Contractual Liability of the Administration in India

Key Takeaways

• Contractual liability of the administration refers to the legal responsibility of the Central Government and State Governments arising from contracts entered into for administrative, commercial and public purposes.
• Article 298 of the Constitution of India empowers the Union and State Governments to enter into contracts, conduct business and undertake transactions involving property, subject to applicable legislative restrictions.
• Article 299 of the Constitution prescribes mandatory conditions for executing government contracts. Such contracts must be expressed in the name of the President or Governor and executed by duly authorised persons.
• Article 300 of the Constitution allows the Union of India and State Governments to sue and be sued. It provides the constitutional framework for legal proceedings involving government contractual obligations.
• Non-compliance with Article 299 generally makes a government contract unenforceable. However, compensation may still be recoverable under Section 70 of the Indian Contract Act, 1872, where the government has received and enjoyed a benefit.
• Government contracts are subject to ordinary contract law. When a valid government contract is breached, the affected party may seek appropriate legal remedies, including damages, subject to the applicable law.
• The Supreme Court has developed important principles governing government contracts through decisions such as State of West Bengal v B.K. Mondal & Sons, Mulamchand v State of Madhya Pradesh and M/s Glock Asia-Pacific Ltd. v Union of India.

What Is Contractual Liability of the Administration?

Contractual liability of the administration refers to the legal responsibility of the government arising from agreements entered into with individuals, companies and other organisations. It determines when a government contract becomes legally enforceable and the consequences when the government fails to fulfil its contractual obligations.

In India, government departments regularly enter into contracts for constructing roads, purchasing equipment, supplying goods, providing public services and undertaking infrastructure projects.

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For example, when a State Government enters into a valid agreement with a construction company for building a public hospital, both parties become bound by the agreed contractual terms. If the government fails to make payments without lawful justification, the contractor may seek appropriate remedies under contract law.

However, government contracts are different from ordinary private contracts in one important respect. Apart from satisfying the requirements of the Indian Contract Act, 1872, contracts made in the exercise of governmental executive power must comply with the constitutional requirements prescribed under Article 299.

Thus, contractual liability of the administration involves both constitutional law and ordinary principles of contract law.

Constitutional Provisions Governing Contractual Liability of the Administration

The constitutional framework governing government contracts in India is primarily contained in Articles 298, 299 and 300.

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Article 298: Power of the Government to Enter into Contracts

Article 298 of the Constitution empowers the Union and State Governments to undertake commercial and contractual activities.

The executive power of the Union and each State extends to:

• Carrying on trade or business: Governments may engage in commercial activities and conduct business through their departments and other governmental arrangements, subject to applicable laws.
• Acquisition and holding of property: Governments may acquire and hold movable and immovable property for administrative, developmental and public purposes.
• Disposal of property: Government property may be sold, transferred or otherwise disposed of in accordance with applicable legal requirements.
• Making contracts: The Union and State Governments may enter into contracts for various purposes, including public works, procurement, services and commercial transactions.

Article 298 also subjects these powers to legislative restrictions in areas falling outside the legislative competence of the government concerned.

Therefore, Article 298 provides the constitutional authority for government contractual activities, while Article 299 regulates the manner in which government contracts must be executed.

Article 299: Requirements for Government Contracts

Article 299 is the principal constitutional provision governing the execution of government contracts in India.

Under Article 299(1), contracts made in the exercise of the executive power of the Union or a State must satisfy certain mandatory conditions.

These conditions are intended to safeguard public funds and prevent unauthorised persons from creating contractual liabilities on behalf of the government.

Article 299(2) further provides that the President, Governor and persons executing contracts on their behalf are not personally liable merely because they execute contracts in accordance with the constitutional provision.

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Article 300: Suits and Proceedings Against the Government

Article 300 establishes the legal capacity of the government to sue and be sued.

Under this provision:

• The Government of India may sue or be sued in the name of the Union of India.
• A State Government may sue or be sued in the name of the State.

This provision enables legal proceedings involving contractual claims against the government.

For example, where a contractor alleges that a State Government has breached a valid construction contract, proceedings may be instituted against the State in accordance with applicable procedural laws.

Article 300 does not independently establish liability for every contractual claim. The existence and extent of liability must be determined under the relevant contract and applicable laws.

The constitutional provisions can be summarised as follows:

These provisions are contained in Part XII, Chapter III of the Constitution of India.

What Are the Essential Conditions for a Valid Government Contract?

Article 299(1) establishes three essential requirements for contracts made in the exercise of governmental executive power.

Contract Must Be Expressed in the Name of the President or Governor

A contract entered into on behalf of the Central Government must be expressed to be made by the President of India.

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Similarly, a contract entered into on behalf of a State Government must be expressed to be made by the Governor of that State.

This requirement identifies the government as the contracting authority.

It does not mean that the President or Governor must personally negotiate or sign every government contract.

Contract Must Be Executed on Behalf of the President or Governor

The contract must clearly indicate that it is executed on behalf of the President or Governor, as applicable.

