LIABILITY OF THE ADMINISTRATION IN CONTRACT

Constitutional provisions and the development of the concept of liability

Articles 294, 298, 299 and 300 complete the constitutional code of contrac- tual liability of the
government. Article 294 makes provision for the suc- cession by the present governments of the
Union and the States to property, assets, rights, liabilities and obligations vested in the former
governments. Article 298 lays down that for carrying out the functions of the State, the government
can enter into contracts. Article 299 contains essential formali- ties which a government contract
must fulfil. Article 300 provides the man- ner in which suits and proceedings against, or by the
government may be instituted. However, the constitutional code for public contract is not com-
plete, therefore, it is supplemented by the provisions of the Contract Act, 1872. A government
contract, in order to be valid, besides satisfying the requirements of Article 299, must also fulfil the
requirements of Section 10 of the Contract Act, 1872 dealing with the essentials of a valid contract In
the same manner, the principles for determining the quantum of dam ages contained in Sections 73,
74 and 75 are also applicable in case of gov ernment contracts. Nevertheless, all the provisions of the
Contract Act, 1872 are not applicable to government contracts. The provisions relating to capacity as
to age and mind have no relevance to such contracts.

The extent of governmental liability is in direct succession of the lia- bility of the East India Company
in similar situations. Article 300 of the Constitution points out that the extent of liability of the Union
of India and the States will be same as that of Dominion of India and the provinces under the
Government of India Act, 1935. The Act of 1935 refers to the Act of 1915 which in turn refers back to
the Government of India Act, 1858. Thus, one must refer back to the times of the East India Company
in order to determine the extent of liability of government today

Before 1947, the Crown in England enjoyed immunity from being sued in its own courts. This
immunity of the Crown was further fortified by the doctrine of feudalistic origin signifying that the
"king can do no wrong". However, even during the heyday of Crown immunity, a person could seek
redress against the Crown through a "petition of right".

There was never any doubt that the East India Company, which was essentially a commercial
concern, was not entitled to any immunity which the Crown may enjoy from the liability arising out
of contracts. In Bank of Bengal v. United Co.³ (Bank of Bengal), Sir Charles Grey and Franks J of the
Bengal Supreme Court clearly held that the East India Company had no sovereign character to
prevent it from being sued for the recovery of interest on three promissory notes on the basis of
which the Company borrowed money for the efficient prosecution of war for defending and
extending the territories of the Crown in India.

Unfortunately, in Nobin Chunder Dey v. Secy. of State for India (Nobin Chunder Dey) a doubt was cast
on the extent of liability of the East India Company, respecting contract. In this case, a ganja licence
was auctioned. Nobin Chunder, the highest bidder, sued for specific performance of the contract. It
was held that the suit for specific performance could not suc- ceed because the auction of ganja
licence was a method of collecting tax which was a sovereign function. It is gratifying to note that this
proposi- tion of immunity of the government from liability arising out of contract entered into in
exercise of its sovereign power was not followed by the courts in India.
There is no denying the fact that government, because of its special responsibilities and position,
cannot be equated with any other individual and, therefore, the Government of India Acts, 1858,
1919 and 1935 made special provisions prescribing the manner in which government contracts are to
be made. The formal requirements in these Acts were always con- sidered mandatory and their non-
fulfilment rendered the whole contract invalid. The mandatory character of these formal
requirements is evident from the fact that in 1870, the government had to pass a special statute to
validate those contracts which were deficient in these formal requirements. Maintaining the same
tradition, the Indian Constitution also lays down certain formal requirements for contracts in Article
299(1). These require- ments are mandatory. These have not been provided merely for the sake of
form but to protect the government against unauthorised contracts, so that public funds may not be
wasted on unauthorised contracts. The formal requirements laid down in Article 299(1) are as
follows:

