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CONTRACTUAL LIABILITY OF THE STATE[1]

Table of Contents

QUESTION BANK

Q.1. Discuss the liability of State in respect of contract with reference to Art.299 of the Indian Constitution.

SHORT NOTES

Discuss the liability of State in Contract.
Kinds of Government contracts.

SYNOPSIS

INTRODUCTION.
POSITION IN ENGLAND.

III. POSITION IN INDIA.

A] Conditions for valid Government contract.

The contract must be in the name of the President or Governor.
By authorised person.
Expressed in the name of President or the Governor.

B] No Ratification or Estoppel.

i) Service Agreements.
ii) Statutory Contracts.

IV] CONTRACTUAL LIABILITY.

A] No personal liability of the Governor or President (Art.299 (2)).

B] Quasi-Contractual liability of Government: Doctrine of unjust enrichment.

INTRODUCTION:-

The modern welfare State is the biggest contractor and a job creator, license provider, etc. It has to undertake various welfare schemes and implement them; for this purpose, it enters into contracts with several individuals. As a result, more and more individuals and businesses benefit from Government contracts, licenses, quotas, mineral rights, jobs, etc.

Both the Union and State Governments can enter into contracts like private individuals. But since the state acts through the government’s agency, it needs to be protected. To protect against the misuse of state funds through unauthorised contracts, the Constitution of India lays down some special formalities in addition to those laid down under the Indian Contract Act. These formalities or rules of procedure are laid down under Art.299 of the Constitution.

POSITION IN ENGLAND:-

For ages, the cardinal principle of English law has been that ‘King can do no wrong’. It placed King and ordinary litigants at different footings. King could not be sued for the wrong committed by his servants or for breach of contract, but King could sue against his subjects. In other words, King could be the plaintiff but not the defendant. However, after the Crown Proceeding Act 1947, the Crown was placed in the position of an ordinary litigant. He can now be a defendant. In other words, King (or the State) can be sued for breach of contract.

III. POSITION IN INDIA:-

The Constitution of India recognises the Government’s liability (either central or State) for contracts entered into by it (the Government). Art. 298 provides that the Executive power of the Union and of each State shall extend to the carrying on of any trade or business, the acquisition, holding, and disposal of property, and the making of contracts for any purpose.

A] Conditions for valid Government contract[2]:-

Art.299 (1) provides[3] the procedure for entering into contracts by the Government. For a contract of the government to be valid, it must fulfil the following conditions: Viz-

The contract must be in the name of the President or Governor[4]–

The contract of state, to be valid, must be made in the name of the governor if the state makes it and the president if the Union of India makes it. Such a contract, to be valid, must be in writing.

In Chatturbhuj Vithaldas V/s. Moreshwar Parashram[5]

Supreme Court held that an oral contract does not bind the Government. A contract not in writing and wanting in form is unenforceable against the Union unless it is ratified (if it is for the benefit of the Government) and put in proper form.[6].

By authorised person[7]–

Secondly, a contract must be entered into ‘by a person authorised for that purpose’ by the President or the Governor, as the case may be.

In The State of U.P. V/s. M/s Raza Buland Sugar Co. Ltd. (AIR 2006 All 61) [8]

Facts– A special- secretary signed loan agreement bonds, and the Official Receiver signed agreement deeds.

Issue– Whether a proper contract?

Held– Contract can be said to have been completed between parties. There was, thus, a valid agreement between the parties.

Expressed in the name of the President or the Governor[9]–

The last requirement is that such contracts must be expressed in the name of the President or the Governor, as the case may be. Thus, the person authorised to make a contract must express it ‘on behalf of’ the President or the Governor’.

M/s.Ranjit Construction Co. Ltd. V/s. National Highways Authority of India[10]

Facts- The tender of the petitioner was rejected on the grounds of –i) Being non-responsive, ii) the original and copy of the price bid were required to be sealed in a separate envelope, iii) Non-submission of copies of the price bid separately and non-mentioning of ‘original’ and ‘duplicate’ on bid documents by tender.

Issue- Was a petitioner (the bidder) required to adhere strictly to procedural instructions and requirements under Art.299?

SUPREME COURT held that rejecting tender (bid) on the ground of being non-responsive is proper. So also, the provisions of Art.299 (1) were not complied with, and the contract was not enforceable.[11].

In Vijay Kumar Gupta V/s. The State of Maharashtra. (2008 (3) All M R 240)

Held– The state is not expected to act as a private individual in relation to the matters of contract more, so when such contracts are for the distribution of state largesse in the matter of trade, with very limited exceptions, the State is expected to adopt the criteria of fairness and equality in such matters.

B] No Ratification or Estoppel[12].

Before 1968, i.e. Mulchand’s Case, the judicial view was that the Government, even though it could not be sued on informal contracts (i.e. without complying with the formalities of Art.299), yet could accept responsibility by ratification (subsequent assent) of the contract. But in Mulchand V/s. State of M. P[13] Supreme Court adopted a rigid view and held that there was no question of ratification or Estoppel by or against the Government if the contract was not confirmed to Art. 299(1).

However, there are two exceptions to this rule.

i) Service Agreements[14]–

A contract of service with the Government is not to be struck down for non-compliance with the provisions of Art.299. So it is because once the person acquires the status of Government servant, he is governed by statutory rules framed under Art.309[15].

ii) Statutory Contracts[16]–

Art.299 (1) does not apply to statutory contracts. A statutory contract means a contract made in the exercise of the statutory powers and not under general executive powers, e.g., licence of liquor under law, etc.