This ensures that the contractual obligation is undertaken by the government rather than by the individual officer acting in a personal capacity.

A contract executed merely in the personal name of a government employee may fail to satisfy this constitutional requirement.

Contract Must Be Executed by a Duly Authorised Person

The person executing the contract must possess the necessary authority to act on behalf of the President or Governor.

The execution must also comply with the manner prescribed or authorised by the appropriate constitutional authority.

Government officials cannot create binding contractual obligations merely because they hold administrative positions.

The authority to execute a particular category of government contracts must be established.

In Bihar Eastern Gangetic Fishermen Co-operative Society Ltd. v Sipahi Singh (1977), the Supreme Court reaffirmed the mandatory character of these three requirements.

Why Are the Requirements of Article 299 Mandatory?

The requirements under Article 299 are not merely procedural formalities. They serve an important public purpose.

Government contracts often involve substantial expenditure from public funds. Unrestricted contractual authority could expose the government to unauthorised financial commitments.

Article 299 therefore serves several purposes:

• Protection of public funds: It prevents unauthorised persons from creating financial obligations that may ultimately affect public resources.
• Administrative accountability: It ensures that government contracts are executed through recognised authorities and established procedures.
• Prevention of fraudulent contracts: It reduces the possibility of disputes involving alleged verbal commitments, unauthorised assurances and improperly executed agreements.
• Legal certainty: It helps establish whether a binding contractual relationship has been created between the government and another party.

The Supreme Court has repeatedly emphasised that these constitutional safeguards cannot ordinarily be waived through private agreement or administrative convenience.

What Happens if a Government Contract Does Not Comply With Article 299?

A government contract that fails to satisfy the mandatory requirements of Article 299(1) is generally unenforceable as a contract against the government.

Consequently, a party cannot ordinarily claim contractual damages merely by proving that an agreement was reached with an unauthorised government officer.

Three important principles arise.

Invalid Contracts Cannot Ordinarily Be Ratified

An agreement that fails to satisfy Article 299 cannot simply be converted into an enforceable government contract through subsequent approval or ratification.

The constitutional requirements must be respected when creating the contractual obligation.

However, a fresh contract complying with the necessary legal requirements may be executed where otherwise permissible.

Implied Contracts Cannot Replace Constitutional Formalities

Ordinary contract law recognises certain implied contractual relationships arising from conduct.

However, an implied contract cannot be used to avoid the mandatory requirements of Article 299.

Otherwise, the constitutional safeguards governing government contracts would become ineffective.

Restitution May Still Be Available

Although the invalid agreement cannot ordinarily be enforced as a contract, a separate claim for compensation or restitution may arise where the government has received and enjoyed a benefit.

This distinction is particularly important in understanding Section 70 of the Indian Contract Act, 1872.

Quasi-Contractual Liability of the Administration Under Section 70

Quasi-contractual liability arises when the law imposes an obligation to compensate another person despite the absence of an enforceable contract.

Section 70 of the Indian Contract Act, 1872, deals with obligations arising when a person lawfully performs a non-gratuitous act for another person, or delivers something to that person, and the recipient enjoys its benefit.

The provision is especially relevant where a government contract is invalid because of non-compliance with Article 299.

Essential Conditions Under Section 70

Three conditions must generally be satisfied.

1. Lawful Act or Delivery

A person must lawfully perform an act for another person or deliver something to that person.

The act must not be unlawful or contrary to applicable legal requirements.

2. Absence of Gratuitous Intention

The person performing the act must not intend to provide the benefit without compensation.

For example, a contractor constructing a government building for payment does not ordinarily intend to provide the construction services gratuitously.

3. Enjoyment of Benefit

The recipient must actually enjoy the benefit of the act performed or the goods delivered.

Merely performing work without establishing that the government accepted or enjoyed the relevant benefit may not be sufficient.

When these conditions are satisfied, compensation or restoration may be required under Section 70.

Example of Quasi-Contractual Liability

Suppose a contractor constructs a warehouse for a government department under an arrangement that does not comply with Article 299.

The department subsequently takes possession of the warehouse and uses it for storing government supplies.

Although the arrangement may be unenforceable as a government contract, the contractor may claim compensation under Section 70 if the statutory requirements are established.

The claim arises from the government’s enjoyment of the benefit rather than from enforcement of the invalid agreement.

Doctrine of Unjust Enrichment in Government Contracts

The doctrine of unjust enrichment prevents one party from retaining a benefit at another person’s expense where the law requires restitution.

In government contractual dealings, this principle becomes relevant when the government receives goods, services or other benefits without an enforceable contract.

Section 70 provides a statutory basis for addressing certain situations of unjust enrichment.

However, the doctrine does not mean that every expenditure incurred by a contractor automatically creates government liability.

The claimant must establish the legal conditions necessary for restitution.

The distinction is important because the amount recoverable under a restitutionary claim may differ from the damages or contractual price recoverable under a valid agreement.

Section 65 of the Indian Contract Act also deals with restoration of advantages received under agreements discovered to be void or contracts that become void. Its application depends on the particular circumstances and legal requirements.

