Requirement of Government Contract

By Raghavendra Pratap Singh, National University of Advanced Legal Studies, Kochi

Editor’s Note: In India, the Union and the States are legal persons and hence are competent to enter into contracts. Article 298 of the Constitution of India provides for contractual liability of the government and Article 299 provides the mode and manner of execution of the contracts. This paper discusses these two Articles in depth.

INTRODUCTION

In England, the Government was never considered as an ‘honest man.’ It is fundamental to the rule of law that the Crown, like other public authorities, should bear its fair share of legal liability and be answerable for wrongs done to its subjects. The immense expansion of governmental activity from the latter part of the nineteenth century onwards made it intolerable for the Government, in the name of the Crown, to enjoyexemption from the ordinary law. English law has always clung to the theory that the King is subject to law and, accordingly, can commit breach thereof. As far as 700 years ago, Bracton had observed: “The King is not under man, but under God and under thelaw, because it is the law that makes the King.” Though theoretically there was no difficulty in holding the King liable for any illegal act, there were practical problems. Rights depend upon remedies and there was no humanagency to enforce law against the King. All the courts in the country were his courts andhe could not be sued in his own courts without his consent. He could be plaintiff butnever be made defendant. No writ could be issued nor could any order be enforcedagainst him. As ‘the King can do no wrong’.

Whenever the administration was badly conducted, it was not the King who was at fault but his Ministers, who must have givenhim faulty advice. But after the Crown Proceedings Act, 1947, the Crown can now be placed in the position of an ordinary litigant. In India, history has traced different path. The maxim ‘the King can do no wrong’ has never been accepted in India. The Union and the States are legal persons and they can be held liable for breach of contract and in tort. They can file suits and suits can be filed against them.

CONTRACTUAL LIABILITY

Constitutional Provisions:-

Contractual liability of the Union of India and States is recognized by the Constitution itself. Article 298 expressly provides 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) 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.”

Requirements of the Contract:-

Reading the aforesaid provision, it becomes clear that Article 299 lays down the following conditions and requirements which must be fulfilled in contracts made by or with the Union or a State:

  1. Every contract must be expressed to be made by the President or the Governor (as the case may be);
  2. Every contract must be executed on behalf of the President or the Governor (as the case may be).
  3. Every contract must be executed by a person authorized by the President or the Governor (as the case may be);

The use of the word “executed” in proportions (2) and (3) above, indicates that the contract between the government and any person must be in writing. A mere oral agreement is not valid for the purpose of Article 299(1).

  • Article 299(1) is mandatory:-

The courts have generally taken the view that Article 299(1) in the Constitution is based on public policy and for the protection of the general public. In number of cases, the Supreme Court has adopted a strict view of Article 299(1) and has held that the terms of Article 299(1) are mandatory and not directory, that these formalities cannot be waived or dispensed with. Therefore a contract not meeting the conditions stipulated in Article 299(1) becomes nullified and void. Such a contract cannot be enforced at the instance of any of the contracting parties. Neither can the government be sued and held liable for damages for breach of such a contract, nor can the government enforce such a contract against the other contracting party.

In the case of K.P. Chowdhary v. State of Madhya Pradesh[i], at the auction 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 arrears 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 299(1) has never been signed. 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. 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[ii] 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. But then, at times, the Supreme Court has taken a somewhat relaxed view of compliance with Article 299(1). Insistence on a strict compliance with these conditions may inequitable to private parties, and at the same time, make government operations extremely difficult and inconvenient in practice.

  • Written Contract:-

A contract to be valid under Article 299(1), must be in writing. The words ‘expressed to be made’ and ‘executed’in this article clearly go to show that the must be a formal written contract executed by a duly authorized person. Consequently, if there is an oral contract, the same is not binding on the Government. This is not a mere formality but a substantial requirement of law and must be fulfilled. It, however, does not mean that there must be a formal agreement properly signed by a duly authorized officer of the Government and the second party. The words ‘expressed’ and ‘executed’have not been literally and technically construed.

