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

Both the Union and the State Governments can enter into a contract like private persons. But since the state acts through the agency of Government, 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 procedures are laid down under Art. 299 of the Indian Constitution.

II. Position in England:-

For ages, the cardinal principle of English law has been that the ‘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 and for the breach of contract, but King could sue his subjects. In other words, King could be the plaintiff but could not be the defendant. However, after the Crown Proceeding Act of 1947, the king 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 liability of the Government (either central or State) for contracts entered into by it. 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:-

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

1) The Contract must be in the name of the President or Governor:-

For the contract of the State to be valid, it must be made in the name of the Governor in case of a contract by a State and the President in case of a contract by the Union of India. For such a contract to be valid, it must be in writing.

In Chatturbhuj Vithaldas V/s Moreshwar Parashram[2]

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[3].

2) By Authorised Person

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) [4]

Facts:– Loan agreement bonds were signed by the special- secretary, and the Official Receiver signed agreement deeds

Issue:-Whether the proper contract?

The Court held that the contract can be said to have been completed between the parties. Thus, there was a valid agreement between the parties.

3) Expressed in the name of the President or the 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, 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[5]

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 of Art 299?

The Supreme Court held that the rejection of tender (bid) on the grounds of being non-responsive was proper. So also the provisions of Art. 299(1) were not complied with, and the contract was not enforceable[6].

B. No Ratification or Estoppel:-

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[7] The Supreme Court adopted a rigid view and held that there was no question of ratification or estoppel by or against the Government in case the contract did not conform to the provisions of Art. 299 (1).

However, there are two exceptions to this rule.

i) Service Agreements[8]:-

A contract of service with the Government is not to be struck down for non-compliance with the provisions of Art. 299, it is because once the person acquires the status of Government servant, he is governed by statutory rules framed under Art. 309[9].

ii) Statutory Contracts[10]:-

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. issuing a licence of liquor under law, etc.

IV] Types of Government Contracts:-

There are several types of Government contracts, and the differences between them are also notable. Each type of contract requires a unique approach to bidding and the performance of the work.

Most Government Contracts above a certain amount require competitive bidding, which can be conducted through sealed bidding or negotiated procurement.

Government contracts belong to two general categories viz- (1) fixed price and (2) Cost- reimbursement. These types of contracts define the expectations, obligations, incentives, and rewards for both the Government and the contractor for performance. The contract also lays down the degree and timing of the responsibility assumed by the contractor for the costs of performance. The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.

Types of Government Contracts:-

1) Fixed Price Contracts[11]:-

In a fixed-price contract, the Government pays a set price when the contractor completes certain tasks. Payment may not be made until an entire project is completed, or it may be made periodically as the project moves through different stages of completion.

2) Costs- Reimbursement Contracts[12] :-

These contracts do not have a fixed price for the completion of the project or the task within the project. Instead, contractors issue invoices to the Government on a regular basis in order to cover their costs as they occur during a particular project. The terms of a cost-reimbursement contract may vary with respect to the timing of invoices and any limitations on the costs.

3) Time and Material Contracts[13] :-

It provides less risk to the contractor involved. The Government purchases the labour of a contractor at a specific negotiated rate. In short, the Government pays the contractor on an hourly or otherwise incremental basis for their labour. This contract sets forth a maximum number of hours for a specified task, and the contractor will bill against the contract accordingly. This type of contract allows the contractor to receive payment as his work progresses rather than putting forth the work without pay until the end of the project.

4) Letter Contract –

It is used in most urgent circumstances when work is needed to be completed immediately. This type of Government contract places a great deal of liability on the Government. Since the contract usually estimates the price of the project completion from the outset, there is little control over the ultimate costs of the contract.

Each of these Government contracts also has sub-types. Some contracts add incentive fees for contractors who complete tasks or projects within a certain timeframe or under a specified cost level. These types of Government contracts allow the contractor to earn additional money for work completed earlier than expected.

V. Contractual Liability:-

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

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

B. Quasi-Contractual liability of Government: Doctrine of Unjust Enrichment[14]:-

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. But an innocent contracting person must equally be protected. Therefore, the Court applies the provisions of S. 70 of the Indian Contract Act of 1872. S. 70 lays down the quasi-contractual liability. It provides that if the goods delivered are accepted or the work done is voluntarily enjoyed, the liability arises to pay compensation for that. This liability is not based on contract but on the principle that ‘no person is allowed to become rich on the cost of the other’. In other words, to prevent ‘unjust enrichment’ of the Government at the cost of another party, 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[15]

Facts: The contractor constructed the building at the request of the Government officer. The officer obtained possession of the building, and the same was used by the Government. But no payment was made to the contractor. He brought a suit against the Government. On behalf of the Government, it was contended that the provisions of Art. 299 (1) of the Constitution had not been complied with, so the contract was 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 on the basis of quasi-contractual liability.

*****

[1] 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.

[2] AIR 1954 SC 236.

[3] But in Union of India v. 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.

[4] In Union of India v. 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. 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”.

[5] (AIR 2004 Delhi 64)

G. Factory V. 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.

[6] Karcunslji V. 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.

[7] AIR 1968 SC 779.

[8] नोकरी संबंधी करार [वैधानिक करार]

[9] In Parshotanulal Dhingra v. 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)

[10] कायदयाप्रमाणे केलेले करार [वैधानिक करार/ कानून अनुसार करार]

[11] निश्चित करार रक्कम [निश्चित मूल्य करार]

[12] होणाऱ्या कामाचा खर्च अदा करण्याचा करार [लागत- प्रतिपूर्ति करार]

[13] तासिका तत्वावर मजुरी चा करार [समय और सामग्री करार]

[14] अयोग्य पध्द्तीने दुस-याच्या संपत्त्तीवर श्रीमंत [अन्यायपूर्ण समृद्धि का सिद्धांत होणे]

[15] AIR 1962 SC 779.