Essay Notes on Contractual Liability of the State in India

Introduction

 In modern welfare states, governments frequently enter into contracts with private
individuals and corporations for services like infrastructure, employment, and public utilities.

 The contractual liability of the state refers to the legal responsibility of the government in
cases where it enters into contracts and fails to fulfill obligations.

 Unlike tort liability, where the state once had sovereign immunity, it has always been liable
for its contractual obligations.

 The Indian Constitution (Articles 298, 299, and 300) provides the legal framework governing
government contracts.

 However, government contracts differ from private contracts as public law principles such as
transparency, fairness, and non-arbitrariness (Article 14 of the Constitution) apply.

Legal Framework Governing Government Contracts in India

1. Constitutional Provisions

Article 298 – Power to Carry Out Business & Enter Contracts

 The executive power of both the Union and the States extends to carrying out trade,
acquiring, holding, and disposing of property, and making contracts.

Article 299 – Essential Formalities of Government Contracts

 Contracts must be expressed in the name of the President or Governor.

 Must be in writing.

 Must be executed by an authorized person.

 Failure to comply renders the contract void (K.P. Choudhary v. State of M.P.).

Article 300 – Suits Against the Government

 The Union and State governments can sue and be sued in the same manner as the
Dominion of India and Provinces under British rule.

2. Principles Governing Government Contracts

 Fairness and Transparency – Government contracts must be awarded in a fair manner to

 Public Interest – The state must act in the interest of the general public, not for political or
personal gain.

 Reasonableness & Non-Arbitrariness (Article 14) – The government cannot randomly select
parties or change contract terms unfairly.

 No Implied Contracts – Government contracts require strict adherence to formalities.

1. Pre-Independence Period (British Rule)

 The Crown enjoyed immunity from lawsuits under the principle “The King can do no
wrong.”

 Crown Proceedings Act, 1947 (UK) allowed the government to be sued in contractual
disputes.

2. Post-Independence (Indian Constitution)

 The Indian government follows a legal framework based on the Government of India Act,
1935.

 The principle of sovereign immunity was never recognized for contractual matters.

 Judicial review of government contracts ensures compliance with constitutional mandates.

Key Judicial Decisions on Government Contracts

1. R.D. Shetty v. International Airport Authority of India (1979)

🔹 Principle:

 Government contracts must comply with Article 14 (Right to Equality).

 The state cannot act arbitrarily while granting contracts or licenses.

 The government must follow a fair and transparent tendering process.

 If eligibility criteria are set, they must be followed strictly.

🔹 Facts:

 The International Airport Authority invited tenders to operate a catering service at an

 The contract was awarded to a firm that did not meet the eligibility criteria.

 The Supreme Court ruled that violating the eligibility conditions was arbitrary and
unconstitutional.

2. K.P. Choudhary v. State of Madhya Pradesh (1967)

🔹 Principle:

 No implied contracts with the government are valid.

 Government contracts must strictly comply with Article 299 requirements.

🔹 Facts:

 The petitioner worked for the government without a formal written contract.
  He sought compensation, but the court held that without a proper contract under Article
299, no legal claim could be enforced.

3. State of Bihar v. Jain Plastics & Chemicals Ltd. (2002)

🔹 Principle:

 Writ petitions under Article 226 cannot be used to enforce government contracts unless
fundamental rights are affected.

 Disputes over contracts should be resolved in civil courts, not through constitutional
remedies.

🔹 Facts:

 The petitioner sought enforcement of a contractual claim through a writ petition.

 The Supreme Court ruled that contractual disputes must be settled through civil suits and
not writ jurisdiction.

4. Tata Cellular v. Union of India (1996)

🔹 Principle:

 Judicial review is applicable in cases where government contracts violate fairness and
transparency.

 Courts should not interfere with policy decisions but can review procedural fairness.

🔹 Facts:

 The case involved the government’s decision to grant cellular licenses.

 The Supreme Court ruled that while the government has discretion in commercial matters,
it must act in a non-arbitrary manner.

5. Sterling Computers Ltd. v. M&N Publications Ltd. (1996)

🔹 Principle:

 If a government contract process is unfair or biased, courts can intervene.

 Courts cannot rewrite contracts but can strike down arbitrary government actions.

🔹 Facts:

 A private company challenged the government’s arbitrary award of a contract.

 The Supreme Court ruled that unfair government actions violate Article 14.

Comparison with Other Countries

Country Contractual Liability of State

United Before 1947, Crown enjoyed immunity. Crown Proceedings Act, 1947 allowed lawsuits
Kingdom against the government.
Country Contractual Liability of State

The Contract Clause (Article 1, Section 10) prohibits states from impairing contractual
United States
obligations. Courts can review government contracts.

The Judiciary Act, 1908 allows lawsuits against the government in contract and tort
Australia
cases.

Judicial Review of Government Contracts

 Courts apply the “Wednesbury Principle” to check if government decisions are reasonable.

 Judicial review is limited to ensuring fairness and preventing abuse of power.

 Courts do not interfere with commercial decisions unless constitutional principles are
violated.

Conclusion & Recent Trends

 Government contracts are crucial in economic development but must be handled fairly.

 The Supreme Court has emphasized transparency and fairness (e.g., 2G Spectrum Case,
2012).

 The Public Procurement Bill, 2012 aims to improve tendering procedures.

 Judicial activism has strengthened oversight on government contracts, ensuring public

Key Takeaways for Exams

1. Article 299 is mandatory – Contracts must be in writing, executed by authorized persons,

2. No implied contracts with the government – If formalities are not followed, the contract is
void.

3. Writ petitions under Article 226 are not applicable for contractual disputes unless
fundamental rights are violated.

4. Judicial review applies only to ensure fairness and prevent arbitrariness in awarding
contracts.

5. Courts follow the “Wednesbury Principle” to determine reasonableness.

This structured and detailed essay format will help in exams by covering legal provisions, case laws,
comparisons, and recent trends. Let me know if you need further clarifications! 😊