Government Contracts

The subject of government contracts has assumed great importance in the modern times. Today the state is a source of wealth. In the modern era of a welfare state, government's economic activities are expanding and the government is increasingly assuming the role of the dispenser of a large number of benefits. Today a large number of individuals and business organizations enjoy largess in the form of government contracts, licenses, quotas, mineral rights, jobs, etc. This raises the possibility of exercise of power by a government to dispense largess in an arbitrary manner. It is axiomatic that the government or any of its agencies ought not to be allowed to act arbitrarily and confer benefits on whomsoever they want. Therefore there is a necessity to develop some norms to regulate and protect individual interest in such wealth and thus structure and discipline the government discretion to confer such benefits.

Contract Meaning of the term

A contract is an agreement enforceable by law which offers personal rights, and imposes personal obligations, which the law protects and enforces against the parties to the agreement. The general law of contract is based on the conception, which the parties have, by an agreement, created legal rights and obligations, which are purely personal in their nature and are only enforceable by action against the party in default.[1]

Section 2(h) of the Indian Contract Act, 1872[2] defines a contract as "An agreement enforceable by law". The word 'agreement' has been defined in Section 2(e) of the Act as ‘every promise and every set of promises, forming consideration for each other’

Government Contract

A contract to which The Central Government or a State Government is a party is called a 'Government Contract'.

Position in Britain
According to Common Law, before 1947, the Crown could not be sued in a court on a contract. This privilege was traceable to the days of feudalism when a lord could not be sued in his own courts. Another maxim which was pressed into service was that the 'King can do no wrong'. A subject could, however, seek redress against the Crown through a petition of right in which he set out his claim, and if the royal fiat was granted, the action could then be tried in the court. The royal fiat was granted as a matter of course and not as a matter of right, and there was no remedy if the fiat was refused.
The Crown Proceedings Act,1947, abolished this procedure and permitted suits being brought against the Crown in the ordinary courts to enforce contractual liability, a few types of contracts being, however, excepted.[3]

Position in India
The Indian Contract Act, 1872 does not prescribe any form for entering into contracts. A contract may be oral or in writing. It may be expressed or be implied from the circumstances of the case and the conduct of the parties.[4]
But the position is different in respect of Government Contracts. A contract entered into by or with the Central or State Government has to fulfill certain formalities as prescribed by Article 299 of the Indian Constitution.

'Contracts' and 'Government contracts'

It is true that in respect of Government Contracts the provisions of Article 299(1) must be complied with, but that does not mean that the provisions of the Indian Contract Act have been superceded.

In the case of State of Bihar v Majeed[5], the Hon'ble Supreme court held that;
"It may be noted that like other contracts, a Government Contract is also governed by the Indian Contract Act, yet it is distinct a thing apart. In addition to the requirements of the Indian Contract Act such as offer, acceptance and consideration, a Government Contract has to comply with the provisions of Article 299. Thus subject to the formalities prescribed by Article 299 the contractual liability of the Central or State Government is same as that of any individual under the ordinary law of contract."

As regards the interpretation of contract, there is no distinction between the contracts to which one of the parties is the Government and between the two private parties.[6]

Though there is hardly any distinction between a contract between private parties and Government contract so far as enforceability and interpretation are concerned yet some special privileges are accorded to the Government in the shape of special treatment under statutes of limitation.[7]
Some privileges are also accorded to Government in respect of its ability to impose liabilities with preliminary recourse to the courts. This probably is because of doctrines of executive necessity and public interest.

Formation of Government Contracts

The executive power of the Union of India and the States to carry on any trade or business, acquire, hold and dispose property and make contracts is affirmed by Article 298 of the Constitution of India. If the formal requirements required by article 299 are complied with, the contract can be enforced against the Union or the States.[8]

Article 299 provides:
"(1) All contracts made in the exercise of executive power of the union or 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 person and in such manner as he may direct or authorize.