1. The contract must be expressed to be made by the President or the Governor, as the case may
be. This requirement is not a mere formality. In Chatturbhuj Vithaldas Jasani v. Moreshwar
Parashram, the court held that the constitutional provisions were inserted not merely for the
sake of form but to safeguard the government against unauthorised contracts. In this case, the
question which arose for consideration was whether a person who has entered into a contract
with the government in violation of the form prescribed in Article 299 was disqualified to be
elected to the leg- islature under Section 7(6) of the Representation of the People Act, 1951. This
contract had been entered into by a person authorised in this behalf, but was not expressed in
the name of the President. The court held that the contract was void. The Supreme Court
maintained the same position in Karamshi Jethabhai Somayya v. State of Bombay. In this case,
the appel- lant entered into a contract with the Minister of Public Works Department (PWD) for
the irrigation of his landholdings. Subsequently, the contract was repudiated on the ground that
it was not expressed in the name of the Governor. A suit was filed for the specific performance of
the contract. The court dismissed the appeal holding that the mandatory requirements of Article
299 had not been complied with.

Though the word "expressed" in Article 299(1) might suggest that the government contract must
be in some particular form, the Supreme Court in Union of India v. A.L. Rallia Ram (A.L. Rallia
Ram) held that no for- mal document need be executed. In this case, the Chief Director of
Purchase (Disposals), Food Department, Government of India bad invited tenders the purchase
of American cigarettes. In the tender of the respondent, the agreement provided for arbitration
in case of dispute between the parties. agreement rent challenged the arbitration award on the
ground that it was not executed in a proper manner. The Supreme Court held that the contract
was entered into by an authorised person and on a fair reading of the letter of acceptance, it
would be reasonable to hold that the contract was entered into in a proper manner. However, if
there is any other statutory require- ment for the execution of a formal deed, it must be
complied with. In State of Madras v. R. Ranganatham Chettiar the High Court held that in view of
a statutory provision requiring formal execution of a deed, the contract as it stood was inchoate
and, therefore, unenforceable. In this case, the rule required that a formal contract had to be
entered into by the govern- ment and the highest bidder at the auction. Though the respondent
was the highest bidder and deposited the security amount, he did not execute any formal
document. Later, when the suit was filed against the government to restrain it from holding
another auction, which became necessary owing to complaints from the public, the court
refused to oblige on the ground that there was no formal contract. A contrary view has, however,
been taken by the Patna High Court in Chandra Dhan Singh v. State of Bihar. Aticle 299 though
provides that the government contracts must be expressed in the name of the President or the
 Governor, as the case may be, yet clause 2 states that they shall not be personally liable in
respect of any contract or assurance.

2. The contract must be executed on behalf of the President or the Governor, as the case may be.
Another formality of Article 299(1) is that the competent authority must execute the contract on
behalf of the President of India or the Governor of the State, as the case may be. If such
authority by mistake or otherwise does not sign on behalf of the Chief Executive, the contract
shall become invalid, as it also belongs to the category of manda- tory conditions." However, the
court has mitigated the harshness of this rule by holding in Davecos Garments Factory v. State of
Rajasthan that in the absence of any specific rule, if the competent authority has signed the
contract deed in its official capacity, the requirement of the formality of Article 299(1) shall be
deemed to have been complied with. In this case, the contract for the supply of police uniforms
was signed by the Inspector General of Police (IG) who did not write after his signatures "signed
on behalf of the Governor".