In Chatturbhuj Vithaldas v. MoreshwarParashram[iii], speaking for the Supreme Court, Bose, J. observed:

“It would, in our opinion, be disastrous to hold that the hundreds of Government officers who have daily to enter into a variety of contracts, often of a petty nature, and sometimes in an emergency, cannot contract orally or through correspondence and that every petty contract must be effected by a ponderous legal document couched in a particular form……”

In Union of India v. A.L. Rallia Ram[iv], tenders were invited by the Chief Director of Purchases, Government of India. R’s tender was accepted. The letter of acceptance was signed by the Director. The question before the Supreme Court was whether the provisions of Section 175(3) of the Government of India Act, 1935 (which were in parimateria with Article 299(l) of the Constitution of India) were complied with. The Court held that the Act did not expressly provide for execution of a formal contract. In absence of anyspecific direction by the Governor-General, prescribing the manner or mode of entering into contracts, a valid contract may result from the correspondence between the parties.

The same view was reiterated by the Supreme Court in another case[v] wherein the court observed:

“It is now settled by this court that though the words ‘expressed’ and ‘executed’ in Article 299(l) might suggest that it should be by a deed or by a formal written contract, a binding contract by tender and acceptance can also come into existence if the acceptance is by a person duly authorised on this behalf by the President of India.”

From the above observations, it can safely be said that the Constitution does not require any formal document to be executed on behalf of the Government and only then it would constitute a binding agreement. Any form of ‘offer and acceptance’ complying with Article 299 of the Constitution would be a valid and binding contract.

  • Execution by authorized person:-

The next requirement is that such a contract can be entered into on behalf of the Government by a person authorized for that purpose by the President or the Governor as the case may be. If it is signed by an officer who is not authorized by the President or Governor, the said contract is not binding on the Government and cannot be enforced against it.

In Union of India v. N.K. (P) Ltd.[vi], the Director was authorized to enter into a contract on behalf of the President. The contract was entered into by the Secretary, Railway Board. The Supreme Court held that the contract was entered into by an officer not authorized for the said purpose and it was not a valid and binding contract.

In Bhikraj Jaipuria v. Union of India[vii], certain contracts were entered into between the Government and the plaintiff-firm. No specific authority had been conferred on the Divisional Superintendent, East India Railway to enter into such contracts. In pursuance of the contracts, the firm tendered a largequantity of food grains and the same was accepted by the Railway Administration. But after some time, the Railway Administration refused to take delivery of goods. It was contended that the contract was not in accordance with the provisions of Section 175(3) of the Government of India Act, 1935 and, therefore, it was not valid and not binding on the Government.

The Supreme Court, after appreciating the evidence – oral as well as documentary – held that the Divisional Superintendent acting under the authority granted to him could enter into the contracts. The Court rightly held that it was not necessary that such authority could be given ‘only by rules expressly framed or by formal notifications issued in that behalf.’

In State of Bihar v. Karam Chand Thapar[viii], the plaintiff entered into a contract with the Government of Bihar for construction of an aerodrome and other works. After some work, a dispute arose with regard to payment of certain bills. It was ultimately agreed to refer the matter for arbitration. The said agreement was expressed to have been made in the name of the Governor and was signed by the Executive Engineer. After the award was made, the Government contended in civil court that the Executive Engineer was not a person authorised to enter into contract under the notification issued by the Government, and therefore, the agreement was void. On a consideration of the correspondence produced in the case, the Supreme Court held that the Executive Engineer had been ‘specially authorised’ by the Governor to execute the agreement for reference to arbitration.

  • Expression in the name of President (Governor):-

The last requirement is that such a contract must be expressed in the name of the President or the Governor, as the case may be. Thus, even though such a contract is made by an officer authorized by the Government in this behalf, it is still not enforceable against the Government if it is not expressed to be made on behalf of the President or the Governor.

In Bhikraj Jaipuria[ix],the contracts entered into by the Divisional Superintendent were not expressed to be made on behalf of the Governor-General. Hence, the Court held that they were not enforceable even though they were entered into by an authorized person.

In Karamshi Jethabhai v. State of Bombay[x], the plaintiff was in. possession of a cane farm. An agreement was entered into between the plaintiff and the Government for supply of canal water to the land of the former. No formal contract was entered into in the name of the Governor but two letters were written by the Superintending Engineer. The Supreme Court held that the agreement was not in accordance with the provisions of Section 175(3) of the Government of India Act, 1935 and, consequently, it was void.