(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purpose of any enactment relating to Government of India hereto before in force , nor shall any such contract or assurance on behalf of any of them be personally liable in respect thereof".
Thus Article 299 lays down three conditions which the contracts made in the exercise of the executive power of the Center or a State must fulfill to be valid –
The contract must be expressed to be made by the president or the Governor as the case may be;

These contracts made in the exercise of the executive power are to be executed on behalf of the President/Governor as the case may be; and

The execution must be by such person and in such manner as the President or the Governor of the case as the case may be, may direct or authorize.
The expression "executed" does not by itself contemplate execution of a formal contract by the executing parties. A tender for the purchase of goods in pursuance of a tender notice, notification or statement inviting tenders issued by or on behalf of the President or the Governor, as the case may be, and acceptance in writing which is expressed to be made in the name of the President or Governor and is executed on his behalf by a person authorized in that behalf would fulfill the requirements of Article 299(1). If these requirements are fulfilled, a valid contract may result from the correspondence.[9]
It has been held by the Hon'ble Supreme Court in the case of Bhikaraj Jaipuria v Union of India[10]

"it is clear from the words "expressed to be made" and "executed" that there must be a formal written contract…The provisions of Article 299(1) are mandatory in character and any contravention thereof nullifies the contract and makes it void. The provisions of Article 299(1) have not been enacted for the sake of mere form but they have been enacted for safeguarding the Government against the unauthorized contracts. The provisions are embodied in the constitution on the ground of public policy on the ground of protection of general public and these formalities cannot be waived or dispensed with."

Where a contract is made by tender and acceptance, the acceptance must be made by a duly authorized person and on behalf of the President, and a valid contract may result from correspondence.[11]

A contract complying with the Article can be enforced by or against the government. It is subject to the general provisions of the contract law ,and its terms cannot be changed by resorting to Article 14 of the constitution . A contract not complying with any of the conditions of Article 299(1) of the Constitution is not binding on or enforceable by the Government , and is absolutely void , though not so for collateral purposes , and cannot be ratified. No damages can be claimed for breach unless the contract is complete under this article[12].

The provisions have been embodied to protect the general public as represented by the government. The terms of the Article have therefore been held to be mandatory and not merely directory. This means that a contract not couched in the particular form stipulated by Article 299(1) cannot be enforced at the instance of any of the contracting parties. Neither the government can be sued and held liable for the breach of such a contract nor can the government enforce such a contract against the other contracting party.[13]

Implied Contract with the Government

In view of Article 299(1) there can be no implied contract between the government and another person, the reason being that if such implied contracts between the government and another person were allowed, they would in effect make Article 299(1) useless, for then a person who had a contract with the government which was not executed at all in the manner provided under Article 299(1) could get away by saying that an implied contract may be inferred on the facts and the circumstances of the particular case.[14]

It was held by the Hon'ble Supreme Court in the case of K.P.Chowdhary v State of Madhya Pradesh[15] that,
"In view of the provisions of Article 299(1) there is no scope for any implied contract. Thus no contract can be implied under this Article.if the contract between the Government and a person is not incompliance with Article 299(1), it would be no contract at all and would not be enforceable as a contract either by the Government or by the person."

The Court justified this strict view by saying that if implied contracts between the government and other persons were allowed, they would in effect, make Article 299(1) a dead letter, for then a person who had a contract with the government which was not executed at all in the manner provided under Article 299(1) could get away by pleading that an implied contract be inferred from the facts and circumstances of the case.

However, the Courts have also realized that insistence on too rigid observance of all the conditions stipulated in Article 299 may not always be practicable. Hundreds of government officers daily enter into a variety of contracts, often of a petty nature, with private parties. At times, contracts are entered through correspondence or even orally. It would be extremely inconvenient from an administrative point of view if it were insisted that each and every contract must be effected by a ponderous legal document couched in a particular form.[16]

The judicial attitude to Article 299 has sought to balance two motivations:

On the one hand, to protect the Government from unauthorized contracts; and
On the other hand, to safeguard the interests of unsuspecting and unwary parties who enter into contracts with government officials without fulfilling all the formalities laid down in the Constitution.