3. The contract must be executed by a person authorised by the President or the Governor, as the
case may be. The condition that government contracts must be signed by "authorised person"
only is certainly very fundamental if State is to be protected from spurious claims made on the
furength of unauthorised contracts. Article 299 does not lay down any spe cific mode of
authorisation and, therefore, the normal governmental pro cedure of notification in the Official
Gazette may be considered as proper authorisation. Lack of proper authority would render the
contract invalid." However, again in order to avoid hardship which this requirement may entail,
the court has held in State of Bihar v. Karam Chand Thapar & Bros. Ltd. that in the absence of any
specific authorisation, implied authorisa- tion may be considered as substantial compliance with
this requirement of Article 299(1). In this case, the respondent-company entered into certain
construction contracts with the Government of Bihar. After the completion of the contract, a
dispute arose in respect of certain payments and the mat- ter was referred to arbitration by an
agreement between the parties. On the basis of the award, the company filed a petition for
decree in terms of the award. The suit was contested on behalf of the government on the ground
that the arbitration agreement was not executed by the Secretary to the government for PWD,
who was the only authorised person. The company contended that the Executive Engineer
signed the document after neces- sary instructions from the Secretary. The whole process of
correspond- ence and negotiations showed that the Secretary was in the picture all the time.
Under these circumstances, the court came to the conclusion that the Executive Officer, though
not specifically authorised, was impliedly author- ised on an ad hoc basis. The Supreme Court
followed the same approach in Bhikraj Jaipuria v. Union of India". In this case, in pursuance of
the order placed by the Divisional Superintendent, food grains were supplied to the Railways.
The Divisional Superintendent was not authorised to sign the contract. The proper authority in
this case was the Secretary to the Railway Board. However, the evidence showed that an officer
of the Railway Board was authorised to take delivery, transport it and distribute it to Railway
ration shops. The Board also fixed programmes for inspection, allotted wagons, accepted railway
ration and made payments. On the basis of these facts, the court held that the Divisional
Superintendent had the implied authority from the Railway Board to execute the contract.
However, in the absence of such evidence from which implied authority cannot be inferred, the
court held in Union of India v. N.K. (P) Ltd." that if the contract has not been signed by a person
authorised by the President or the Governor, as the case may be, the contract is absolutely void.
 The act of entering into a contract is an executive act, and therefore, if a contract has been
entered into not in exercise of executive powers but statutory powers, the requirements of
Article 299(1) will not apply. Consequently, if the liquor licence is to be granted by auction under
excise law, the formality formulations of Article 299(1) of the Constitution shall not apply.

4. Ratification. The question whether an agreement which does not fulfil the requirements of
Article 299(1) can be ratified by the government has been answered in the negative by the
Supreme Court in Mulamchand v. State of M.P. (Mulamchand). Therefore, the government
cannot ratify a contract if it does not comply with the requirements of Article 299(1) as to enable
it to enforce it against a private party. However, if the parties to the contract agree to ratification,
there seems to be no reason why ratification may not be allowed.