IV] CONTRACTUAL LIABILITY[17]:-

A] No personal liability of the Governor or President[18] (Art.299 (2))-

Art.299 (2) protects the President and Governor or the person executing the contract from personal liability arising from such a contract. This immunity is personal and does not immunise the Government from a contractual liability arising under a contract that fulfils the requirements of Art.299 (1).

B] Quasi- Contractual liability of Government: Doctrine of unjust enrichment[19]–

As discussed above, the provisions of Art.299 (1) are mandatory and must strictly be complied with; otherwise, the contract cannot be enforced in a court of law at the instance of any of the contracting parties. This provision protects the Government. However, an innocent contracting person must equally be protected. Therefore, the Court applies the provisions of S.70 of the Indian Contract Act 1872. S.70 provides for quasi-contractual liability. It provides that if the goods delivered are accepted or the work done is voluntarily enjoyed, the liability to pay compensation for that arises. This liability is not based on contract but on the principle that ‘no person shall be allowed to become rich at the cost of the others’. In other words, to prevent unjust enrichment of the Government at the cost of other parties, S. 70 may be invoked. This doctrine applies to the Government as well as to private individuals.

In State of W.B V/s. B. K. Mondal[20]

Facts—The contractor constructed the building at the request of a Government officer. The officer obtained possession of the building, and the Government used it. However, no payment was made to the contractor. As a result, he brought a suit against the Government. On behalf of the Government, it was contended that the provisions of Art.299 (1) have not been complied with; hence, the contract is not enforceable.

Supreme Court held– that the contract was unenforceable, but the Government was liable to pay the Contractor under S.70 of the Indian Contract Act based on quasi-contractual liability.

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[1] सरकारची करारविषयक जबाबदारी [सरकार की संविदात्मक जिम्मेदारी]

[2] कायदेशिर सरकारी करारासाठी आवष्यक अटी [कानूनी सरकारी अनुबंध के लिए आवश्यक शर्तें]

[3] Art. 299. Contracts.—(l) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by President, or by the Governor of the State, as the case may, 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 authorise.

(2) Neither the President nor the Governor shall 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 hereto in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.

[4] करार राश्ट्रपती किंवा राज्यपालाच्या नावे [राष्ट्रपति या राज्यपाल के पक्ष में अनुबंध]

[5] AIR 1954 SC 236

[6] But in Union of India V/s. Rallia Ram (AIR 1963 SC 1685).

SUPREME COURT Held– that in absence of any specific directions of the Governor, prescribing the manner or mode of entering into contracts a valid contract may result from the correspondence between the parties.

Facts– The defendant Government servant, the Chief Director of Purchase, issued tenders for purchase of certain quantity of cigarettes and the plaintiff’s tender (quotation) was accepted and signed by the Chief Director. But, no formal agreement was entered into for the purchase. The plaintiff sued the Government for specific performance of contract. The Government contended that the contract was not enforceable since there was no formal agreement.

[7] करार अधिकृत व्यक्तींमार्फत [अधिकृत व्यक्तियों के माध्यम से अनुबंध]

[8] In Union of India V/s. N.K. (P) Ltd. (AIR 1972 SC 915)

Facts– The Director was authorised to enter into a contract on behalf of the President. But the contract was actually entered into by the secretary of the Railway Board.

SUPREME COURT held– that contract was entered into by an officer not authorised for the said purpose and it was not a valid and binding contract.

In Bhikaraj Jaiuria V/s. Union of India (AIR 1962 SC 113).

Facts- Certain contracts were entered into between the Government (through Divisional Superintendent Railway) 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, a firm tendered a large quantity 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 on behalf of Government that the contract was not entered in accordance with the provisions of S.175 (3) Government of India Act 1935, (similar to Art.299 of the present Constitution).

SUPREME COURT Held– that the Divisional Superintendent acting under the authority granted to him could enter into contract. It further held that, it was not necessary that such authority could be given “only by rules expressly framed”.

[9] करार राष्ट्रपती किंवा राज्यपालाचे नावे [राष्ट्रपति या राज्यपाल के नाम]

[10] AIR 2004 Delhi 64, In D. G. Factory V/s. State of Rajasthan (AIR 1971 SC 141)

Facts- A contract was entered into by 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’. Contractor filed a suit for damages for breach of contract from Government.

SUPREME COURT held– that, the provisions of Art.299 (1) were not complied with and the contract was not enforceable.

[11] Karcunslji V/s. Bombay (AIR 1964 SC 1714) In this case, an agreement for supply of canal water for irrigation purposes was entered into between the plaintiff and the P.W.D. Minister, through some letters. But, there was no formal agreement to that effect i.e. in the name of the Governor.

The Supreme Court held the contract void, and not enforceable.

[12] मंजूरी अथवा प्रतिबंधाचे तत्व सरकारविरुध्द लागू नाही [मंजूरी या निषेध का सिद्धांत सरकार के खिलाफ लागू नहीं होता है]

[13] AIR 1968 SC 779

[14] नोकरी करार [रोजगार समझोता]

[15] In Parshotanulal Dhingra V/s. Union of India it has been stated that as a service contract with the government is subject to pleasure under Art. 310(1), and can be terminated at will despite an express condition to the contrary, it cannot be regarded as a contract in the usual sense of the term and, as such, it should not be brought within the purview of Art.299(1).

[16] कायदेशिर करार [कानूनी अनुबंध]

[17] करारविशयक जबाबदारी [संविदात्मक दायित्व]

[18] राष्ट्रपती किंवा राज्यपाल निम-करारविशयक जबाबदारी. [राष्ट्रपति या राज्यपाल अर्ध-संविदात्मक जिम्मेदारी।]

[19] ‘अन्याय/अयोग्य श्रीमंती तत्व’ [‘अन्याय/अन्यायपूर्ण धन का सिद्धांत’]

[20] AIR 1962 SC 779