Liability of the Government for Breach of Contract

When a government contract is validly executed and legally enforceable, the government is generally subject to the applicable principles of contract law.

If the government fails to fulfil its contractual obligations without lawful justification, the affected party may pursue appropriate remedies for breach of contract.

Compensation for Breach of Contract

Section 73 of the Indian Contract Act, 1872, provides for compensation for loss or damage caused by breach of contract.

The compensation generally concerns losses arising naturally from the breach or losses that the parties knew, when entering into the contract, were likely to result from it.

Remote and indirect losses are not ordinarily recoverable under Section 73.

Compensation Where a Sum Is Specified

Section 74 deals with compensation where a contract specifies an amount payable upon breach or contains a stipulation by way of penalty.

The court may award reasonable compensation in accordance with the statutory requirements, subject to the prescribed limit.

Other Contractual Remedies

Depending on the contract and applicable law, remedies may also involve:

• Recovery of outstanding payments: A contractor may seek payment for goods supplied or services performed under an enforceable agreement.
• Refund or restitution: Amounts paid or benefits transferred may be recoverable where a recognised legal basis for restitution exists.
• Arbitration: Contractual disputes may be referred to arbitration where a valid arbitration agreement exists and the dispute is legally arbitrable.
• Specific relief: Appropriate relief may be sought under the Specific Relief Act, 1963, subject to its restrictions and the circumstances of the dispute.

The government does not receive blanket immunity from ordinary contractual remedies merely because it is exercising executive authority.

Does Promissory Estoppel Apply Against the Government?

The doctrine of promissory estoppel may prevent the government from withdrawing a clear promise when another party has acted upon it and altered its position, provided the legal requirements are satisfied.

In Motilal Padampat Sugar Mills Co. Ltd. v State of Uttar Pradesh (1979), the Supreme Court recognised that the doctrine may operate against the government in appropriate circumstances.

However, promissory estoppel cannot compel the government to act contrary to law.

Public interest and statutory restrictions also remain important considerations.

A distinction must therefore be maintained between:

• Enforcing a government contract that fails to satisfy Article 299; and
• Enforcing an independent promise through the doctrine of promissory estoppel where the applicable legal conditions are satisfied.

Promissory estoppel is not a general mechanism for validating every constitutionally defective government contract.

Judicial Review of Government Contracts Under Article 14

Government contractual decisions may also be examined under Article 14 of the Constitution, which guarantees equality before the law and equal protection of the laws.

The government must exercise public power fairly and without arbitrariness.

This constitutional obligation is particularly significant in public procurement, tendering and the award of government contracts.

Judicial Review of Tender Decisions

In Tata Cellular v Union of India (1994), the Supreme Court explained the principles governing judicial review of administrative decisions concerning government tenders.

Courts generally examine the legality of the decision-making process rather than substituting their commercial judgment for that of the tendering authority.

In Jagdish Mandal v State of Orissa (2007), the Supreme Court further emphasised that judicial interference in tender matters must remain limited and should not be based merely on technical objections or commercial disappointment.

Judicial review may nevertheless be justified where the decision-making process suffers from legally significant arbitrariness, mala fides or other recognised grounds of illegality.

Judicial Review During Contractual Performance

In ABL International Ltd. v Export Credit Guarantee Corporation of India Ltd. (2004), the Supreme Court recognised that government authorities and State instrumentalities remain subject to Article 14 obligations even when acting in contractual matters.

A writ petition is not automatically barred merely because a dispute arises from a contract.

However, the availability of writ relief depends on the nature of the dispute, the existence of a public law element and other relevant circumstances.

Ordinary disputes concerning payment, contractual interpretation or damages may be more appropriately resolved through civil proceedings or arbitration.

Difference Between Contractual Liability and Tortious Liability of the Administration

Contractual liability and tortious liability of the State are two distinct aspects of government responsibility.

A government dispute may occasionally involve both contractual and non-contractual obligations. However, each claim must satisfy its own legal requirements.

Conclusion

Contractual liability of the administration in India establishes the legal responsibility of the government in its contractual dealings with private individuals, businesses and organisations.

Articles 298, 299 and 300 of the Constitution provide the principal constitutional framework. Article 298 authorises government contractual activities, Article 299 establishes mandatory execution requirements, and Article 300 recognises the capacity of governments to sue and be sued.

Although compliance with Article 299 is essential for enforceable government contracts, the absence of a valid contract does not necessarily eliminate every legal obligation. Section 70 of the Indian Contract Act may provide restitutionary relief where the government has lawfully received and enjoyed a non-gratuitous benefit.

The Supreme Court has consistently sought to balance two important considerations: protecting public funds against unauthorised contractual commitments and preventing legally unjustified retention of benefits by the government.

Thus, contractual liability of the administration reflects the broader principle that governmental contractual powers must operate within the framework of constitutional requirements, statutory obligations and the rule of law.

Note: This article was originally written by Sidra Javed and published on 10 April 2020. It was subsequently updated by the LawBhoomi team on 20 October 2026.