December 3, 2020

Contractual Liability of the Administration – Constitutional Provisions

INTRODUCTION

Contractual liability of the Administration arises for when government is a party to a Contract. But, how does Indian Constitution deals it?

Government contracts have become the subject of great importance in modern times. The state is the source of wealth. In the modern times of a welfare state, economic activities of the government are expanding and the government is assuming the role of the distributor of a large number of benefits more and more. The number of individuals with wealth which consists of new forms of property has gradually risen. Most of these forms of wealth which include government contracts, licences, quotas, etc are in the nature of ‘privileges’, though some can be imputed the character of a legal right.[1]

The question of contractual liability of the state is a matter which brings forth the feeling of majority response whenever the role of a welfare state is assumed by the government. The state is governed by law and cannot violate it. The issue that arises here is whether the individual who has suffered damage or injury by any act of the state is entitled to any remedy by the state.[2] The object is to regulate, structure, and discipline the discretion of the government which it has the power to exercise to confer benefits.[3]

WHAT IS A CONTRACT?

Section 2(h) of the Indian Contract Act, 1872 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’.

When the central government or any state government is a party to any contract, it is known as a government contract.

CONTRACTUAL LIABILITY OF THE ADMINISTRATION IN BRITAIN

Before 1947, in Common Law, the Crown could never be sued in a court on a contract. This privilege could be traced back to feudalism when no individual could sue a lord in his own courts. A subject could however seek redress against the Crown by filing a petition to put forth his claim, and if the royal fiat was granted, the action of the Crown could be tried in a court. If the royal fiat was refused, there was no course to remedy.

This rule was abrogated by The Crown Proceedings Act, 1947 which permitted suits to be brought against the Crown to enforce contractual liability.[4]

CONTRACTUAL LIABILITY OF THE ADMINISTRATION IN INDIA

A. FORMATION OF CONTRACTS

Article 299(1) of the Constitution lays down certain conditions which the contracts made under the exercise of the executive power of the centre or a state must fulfil to be valid: These conditions are as follows:

(1) Such contracts must be expressed to be made by the President/Governor as the case may be;

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

(3) The execution and the manner of execution of such contracts may be directed or authorised by the President/Governor.

(4) The word executed in Article 299(1) indicates that the contract between the government and any person must be in writing. A mere oral contract is not sufficient for the purposes of Article 299(1).[5]

The Supreme Court, in K.P. Chowdhary v. State of Madhya Pradesh,[6] observed that in view of Article 299(1) there cannot exist an implied contract between the Government and another person. The Court also ruled that ‘if the contract between the Government and another person is not in full compliance with Article 299(1), it would be no contract at all and will be unenforceable either by the Government or other person as a contract.

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

(1) on one hand, the need to protect the Government from unauthorised contracts; and

(2) at the same time, to safeguard the interest of unwary parties who enter into contracts with government officials while no formalities laid down in the Constitution are fulfilled.

Under Article 299(1) a contract between the government and a private party to be enforceable must be expressed in the name of the President or the Governor. Regardless of the contract being made by a person authorised by the President or the Governor to make it, it will be unenforceable against the government if it is not expressed to be made on behalf of the President or the Governor.[7]

The Supreme Court has held that whenever the government has to deal with the public by entering into a contract or by issuing a licence, the government cannot act arbitrarily. It must act in accordance with the law and the decisions and actions of the state must be established upon a sound, transparent, and well-defined policy that should be communicated to the public.[8]

B. RATIFICATION

A judicial view, before 1968, expressed that even though the government could not be sued on informal contracts ordinarily, it could accept responsibility of them by ratifying them.[9]

In State of West Bengal v. B.K. Mondal,[10] the Supreme Court observed that a contract which does not conform with Article 299(1) was not ‘void’ in the technical sense that it could not be ratified.[11]

References

[1] M.P. JAIN, INDIAN CONSTITUTIONAL LAW 1644 (8TH ed. 2018).

[2] Sonali Mahajan, Contractual Liability of State in India – An Analysis, 2 RHIMRJ 1, 1 (2015).

[3] Supra note 1.

[4] Ibid.

[5] Supra note 3, at 1645.

[6] A.I.R. 1967 S.C. 203.

[7] Bikhraj Jaipuria v Union of India, A.I.R. 1962 S.C. 113.

[8] City Industrial Development Corporation v. Platinum Entertainment, A.I.R. 2015 S.C. 340.

[9] N. Purkayasha v. Union of India, A.I.R. 1955 Ass 33.

[10] A.I.R. 1962 S.C. 779.

[11] Supra note 5, at 1648.


Author Details: Sidra Javed

The views of the author are personal only. (if any)

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