Contractual Liability

Introduction:

Contract desirably marks the first overt action taken by parties which brings
the parties under an obligation to perform such act. An agreement gets a
legal validity only if it is written down as a contract. Though a contract can
be written or oral, it is always desirable to have a written contract to avoid
any misunderstandings in future. All the contracts are regulated and
governed under Indian Contract Act, 1872. Section 2(h) clearly states that a
contract is an agreement which is enforceable by law[1]. The Act entails all
the essentials of how a contract should be formed and what are the
essentials[2] and capacity of parties entering into a contract. Such is the
importance of entering into a valid legal contract as all the disputes shall be
resolved only in accordance with the terms and conditions laid down in the
contract.

Government Contracts

In the modern era, Government undertakes lot of financial activities and

collaborates with private sector for a wide ambit of functions. So it is
imperative that all the activities undertaken by government should also be
regulated to avoid any future dispute and discrepancies. But since the
government is much bigger entity than an individual party there has to be
more regulation than a normal contract, so the constitution of India lays
down the procedure and requisites to be followed to enter into a valid
contract with Government[3]. This regulation is an additional requirement
along with all the general principles laid down in the Indian Contract Act and
all the regulation laid down in that statute will also hold good for a
Government contract. Thus it is clear that a Government contract is
governed by both the provisions of Indian Contract Act and the Constitution
of India.[4]

Analysis Of The Provision Of The Constitution

Chapter XII Part III of the Constitution deals with the Government Contracts,
its liabilities, properties, obligations etc… The provisions relevant to
government contracts are Article 298 and Article 299 of Indian Constitution

Article 298 of Indian Constitution:

Article 298 of Indian Constitution empowers the government and its

executives to carry on any kind of trade, acquire properties and enter into
contracts with other parties which comes with a proviso that such trade
activity must not be once in respect of which the Parliament/State legislature
has right to make laws. Thus the Constitution provides the Government to
carry on trade[5] and for effective functioning of a trade, a legally binding
contract is indispensible. Thus the regulation for entering into a legally valid
contract is laid down in Article 299 of Indian Constitution.

Article 299 of Indian Constitution:

Article 299(1) lays down that the contract entered by the Government should
bear the name of either President (in case of Central Government contract)
and the name of Governor (in case of State Government contract) and should
be executed in the manner, it is executed by them.[6]. This has been upheld
in the landmark judgment of Lalji Khimji v. State of Gujrat where the court
explicitly held that As a matter of fact, Article 299(1) applies only to a
contract made in exercise of the executive power of the Union or of a State.
[7] However it is not possible for every petty contract to entail the name of
the president/ governor as there are many contracts entered by Government
Department in one day, hence an officer can enter into a contract in his own
name if stated in a statute[8] The Article does not prescribe the manner in
which the authorization must be conferred, however it’s an established rule
by Judicial precedents that it may be conferred Ad-hoc on any person[9]

Article 299(2) explicitly states that though President and Governor are to be
made parties to contract, they are not personally liable to satisfy any debts
neither are liable for any breach occurred by a public official[10] as it is not
possible for executives to look into each and every contract entered and
made accountable for each, thus it will be the liability of the Government as
a whole to satisfy the claims[11] and the executives are not personally liable
for any contract entered in such capacity.[12]

Mandatory Requirements:

A contract entered in the name of Government makes the government liable

which is eventually People’s money, therefore the intensity of such contract
is very high and on the other hand it is also important for the other
contracting party to enter into valid legal contract so that he can enforce his
claims without complexities. As rightly held in the case of Hindusthan Sugar
Mills v. State of Rajasthan, that in a Democratic setup like India, it is the duty
of the state to what is in the best interest of the citizens and also not defeat
any legitimate claims of any party and provide him his remedy through a
proper Judicial process.[13] Thus the degree of responsibility in such
Governmental claims is so high and thus the process mentioned in the
constitution is ought to be followed strictly. The court in the case of Seth
Bhikraj Jaipuria v. Union of India, while analyzing the scope of Article 299(1)
clearly stated that words ‘expressed to be made’ and ‘executed’ in Article
299 it is clear that the Government contract should be made by a formal
written contract. The court stated that the provisions are mandatory in
nature and if these provisions are contravened then the whole contract shall
stand nullified and will not be legally enforceable.[14] The court in the case
of Chaturbhuj Vithal Das Jasani v. Moreswar Parashram while analyzing the
object of enacting and intention of legislation came into the conclusion that
the Government contract should be made in a procedure laid down under the
act as irregular mode of creating a contract using government as a party
may result in the depletion of public funds due to the fault of one public
officer, thus the procedure laid down must be strictly adhered to.[15] It has
been held that an oral contract shall not be binding on the government.[16]
In the landmark judgment of K.P Chowdry vs. State of Madhya Pradesh, the
court held that ther can be no implied contract made in the name of
government and implied contract cannot be enforced by either of the parties
in court of law.[17] However over the time the procedural complexities have
been liberated to protect the parties and the Doctrine of promissory
estoppels has also been evolved over the period of time.
Evolution Of Doctrine Of Estoppel