A strict compliance with these conditions may be inequitable to private parties, and at the same time, make government operations extremely difficult and inconvenient in practice. Consequently, in the context of the facts of some cases, the courts have somewhat mitigated the rigours of the formalities contained in Article 299(1), and have enforced contracts even when there have not been full, but substantial, compliance with the requirements of Article 299(1). In effect, it may be true to say that the judicial view has oscillated between the liberal and rigid interpretation of Article 299.[17]

A contract to be valid under Article 299(1) has to be in writing. It does not, however, mean that there should always be a formal legal document between the Government and the other contracting party for the purpose. A valid contract could emerge through correspondence, or through offer and acceptance, if all conditions of Article 299(1) are fulfilled.

Under Article 299(1), a contract can be entered into on behalf of the Government by a person authorized for the purpose by the President, or the Governor, as the case may be. The authority to execute the contract on behalf of the government may be granted by rules, formal notifications, or special orders; such authority may also be given in respect of a particular contract or contracts by the President/Governor to an officer other than the one notified under the rules. Article 299(1) does not prescribe any particular mode in which authority must be conferred; authorization may be conferred ad hoc on any person.[18]

Principles Underlying Government Contracts

Reasonableness, fairness
The principle of reasonableness and rationality which is legally as well as philosophically an essential element of equality or non-arbitrariness is projected by Article 14 and it must characterize every State Action , whether it be under the authority of law or in exercise of executive power without making of law. The state cannot , therefore , act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational an non- discriminatory. The action of the Executive Government should be informed with reason and should be free from arbitrariness.[19]
It is indeed unthinkable that in a democracy governed by the rule of law the executive Government or any of its officers should possess arbitrary power over the interests of the individual. Every action of the executive Government must be informed with reason and should be free from arbitrariness. That is the very essence of the rule of law and its bare minimal requirement. And to the application of this principle it makes no difference whether the exercise of the power involves affection of some right or denial of some privilege[20].

ll actions of the State and its instrumentality are bound to be fair and reasonable.

The actions are liable to be tested on the touchstone of Article 14 of the Constitution of India. The State and its instrumentality cannot be allowed to function in an arbitrary manner even in the matter of entering into contracts. The decision of the State either in entering into the contract or refusing to enter into the contract must be fair and reasonable. It cannot be allowed to pick and choose the persons and entrust the contract according to its whims and fancies. Like all its actions, the action even in the contractual field is bound to be fair. It is settled law that the rights and obligations arising out of the contract after entering into the same is regulated by terms and conditions of the contract itself.[21]

The requirement of 'fairness' implies that even administrative authority must act in good faith; and without bias; apply its mind to all relevant considerations and must not be swayed by irrelevant considerations; must not act arbitrarily or capriciously and must not come to a conclusion which is perverse or is such that no reasonable body of persons properly informed could arrive at. The principle of reasonableness would be applicable even in the matter of exercise of executive power without making law. It is settled principle of law that the court would strike down an administrative action which violates any foregoing conditions.[22]
The duty to act fairly is sought to be imported into the contract to modify and alter its terms and to create an obligation upon the State which is not there in the contract. The Doctrine of fairness or the duty to act fairly and reasonably is a doctrine developed in the administrative law field to ensure the Rule of Law and to prevent failure of justice where the action is administrative in nature. Just as principles of natural justice ensure fair decision where the function is quasi-judicial, the doctrine of fairness is evolved to amend, alter or vary the express terms of the contract between the parties. This is so, even if the contract is governed by statutory provisions.[23]

In a democratic society governed by the rule of law, it is the duty of the State to do what is fair and just to the citizen and the State should not seek to defeat the legitimate claim of the citizen by adopting a legalistic attitude but should do what fairness and justice demand.[24]

