
(1956) 351 U.Section 173
64
(1956) 352 U.Section 315
65
(1955) 350 U.Section 617


AUSTRALIA:
The Judiciary Act, 1963 lays down the law relating to government liability. In the case of Sargood
Bros. v. Commonwealth
66
it was held that an action lies against the Commonwealth in contract or
tort, in the ordinary manner, by a subject or a state. Similarly, in the case of Commonwealth v.
New South Wales
67
, it was held that a State may be sued in contract or in tort without its consent.
Thus the maxim, the King can do no wrong, has not been applied in Australia.

INDIA:
The words had not this Constitution been enacted in Article 300(1) indicate that the basis of
sueability of the state in India is historical. In order to appreciate the significance of these words,
we must trace the history of the Indian Administration from the time of the East India Company,
when the Court was of the view that even though the East India Company has sovereign powers,
if it contracts in civil capacity and if it breaks its contract it would be held answerable.
Later the Government of India Acts (Section 30 of Act of 1915 and Section175 of Act of 1935)
expressly empowered the Government to enter into contracts with private individuals and the
corresponding provision in the Constitution is Article 299(1). In all these Acts it was provided
that the person making the contract on behalf of the Government would not be personally liable in
respect thereof.
The Indian Contract Act, 1872 does not prescribe any form for entering into contracts. A contract
may be oral or in writing. It may be expressed or be implied from the circumstances of the case
and the conduct of the parties. But the position is different in respect of Government Contracts.
A contract entered into by or with the Central or State Government has to fulfill certain
formalities as prescribed by Article 299 of the Indian Constitution. In the case of State of Bihar
v. Majeed
68
the Honble Supreme Court held that:

66
(1910) 18 CLR 258.
67
(1923) 32 CLR 200.
68
AIR 1954 SC 786


the ordinary law of contract..

As regards 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 hardly
any distinction between a contract between private parties and Government contract so far as
enforceability and interpretation are concerned, yet, some special privileges are accorded to the
Government in the shape of special treatment under statutes of limitation. Section 112 of the
Limitation Act, 1963 contains provision for longer period of limitation of suits on or behalf of
the State. The longer limitation period was based on the common law maxim nulla tempus
occurit regi i.e. no time affects the Crown. 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
69
.
The executive power of the Union of India and the States to carry on any trade or business,
acquire, hold and dispose property and make contracts is affirmed by Article 298 of the
Constitution of India. If the formal requirements required by article 299 are complied with, the
contract can be enforced against the Union or the States. The issue in Administrative Law mainly
arises where the Departmental Authorities and public officials, owing to their inertia or ignorance,
enter into informal contracts which do not comply with the requirements of Article 299(1). There
has been a plethora of cases on this point, yet the law is still not well settled.

69
H.M. Seervi, Constitutional Law of India, Bombay: N.M. Tripathi, 1991, p1768


CONCLUSION
The State cannot, therefore , act arbitrarily in entering into relationship, contractual or otherwise
with a third party, but its action must conform to some standard or norm which is rational an non-
discriminatory. The action of the Executive Government should be informed with reason and
should be free from arbitrariness. The test of liability of the State should not be the origin of the
functions but the nature of the activity carried on by the State. Despite the clear mandate for
legislation provided under Article 300, nothing has done in this regard. Even the Government
(Liability in Tort Bill), 1967 which was introduced in the Parliament had not been passed due to
the resistance of various State Governments.
The Government was of the view that the financial burden on the State would be more than it
could possibly handle. In absence of a clear and concise statute that clearly defined the
contractual liability of the State, the pronouncements made by the Judiciary assume all the more
importance. 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, when it enters into a contract, must do so
fairly without discrimination and without unfair procedure; and its action is subject to judicial
review under Article 14 of the Constitution of 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 Courts ability to quash an
administrative decision on its merits. These restraints bear the hallmark of judicial control over
administrative action. Judicial review is concerned with not reviewing the merits of the decision
in support of which the application for judicial review is made, but the decision making process
itself and therefore judicial review can be a sufficient tool to decide the ambit of contractual
liability of the State.



BIBLIOGRAPHY
Books:
1. Seervi, H.M., Constitutional Law of India Vol. I & II, III, Bombay: N.M. Tripathi, 1991.
2. Basu, Durga Das, Commentary on the Constitution of India, Calcutta: Debidas Basu,
1989.
3. Bakshi, P.M., The Constitution of India, Delhi: Universal Law Publishing, 2002
4. M.P Jain, Indian Constitutional Law, 5
th
Edition, Wadhwa & Co. Law Publishers,
Nagpur, 2003.
5. Pandey, J.N. Constitutional Law of India, Allahabad : Central Law Agency,2003.

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CONTRACTUAL LIBILITY OF GOVERNMENT 2013

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA 1

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