In the law of contracts, the Doctrine of Promissory Estoppel provides that if a

party changes his or her position substantially by acting or forbearing from
acting in reliance upon a gratuitous promise, then that party can enforce the
promise although the essential elements of the contract are not fulfilled.[18]
The Doctrine of Promissory Estoppel is applicable against the Government,
as against a private person, even though there has been no contract
according to the requirements of Article 299 of the Constitution of India.[19]
The court in the case of General Mills Ltd. V. Union of India has further stated
that acting upon the promise or assurance is enough to apply the doctrine
and actual prejudice need not be proved by the promise[20]. The intention
behind the same being Government or some other public body or its officials
makes a representation or a promise and an individual acts upon such
promise and alters his position, Government or the public body must make
good that promise and shall not be allowed to fall back upon the formal
defect in the contract.[21]

Contractual Liability Of The Government:

If the requisites of Article 299 are not fulfilled, the other party can still
approach the court and get its claim satisfied against the Government as per
the regulations laid down under Section 70 of the Indian Contract Act. The
clear intention behind this is to protect the innocent parties whose claims are
not just nullified due to complex procedure and also not let the government
advantage of unjust enrichment. The other party will be compensated to the
extent of benefit received by the Government through the performance of
the contract. These contracts are to be treated as Quasi contracts and the
following conditions[22] laid down below must be satisfied as per Section 70
of the Indian Contract Act so as to be eligible to claim:

There must be a lawful act by one party for the benefit of the other party.

The act must not be gratuitous act

The other party who receives the benefit must enjoy the benfit.

If these three conditions are fulfilled a party can claim under this provision
even if the requisites of Article 299 are not met. If the contract entered by
the Government is void, it can claim under Section 65 of Indian Contract Act,
1872.[23]

Judicial Review:

Judicial Review is courts authority to examine an executive or legislative act

and to invalidate that act if it is contrary to constitutional principles.[24] Thus
in simple works it is the power of the court to review the actions of the
executive and legislative branches of the Government. The principle of
Judicial review is of utmost importance to gather the confidence of public,
increase transparency and reduce arbitrariness, nepotism, favoritism etc…
The concept of Judicial review in the ambit of Government contracts is
narrow and the court cannot interfere with the merits of the decision of
contract but can only check the mode/procedure in which the Government
has entered the contract into, thus judicial review does not review the merit
of the decision of the government entering into a particular contract but
scrutinizes the process the whole decision making process itself.[25] The
grounds on which the administrative actions can be reviewed by judicial
authority are as follows:

Irrationality

Procedural impropriety

Illegal

However these grounds are not exhaustive and are only directory but the
court cannot enter into the merits of the contract and can check only the
procedural regularity thus conferring the government independence of
decision making process and also has a check on arbitrariness and
procedural irregularity.[26] Thus such is the power of court to review the
contract entered by the government.

Conclusion
It can be inferred that the contractual liability of the government is guided by
the principles and provisions laid under both Constitution of India, 1949 and
Indian Contract Act, 1872. The peculiarity to the government contracts is
bought with the intention of safeguarding the government from the liability
which otherwise might be caused due to the fault of one public official, thus
the degree of care and diligence laid down in the contract entered by
government needs to be more than that of other normal contracts and thus
Article 299 lays down the procedure of how to enter into valid legal contract
with the Government to make it enforceable in the court of law.