Similarly in D.G. Factory v. State of Rajasthan[xi], a contract was entered intoby a contractor and the Government. The agreement was signed by the Inspector General of Police, in his official status without stating that the agreement was executed ‘on behalf of the Governor’. In a suit for damages filed by the contractor for breach of contract, the Supreme Court held that the provisions of Article 299(l) were not complied with and the contract was not enforceable.

In State of Punjab v. Om Prakash[xii], the Executive Engineer, PWD, who was authorised under the PWD Manual to enter into a contract accepted the tender of the contractor for construction of a bridge. The letter of acceptance was signed by the Executive Engineer but was not expressed in the name ofGovernor. The Supreme Court held that there was no valid contract.

Reiterating the principles laid down in earlier decisions and holding the provisions of Article 299 mandatory and in public interest, the Court ruled that the said formalities could not be waived or dispensed with.

NON-COMPLIANCE: EFFECT

The provisions of Article 299(1) are mandatory and not directory and they must be complied with. They are not inserted merely for the sake of form, but to protect the Government against unauthorized contracts. If, a contract is unauthorized or in excess of authority, the Government must be protected from being saddled with liability to avoid public funds being wasted. Therefore, if any of the aforesaid conditions is not complied with, the contract is not in accordance with law and the same is not enforceable by or against the Government.

Formerly, the view taken by the Supreme Court was 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[xiii], the Supreme Court held that if the contract was 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 S. 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.

VALID CONTRACT: EFFECT

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 parties thereto. Once a legal and valid contract is entered into between the parties, i.e. Government, each a private party, the relations between the contracting parties are no longer governed by the provisions of the Constitution but by the terms and conditions of the contract. 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.

QUASI-CONTRACTUAL LIABILITY

The provisions of Article 299(1) of the Constitution [Section 175(3) of the Government of India Act, 1935] are mandatory and if they are not complied with, the contract is not enforceable in a court of law at the instance of any of the contracting parties. In these circumstances, with a view to protecting innocent persons, courts have applied the provisions of Section 70 of the Indian Contract Act, 1872 and held the Government 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 is voluntarily enjoyed, then the liability to pay compensation for the enjoyment of the said goods or the acceptance of the said work arises. Thus, where a claim for compensation is made by one person against another 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. 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; and
  • 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 paycompensation to the other party.

CONCLUSION

Before 1947, in common law, the crown could not be sued in a court on a contract.  The Crown Proceedings Act, 1947 abolished this procedure and permitted suits being brought against the crown in ordinary courts to enforce contractual liability barring a few types of contracts.

However in India, this view was never accepted and government was liable as an ordinary litigants in court. Section 175(3) of the Government of India Act, 1935 prescribes the requirements for the government liability in contractual obligations, which is reincorporated in Article 199(1) of the Constitution of India.

To bind the government in contractual liability the three requisites must be there, which includes i.e. written contract, execution by authorised person and expression in the name of President. Earlier the Apex Court took the rigid view that these requirements are mandatory and must be complied with. However, in recent times theCourt has taken a lenient view in respect of mandatory requirements of Article 299(1).

BIBLIOGRAPHY

  1. P. Jain & S.N. Jain, Principles of Administrative Law, Vol. 2, (LexisNexis, 7th Edition, 2013)
  2. K. Takwani, Lectures on Administrative Law, (Eastern Book Company, 4th Edition, 2010)
  3. P. Sathe, Administrative Law, (LexisNexis, 7th Edition, 2010)
  4. VishnooBhagwan&VidyaBhushan, Public Administration, (S. Chand & Company, Reprint 2009)
  5. P. Massey, Administrative Law, (Eastern Book Company, 7th Edition, 2008)
  6. http://www.manupatrafast.com/
  7. http://login.westlawindia.com/

Edited by Sinjini Majumdar

[i] AIR 1967 SC 203

[ii] AIR 1967 SC 203

[iii] AIR 1954 SC 236

[iv] AIR 1963 SC 1685

[v] Union of India v. N.K. (P) Ltd., (1973) 3 SCC 388

[vi] AIR 1972 SC 915

[vii] AIR 1962 SC 113

[viii] AIR 1962 SC 110

[ix]BhikrajJaipuria v. Union of India, AIR 1962 SC 113

[x] AIR 1964 SC 1714

[xi] (1970) 3 SCC 874

[xii] AIR 1988 SC 2149

[xiii] (1968) 3 SCR 214

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