Public Interest
Tate owned or public owned property is not to be dealt with at the absolute discretion of the executive. Certain percepts and principles have to be observed. public interest is the paramount consideration. There may be situations where there are compelling reasons necessitating the departure from the rule, but there the reasons for the departure must be rational and should not be suggestive of discrimination. Appearance of public justice is as important as doing justice. Nothing should be done which gives an appearance of bias, jobbery or nepotism.[25]

The consideration to weigh in allotting a public contract are and have to be different than in case of a private contract as it involves expenditure from the public exchequer. The action of the public authorities thus have to be in conformity with the standards and norms which are not arbitrary, irrational or unreasonable. And whenever the authority departs from such standard or norms, the Courts intervene to uphold and safeguard the equality clause as enshrined in Article 14 of the Constitution and strike down actions which are found arbitrary, unreasonable and unfair and prone to cause a loss to the public exchequer and injury to public interest. Therefore, even when an award of contract may not be causing any loss to the public exchequer manifestly, it may still be liable to quashment for being unfair, unreasonable, discriminatory and violative of the guarantee contained in Article 14.[26]

Equality, non-arbitrariness

From a positivistic point of view, equality is antithetic to arbitrariness. In fact, equality and arbitrariness are sworn enemies; one belonging to the rule of law in a republic, while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is violative of Article 14. the principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omni-presence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14.[27]

Contractual Liability

Article 299(2) immunizes the President, or the Governor, or the person executing any contract on his behalf, from any personal liability in respect of any contract executed for the purposes of the Constitution, or for the purposes of any enactment relating to Government of India in force. This immunity is purely personal and does not immunize the government, as such, from a contractual liability arising under a contract which fulfills the requirements under Article 299(1).[28]
The governmental liability is practically the same as that of a private person, subject, of course, to any contract to the contrary.[29]

In order to protect the innocent parties, the courts have held that if government derives any benefit under an agreement not fulfilling the requisites of Article 299(1), the Government may be held liable to compensate the other contracting party under S.70 of the Act, on the basis of quasi-contractual liabilities, to the extent of the benefit received. The reason is that it is not just and equitable for the government to retain any benefit it has received under an agreement which does not bind it. Article 299(1) is not nullified if compensation is allowed to the plaintiffs for work actually done or services rendered on a reasonable basis and not on the basis of the terms of the contract.[30]

Section 70 lays down three conditions namely:

1. a person should lawfully do something for another person or deliver something to him;
2. in doing so, he must not intend to act gratuitously; and
3. the other person for whom something is done or to whom something is delivered must enjoy the benefit thereof.

The Courts have adopted this view on practicable considerations. Modern government is a vast organization. Officers have to enter into a variety of petty contracts, many a time orally or through correspondence without strictly complying to the provisions under Article 299. In such a case, if what has been done is for the benefit of the government for its use and enjoyment, and is otherwise legitimate and proper, Section 70 of the Act should step in and support a claim for compensation made by the contracting parties notwithstanding the fact that the contract in question has not been made as per the requirements of Article 299.If Section 70 was to be held in applicable, it would lead to extremely unreasonable circumstances and may even hamper the working of government. Like ordinary citizens even the government should be subject to the provisions of Section 70.[31]

Similarly, if under a contract with a government, a person has obtained any benefit, he can be sued for the dues under Section 70 of the Act though the contract did not confirm to Article 299.[32] if the Government has made any void contracts it can recover the same under Section 65 of the Act.[33]

It needs to be emphasized that Section 70, Contract Act, does not deal with the rights and liabilities of parties accruing from that from relations which resemble those created by contracts. Thus, in cases falling under Section 70 , the person doing something for another cannot sue for specific performance of the contract nor can he ask for damages for breach of the contract for a simple reason that no valid contract exists between the parties. All that Section 70 provides is that if the goods delivered are accepted, or the work done is voluntarily enjoyed, then the liability to enjoy compensation for the said work or goods arises. Section 70 deals with cases where a person does a thing not intending to act gratuitously and the other enjoys it.[34]

