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Liability Of State In A Contract

In England the concept The King can do no wrong had its sway. All the courts in England were under the Crown and hence Ould not be sued. Absolute immunity was provided to the Crown and hence couldnít be held liable for the acts of their servants. After the Crown Proceeding Act 1947, the immunity provided to them was abolished and the Crown could be held liable for contractual (and tortuous) obligations.

In India under article 294B states about the liability of Union and State Government can be sued under any contract(tortuous liability as well)The government and state can be sued with regard to their respective affairs.

Liability of state:
Under article 300 of the constitution which empowers the principle, state can be sued in its own court subject to certain principles of liability.

In Stream Navigation Company case the SC stated that as the general rule is concerned, it is there for the attribute of sovereignty that the state canít be sued without the consent and with this respect distinction between sovereign and non-sovereign functions were drawn.

Sovereign and Non-sovereign function:
Sovereign function is one where the state is not answerable to the court for the functions which concerns defence, maintenance of armed forces, peace of the state while non sovereign functions are those functions under which the state can be sued. It includes any kind of tort or breach of contract, they will be liable for their damages which is states.

In State Of Rajasthan v/s Mrs. Vidyavati, Vidyavatiís husband died of an accident caused by the government driver who was driving negligently the government jeep from the garage to the office. Vidyavati sued the government , for compensation. It was held valid as he died during the course of his employment.

Liability of state in a contract under article 299:

The objective of this article is to safeguard the government and not to saddle the government with obligations, which are made by unauthorised officers or in excess of authority. Saving funds is essential. Hence if the contract is invalid the government can ratify and make modifications and can make it valid.

In article 299 it states the requirement of the formulation of contract:
  1. Contract made by President or governor
  2. By state or union
  3. It should be assumed all the contracts were under the eye of president or governor
  4. Governor or president can authorise agent to enter in their behalf
  5. Should be a written contract (oral contract is not binding on the government)
It is not directory but mandatory that it must be complied with all the requirements under article 299, hence it canít be enforced by the government or the other party. When the contract is valid, article 299 immunes the Governor or President and also the person they authorised will also be immune.
  1. Contract made by an unauthorised person
    In UOI V NK Pvt Ltd, railway board made an offer to the company to maintain surplus trains. The authorised person was the director of store on behalf of President. The letter of acceptance was given by secretary. It was held not binding as the contract created was by an unauthorised person.
  2. Even if the contract is void if the state acquires any kind of benefit theyíll be liable to pay:
    State Of West Bengal v/s BK Mondal
    Construction was to be executed by the respondent and the building was constructed and that it was used for government purpose. No payment was made to the contractor. The government claimed as all the requirements of article 299 were not in compliance the contract was not enforceable. The SC held that it is not enforceable but the government needs to pay under section 70 of Indian Contract Act for which the work has been done.
  3. When the government didnít receive any kind of benefit under void contract:
    In State Of UP v/s Murari Lal & Brothers
    Officers of agricultural department was not authorised to enter into contract on behalf of government. He entered into a contract for space of cold storage for potato. But the government never sent the potato. The place was kept vacant and the person suffered loss. It was held not applicable under article 299 and section 70. Hence the party will have no over the claim as no benefit was taken by the government. Till there is no benefit it canít claim for money.

    LIC India v/s Consumer Edu & Research Centre
    When a matter of state action, the action of state having public interest authority, the terms and policy were restricted to some class of person and for other people the benefit was not available. Because it states instrumentality it must make fair, just and socio economically correct policy and if the policy is not biding to these it wonít be valid.
  4. When the contract is between state and a person it is precisely contractual and also the rights. The court can entertain the petition in the area where the contract shows arbitrariness, unjust and unfair.
Mahabeer Auto Store v/s IOC
The petitioner carried business of lubricant service for 18 yrs. IOC suddenly stopped the supply and no opportunity was given. The SC held that it is well settled principle, every action taken by instrumentality of state, it should be taken without any arbitrary and should be informed(reasoning should be given) as IOC comes under article 12 and should follow rules and tell the termination reason which should be relevant. Government while entering into contract should give equal opportunity to everyone.

Eurasian Equipment & Co Ltd v/s State Of West Bengal
Government blacklisted some person to enter into contract. This hampered them to enter into contract . All the individuals should be given equal right to opportunity to be heard and also the reason should be valid.

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