Liability of Government in Contract - Administrative Law


Introduction

In this post we will cover contractual liability of government. We will mainly deal with below things:
  • Constitutional Provision for Contracts by Government (Article 298, 299)
  • Elements of valid contract and it's effect
    • Ratification of Invalid contracts
  • Liability of government
    • Who is liable?
    • Extent of liability?
    • Judicial intervention into contracts by government.
    • Quasi Contractual Liability
    • Applicability of Section 65 of Contracts Act

Constitutional provisions related to contract

Article 298 and 299 deals with Contracts by government.

Article 298

This articles confers powers on government to carry on business or trade. Its states that government can form business entities, acquire a property and dispose a property. Government can also enter into contracts with other parties.

Article 299

This articles states how the contracts are entered by governments.

It provides that contracts are to be made on behalf of President or Governor. It also states that all contracts should be executed on behalf of President or Governor by person appointed for such purpose.

For example, when Railways enters into contract , then it's on behalf of President. Such contracts are executed by Chairman who was appointed for such person.

This article also expressly exclude President or Governor from personal liability. Meaning if something goes wrong, the President or Governor don't have to go to court.

Above two articles in short provides the details about Contracts by government. The general principles of Contract Law will be applicable to the contracts entered into by governments.

Elements of valid contracts and effect of valid contract

Below are essential elements for valid contract
  1. It must be expressed in the name of President or Governor.
  2. It must be executed on behalf of President or Governor. It follows that these contracts must be written
  3. Contract must be entered by duly authorized person.
As soon as valid contract comes into existence, the provision of general law of contract becomes applicable.

Contractual parties are then bound by contractual obligation.

Ratification

Current position in this regard is that if Contracts are entered into in contravention of the provision of Article 299, then such contract would be void ab-initio and cannot be ratified.

Liability of Government in Contract

Well, this was the main purpose of the this blog post. In this section we will actually deal with contractual liability of government.

Article 299  specifically states that President/Governor's are not personally liable. Then who is going to be liable ? The government.!!

You can file a suit for breach of contract in the name of President/Governor, and government will appear in behalf of President/Governor.

What is the extent of liability ?

General law was that you can ONLY claim damages in breach of contract by governments. You can go for specific performance of contract if other party is normal party, but not government.

However this scenario changed after Court ruling in the case of Gujrat State Financial Corporation Vs Lotus Hotels (1983 SCC 379). The view taken by Court in this case was that Writ of Mandamus can be issued to fulfill the contractual obligation. (Writ of Mandamus is the order from the Court to do some specific act).

What about Service Contracts ? (Job thing)

Service contracts are not contracts under Article 299. Service contracts are governed by some statutory rules framed by Governments. In Parshottam Lal Dhingra Vs Union of India , AIR 1958 SC 36 it was held that service contracts are not contract in usual sense of the term as they can be determined at will despite the express condition to contrary.


Next thing to discuss is judicial interfering in Contracts by government.

Earlier view of the court was that it's the call of the government to enter into contract with whomever they want to. For example, if government issue a tender for construction, they can enter into contract with anybody they wish. So political party in power can enter into contract with businesses who will offer them more donation and court could do nothing.  (Is this happen today also: BJP Received maximum donation via electoral bonds)

However court changed it's view in the case of Ramana Dayaramm Shetty Vs International Airport Authority (AIR 1979 SC 1628). Court held that they can go for the judicial review for the contracts entered into by government. Court also held that Government does not enjoy absolute discretion to enter into contract with anyone they like.

In Kasturi Lal Vs State of J&K (AIR 1980 SC 1992) Justice Bhagwati Said
Every activity of Government has public element to it, and it must therefore be informed with reason and guided by public interest. Government cannot act arbitrarily without reason and if it does, its action would be liable to be invalidated

In Shrilekha Vidyarthi Vs State of UP (1991 SCC 212), Supreme Court has made it clear that State has to act justly, fairly and reasonably even in contractual field.

In Tata Cellular Vs Union of India AIR 1996 SC 11 Supreme Court held that principles laid down in Article 14 of the Constitution have to be kept in a view while accepting or refusing a tender.


To summarize, government can enter into contract with anybody, but they had to be guided by reason and public interest. It should be not like "Hey, I will give you contract, you give donation for my political party".

Quasi contractual liability

Section 70 of the contracts deals with quasi contract or restitution. It mean that if someone had done something for other party, then the party which enjoys the benefit has to restored or make compensation to other party.

So if anything is done for government, and government enjoyed the benefit out of such thing government will be liable to make good to other party.

Section 70 is essentially enables a person who actually supplies the goods or service not intending to do it on a purpose or gratuitously, to claim compensation from the person who enjoys the benefit of supply of service or goods.

Applicability of Section 65

If there is contravention in respect to Article 299, the contract with the governments will be void. However if contract is made and some benefits are conferred to government, then government is bound to pay compensation for the benefits it received during this void contract.


Conclusion

We have discussed the Contractual liability of government. However bringing government to court is not easy. In earlier post we have discussed the immunities and privileges by administration. In next post will will discuss the liability of government in torts.






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