Section 70, in no way detracts from the binding character of Article 299(1) . The cause of action for the respondent's claim under Section 70 is not any breach of contract by the government. In fact, the claim under Section 70 is based on the assumption that the contract in pursuance of which the respondent has supplied the goods, or made the construction in question, is ineffective and, as such, amounts to no contract at all. Thus, Section 70 does not nullify Article 299(1). In fact, Section 70 may be treated as supplementing the provisions under Article 299(1).What Section 70 prevents is unjust enrichment and it as much to individuals as to corporations and governments.[35]

Judicial Review in Contractual Matters

Judicial quest in administrative matters has to find the right balance between the administrative discretion to decide matters contractual or political in nature, or issues of social policy and the need to remedy any unfairness. A State need not enter into contract with anyone, but when if does so it must do so fairly without discrimination and without unfair procedure; and its action is subject to judicial review under Article 14 of the Constitution of India[36].

Where the Government is dealing with the public, whether by way of giving jobs or by entering into contracts or issuing quotas or licenses or granting other forms of largess, it cannot arbitrarily use its power of discretion and in such matters must conform to certain standards or norms which are not arbitrary, irrational or irrelevant.[37]

The principles of judicial review would apply to the exercise of the contractual powers by the Government bodies in order to prevent arbitrariness or favoritism. However, there are inherent limitations in the exercise of that power of judicial review.[38]

The judicial power of review is exercised to rein any unbridled executive functioning. The restraint has two contemporary significances. One is the ambit of judicial intervention; the other covers the scope of the Court's ability to quash an administrative decision on its merits. These restraints bear the hallmark of judicial control over administrative action. Judicial review is concerned with not reviewing the merits of the decision in support of which the application for judicial review is made, but the decision making process itself.[39]

It is not for the Court to determine whether a particular policy po particular decision taken in the fulfilment of that policy is fair. It is only concerned with the manner in which the decisions have been taken. The extent of the duty to act fairly will vary from case to case. Shortly put, the grounds upon which an administrative action is subject to control by judicial review can be classified under:
1. Illegality: This means the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it.
2. Irrationality
3. Procedural impropriety
The above are only the broad grounds but it does not rule out the addition of further grounds in course of time.
With respect to the judicial review of administrative decisions and exercise of contractual powers by Government bodies, the Hon'ble Supreme Court has held,
"The Government must have freedom of contract. In other words, a fairplay in the joints is a necessary concomitant for an administrative body functioning in the administrative sphere or quasi- administrative sphere. However, the decision must not only be tested by the application of the Wednesbury principle of reasonableness (including its other facts) but must be free from arbitrariness not affected by bias or actuated by malafides."[40]

While exercising the power of judicial review, in respect of contracts entered into on behalf of the State, the Court is concerned primarily as to whether there has been any infirmity in the 'decision making process'. By way of judicial review the Courts cannot examine the details of the terms of the contract which have been entered into by the public bodies or the State. Courts have inherent limitations on the scope of any such enquiries. But at the same time the Courts can certainly examine whether "decision making process" was reasonably rational, not arbitrary and violative of Article 14 of the Constitution. If the contract has been entered into without ignoring the procedure which can be said to be basic in nature and after an objective consideration of different options available, taking into account the the interest of the State and the public, then Court cannot act as an appellate authority by substituting its opinion in respect of the selection made for entering into such contract.

