Concept Contractual Liability of the State: Government Contracts

THE CONCEPT OF CONTRACTUAL LIABILITY OF THE STATE: GOVERNMENT CONTRACTS[1]

The Concept of enforcement of Legal rights against the State, in terms of a contract, could be traced back to 1785, long before the commencement of the Constitution of India. The contractual liabilities were conferred upon the East India Company in regard to its commercial transactions. The prominent significance of contractual liability was that the doctrine of Sovereign immunity had no effect upon such liability and therefore, the company could be sued in its own Courts just as a private individual.

The doctrine of liability of the East India Company was expounded by the Court in Moodalay v. Mortan[2] which drew a distinction between the sovereign function and non-sovereign functions of the Company in terms of the Contractual Transactions. The court observed: There is a great and clear distinction between acts done in the exercise of what are usually sovereign powers and acts done in the conduct of undertakings which might be carried on by private individuals without having such powers delegated to.

The Court further observed that when the Company enters into a contract it does so in a civil capacity just like any other private individual and subsequently on the breach its contractual liability could be enforced towards the other party to the contract. Thus it could be rightly said that the concept of contractual liability had great historical significance, long before our democratic republic came into existence through the Constitution. Its traces could also be found in several statutes like Government of India Act, 1833, 1858, 1915, and 1935.

CONTRACTUAL LIABILITY OF THE GOVERNMENT UNDER THE CONSTITUTION

Article 300 of the Constitution states that the Government of India may sue or be sued by the name of the Union of India and likewise, the State government may sue or be sued by the name of the State or of the Legislature of a State. Thus, the Constitution expressly confers the legal personality upon the State and recognizes it as a juristic person capable of holding and acquiring property, making contracts, carrying on trade or business, bringing and defending legal action, just as a private individual.

In Calcutta Corporation v. Director of Rationing[3] the Calcutta High Court also reiterated the same and held that the legal personality of the Union of India or a State of Indian Union is thus placed beyond doubt by the express language of Article 300.

Article 299 authorizes the Government of India and the State government to enter into contract for any purpose subject to the mode and manner provided by Article 299. Article 299(1) provides:

1. All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the governor of the State, as the case maybe.
2. 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.
3. Its execution must be by such persons and in such manner as the President or the Governor may direct or authorize.

Thus the analysis of the provisions of Article 299 clearly provides the following three requirements for a valid government contract under this Article:

1. The Contract must be expressly formed: It is an essential condition for a valid government contract under Article 299 that it must be in a proper form i.e. it must be written. Where a contract is not expressly made or is orally made, such contract is not enforceable. Thus a mental resolve to contract is not sufficient unless there is some external manifestation of such intent by way of a written contract. In Bhikraj Jaipuria v. Union of India[4] the hon’ble apex court also reiterated the same and held that where a contract is not properly formed, it is unenforceable. However, the interpretation that the contract must be in the form as provided by Article 299(1), sometimes, becomes inequitable to the party dealing with the government and it also makes the operation of the government difficult therefore to mitigate such situations, it has been held that the execution of the contract does not always mean the contract to be in written form of a legal document. Reliance could be taken from the case of Union of India v. A.L. Rallia Ram[5] wherein the Court held that the mere fact that the officer failed to express that he is executing the contract on behalf of the President can be ignored if the facts give an inference that it has been made on behalf of the President. In Chaturbhuj Vithaldas v. Moreshwar Parasharan[6] the Supreme Court observed that sometimes, it would be practically impossible to adhere to the particular form for instituting a contract by a government officer as they have to enter a variety of contracts, some in emergency and even some of petty nature, and therefore the scope of an oral contract cannot be put out of the doors and where circumstance demands such contracts could be formulated.

2. The expression must be in the name of the President or the Governor, as the case may be: Another significant requisite for a valid government contract is that it must be expressed in the name of the President or the Governor. Where a government contract is not expressed in the name of the President or the governor, as the case may be, even though it may be made by the authorized person, such contract would not be enforceable. In Davecos Garments Factory v. State of Rajasthan[7] an agreement was entered into between a contractor and the Government. The contract was for the supply of police uniforms. But it was signed by the Inspector General of Police in his official status without mentioning that the agreement was executed ‘on behalf of the Governor’. The Supreme Court held that the contract was invalid and void. It is a noticeable point that under Article 299(2) the president or the governor shall not be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the government of India.
3. Executed by an authorized person: It is also an essential requirement for a valid government contract that the execution of the contract must be by an authorized person. It means that that the contract must be executed by such persons as the President or the Governor may direct or authorize. Such direction or authorization may be by way of rules, notifications, special orders, etc. Thus where a contract is executed by an unauthorized person, it shall not be binding on the government. In Bhikaji Jaipuria v. Union of India[8], the railway administration accepting the offer of the firm purchased the food grains from the firm and made the payment. The purchase orders had been issued by the Divisional Superintendent who had not been conferred any special authority but from the facts of the case, an inference was drawn by the court for grant of special authority to him to enter into the contract.