But once the procedure adopted by the authority for the purpose of entering into the contract is held to be against the mandate of Article 14 of the Constitution, the Court cannot ignore such action saying that the authorities concerned should have some latitude or liberty in contractual matters and any interference by the Court amounts to encroachment on the exclusive right of the executive to take such decision.[41] The doctrine that the powers must be exercised reasonably has to be reconciled with the no less important doctrine that the Court must not usurp the discretion of the public authority which the Parliament has appointed to take the decision. Within the bounds of legal discretion is the area in which the deciding authority has genuinely free discretion. If it passes thes bounds , it acts ultra vires. The decisions which are extravagant or capricious cannot be legitimate. But if the decision is within the confines of reasonableness, it is no part of the Court's function to look further into its merits.[42]

End notes
[1] Moitra's Law of Contract & Specific Relief; 5th ED; Page 4
[2] Hereinafter referred to as the Act
[3] M.P.Jain; Indian Constitutional Law;5th Ed;Page1801
[4] Supra, note 1, Page 1353
[5] AIR 1954 SC 786
[6] Ram Lal v State of Punjab , AIR 1966 Punj 436
[7] Navrattanmal v State of Rajasthan , AIR 1961 SC 1704
[8] Pollock &Mulla; Indian Contract & Specific Relief Acts;12th Ed; Page 312
[9] State of Madhya Pradesh v Firm Gopi Chand Sarju Prasad ,AIR 1972 MP 43
[10] AIR 1962 SC 113: (1962)2 SCR 880 ; see also State of West Bengal v B.K. Mondal & Sons, AIR 1962 SC 779; Milan Chand v State of Madhya Pradesh, AIR 1968 SC 1218.
[11] Union of India v Rallia Ram, AIR 1963 SC 1685
[12] State of Uttar Pradesh v Kishori Lal ,AIR 1980 SC 680
[13] Chatturbhuj v Moreshwar,AIR 1954 SC 236
[14] T.K Mukherjee;Law of Contract;Vol-1;Ed 2000;Page37
[15] AIR 1967 SC 203: (1966)3 SCR 919 see also Chandra Bhan Singh v State of Bihar, AIR 1967 Pat 15
[16] Supra, note 4, Page1803
[17] ibid
[18] State of Bihar v Karam Chand Thapur, AIR 1962 SC 110
[19] Supra, note 15, Page45
[20] Ramana Dayaram Shetty v International Airport Authority of India,(1979)3 SCC 489: AIR 1979 SC 1628
[21] Y.Konda Reddy v State of A.P.,AIR 1997 AP 121
[22] M/s. Pyrites, Phosphates & Chemicals Ltd. v. Bihar Electricity Board, AIR 1996 Pat 1
[23] Assistence Excise Commissioner v Issar Peter, AIR 1994 SCW 2616; see also Mahabir Auto Stores v Indian Oil Corporation,(1990)1 JT(SC)363
[24] (M/s.) Hindustan Sugar Mills v State of Rajasthan, AIR 1981 SC 1681
[25] Shri Sachidanand Pandey v State of W.B., AIR 1987 SC 1109
[26] Supra, note 15,Page49
[27] Maneka Gandhi v Union of India, AIR 1978 SC 597
[28] State of Bihar v Sonabati, AIR 1954 Pat 513
[29] State of Bihar v Abdul Majid, AIR 1954 SC 245: 1954 SCR 786
[30] Supra, note 4,Page1808
[31] State of West Bengal v B.K. Mondal, AIR 1962 SC 152; see also New Marine Coal Co v Union of India,AIR 1964 SC 152
[32] State of Orissa v Rajballav, AIR 1976 Ori 79
[33] Pannalal v Deputy Commissioner, AIR 1973 Sc 1174; see also Union of India v J.K Gas Plant, AIR 1980 SC 1330.
[34] Supra, note 4,page 1809
[35] ibid
[36] Eurasian Equipment & Chemicals Ltd v State of West Bengal,[1975]2 SCR 674, AIR 1975 SC 266
[37] Supra, note 21
[38] Supra, note 15, page 50
[39] ibid
[40] Tata Cellular v Union of India, AIR 1996 SC 11
[41] Sterling Computers Ltd v M/s M&N Publications Ltd, AIR 1996 SC 51
[42] ibid

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