REPERCUSSIONS OF NON-COMPLIANCE

1. Ratification The provisions of Article 299(1) are mandatory. Thus it is pertinent to understand that neither the government nor the person entering into a contract with the government, not in the prescribed form provided by Article 299(1), is enforceable or is liable for the breach thereof. Hence there can be no implied contract between the contracting parties as else the provisions of Article 299 would be nothing more than a dead letter.[9] The hon’ble Apex Court in the cases of, Mulamchand v. Sate of M.P.[10] & Jit Ram Shiv kumar v. State of Haryana[11] also expressed the same view and held that a contract not in compliance with Article 299(1) would be no contract at all. But does that mean that such a contract cannot be revived back or ratified? The answer to this could be traced by analyzing different precedents. In State of West Bengal v. B.K. Mondal[12] the Court held that the contract entered into with the government not conforming with the provisions of Article 299(1) was not void in the technical sense and thus it could be not be ratified by the government. In, State of Bihar v. Karam Chand Thapar Bros. Ltd.[13] the Court held that a contract entered into by an unauthorized person could be ratified by the government but in Mulamchand v. State of M.P.[14] the Supreme Court held that a contract not conforming with the provisions of Article 299(1) could not be ratified as the enactment of Article 299 was not a mere formality and its provisions could not be dispensed with. The same view has also been adopted in Fernandez v. State of Karnataka[15] wherein the court held that the provisions of Article 299(1) are mandatory and must be complied with. If the requirement does not comply, there shall be no binding contract.

2. Restitution When there is a contract not in compliance with Article 299(1), the contract is not enforceable but the doctrine of restitution applies to such contract. Under Section 70 of the Indian Contract Act, 1872, if a person lawfully does anything for another person or delivers anything to him and his intention is not to do so gratuitously and such other person enjoys the benefit of that act or thing, then the person who enjoys the benefit is bound to make compensation to the doer of the act or to restore to him the things so delivered. In State of West Bengal v. B.K. Mondal[16] the Court accepted the position of the government as that of a citizen, and subsequently, the government was made liable, not under a contract but under a relation resembling those created by the Contract under section 70 of the Indian Contract Act, 1872. In Pannalal v. Dy. Commissioner[17] the Court held that where the government had made the payment but the contract was void, it was recoverable under section 65 of the Indian Contract Act, 1872[18].Another important point of consideration is that where under a void contract a person has performed his part but the government has not benefited from it, whether it would be liable to compensate? The clouds in this regard were cleared by the hon’ble Apex Court in State of U.P. v. Murari Lal[19] wherein the court held that the provisions of Section 70 will not be attracted where the government has obtained no benefit from the acts of the other party.

CONCLUSION

The examining of all the essential provisions and case laws clearly infer, firstly in order to confer the contractual liability upon the  government, the provisions of Article 299 shall be satisfied. Where a contract is created in non-compliance to the said provisions such contract would be void and it can also not be ratified by the government. Secondly, the government would be liable to compensate or the doctrine of restitution will apply only in case of benefits obtained from the performance of the other party under Section 70 of the ICA and not otherwise. Thus, it could be rightly said that the provisions of government contract are such which protects the interest of both the stakeholders, i.e. the general public and the government.

[1] Aman Pandey, LL.B. hons., Faculty of Law, University of Lucknow, email- amanpandey.ap03@gmail.com.

[2] (1785) 1 Bro C.C.469

[3] AIR 1954 Cal. 282.

[4] AIR 1962 SC 113

[5] AIR 1963 SC 1685

[6] AIR 1954 SC 236

[7] AIR 1971 SC 141

[8] Supra note 3.

[9] K.P. Chowdhary v. State of M.P., AIR 1967 SC 203

[10] AIR 1968 SC 1218.

[11] AIR 1980 SC 1285.

[12] AIR 1962 SC 779.

[13] AIR 1962 SC 110.

[14] Supra note 9.

[15] 1990 2 SCC 488.

[16] Supra note 11.

[17] AIR 1973 SC 1174

[18] When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore, it, or to make compensation for it, to the person from whom he received it.

[19] AIR 1971 SC 2210.

Author: Aman Pandey,
Faculty of Law, University of Lucknow, LL.B. hons. 4th Year Student