5. Enforcement of liability. The question then arises that if a gov- ernment contract is void for its
non-compliance with the requirements of Article 299(1) and it cannot be ratified either, can the
party claim the ben- efit of Sections 70, 230(iii) or 235 of the Contract Act, 1872. Application of
Section 70 does not pose much problem. In New Marine Coal Co. v. Union of India", the Supreme
Court held that the government must make compensation for the coal supplied which has been
consumed by it, even though the contract does not comply with the requirements of Article 299
of the Constitution. Therefore, if a person has done something for govern- ment under an invalid
contract without doing it gratuitously and the gov- ernment has obtained any benefit out of it,
then the government is bound to make compensation. However, a more complicated question of
liability arises in situations where a person has done something for the government under a void
con- tract, but the government has not obtained any benefit under it. In State of U.P. v. Murari Lal
& Bros.20 (Murari Lal), such a situation came before the Supreme Court. In this case, an officer of
the government department of agriculture, who was not authorised to sign contracts on behalf
of the government, contracted for a space in the cold storage for potatoes from the Agriculture
Department, which never came. The proprietors sued for damages which they suffered for
keeping the space vacant. The Supreme Court held that since the requirements of Article 299 are
not complied with, the contract was void and was also not capable of ratification, which
presupposes a valid contract. Section 70 of the Contract Act, 1872 was also not applicable as the
government had not derived any benefit under the contract. In such a situation, the court
considered the question of liability of the officer concerned under Section 230(iii) or 235 of the
Contract Act, 1872. Section 230(iii) provides that an agent may be personally bound under a
contract in cases where the principal, though disclosed, cannot be sued The court held that the
officer concerned, acting as agent on behalf of the government, cannot be held personally liable
under Section 230(iii) because the section presupposes a valid contract. However, the Supreme
Court did not express any opinion as regards the applicability of Section 235 of the Contract Act,
1872 in this case. However, the observations of the Supreme Court seem to favour the view that
even Section 235 will not be attracted because that section also presupposes a valid contract.
Section 235 lays down that where a person, untruly representing himself to be the agent of the
other party thereby, induces a third party to deal with him, he will be liable if this alleged
principal does not ratify his act to make compensation to the other party for the loss or damage
suffered by him in such dealing. Therefore, the position of the government as it emerges is that
the contracts which do not comply with the requirements of Article 299 are absolutely void, not
even capable of ratification, and the party shall have no claim whatsoever, either against the
government or the officer, except where the government has taken any benefit under such
contract. Murari Lal makes one think that there is something wrong with the law relating to
public contracts in India; because for no fault of his, a per- son may be compelled to suffer a loss
 without a remedy. In this age of an intensive form of government, it is not humanly possible for
any person to keep himself up-to-date with the list of government officials authorised to
negotiate public contracts in various departments. The difficulty with the law relating to public
contracts in India seems to be that the separate entity of public contracts is not being fully
recognised. A public contract, besides the provisions of Article 299 of the Constitution, is also
governed by the general law of contract. Therefore, when the provi- sions of a general law
governing private contracts is applied to public con- tracts, which have a special status because
of the public interest involved therein, injustice and arbitrariness is bound to arise. It is for this
reason that in France the law governing public contracts is entirely different and exclusive from
the law governing private contracts. In France, if the for- malities of a public contract are not
complied with, it is void; but is capable of ratification by the administration, and it is always open
to the private party to question the authority of the administration to withhold ratifica- tion in a
court of law. The courts in France have also developed a viable principle of "public interest",
which must always be protected even if it demands variations in the express terms of the
contract. Therefore, when the administrative law recognises the right of the administration to
modify the terms of a contract, or to upset the economic basis of the contract, it also recognises
the right of the other party to claim compensation. Both also recognises to be equally justified
on grounds odify public interest". In thessa asemanner, the courts exercise power to modify the
express terms the same thaontracts, through their power of interpretation, and to allow of
standard the obligation of the contract under hard circumstances on the public interest. The
administrative courts have further developed the doctrine of imprevision which implies that if
unforeseen circumstances arise which make it uneconomical for the private party to perform the
contract, the court will allow action against the administration for the extra cost. This doc. trine is
different from the common-law doctrine of "frustration" of the contract, which provides relief by
determining the contract if it is physically or legally incapable of performance. The French
doctrine applies even in cases where the economic contents of the contract are changed to the
disad- vantage of the private party by unforeseen circumstances. However, in the public interest
the contract is not determined, but is made to be performed subject to compensation for the
extra economic burden. Interestingly, in common-law countries whatever law has been devel-
oped, besides the ordinary law of contract governing public contracts, it heavily leans in favour of
the government. The doctrine of "executive necessity" developed in England in
Rederiaktiebolaget Amphitrite v. Ra (Amphitrite), which allows the administration to rescind the
contract in its discretion under certain circumstances without any remedy to the other
contracting party, may be cited as an illustration. The same doctrine still holds ground in England.
Thus, in Commissioners of Crown Lands v. Page, where the question was whether an implied
covenant for quiet enjoyment in a lease granted by the Crown was broken when the Crown
requisitioned the premises under wartime legislation, the Court of Appeal held, unanimously,
that it was not. The judgment was based on the ground that an implied covenant would not
extend to prevent the future exercise by the Crown of powers and duties imposed on it in its
executive capacity by statute. Devlin LJ went a step further to hold that the same conclusion
would follow even if such covenant is expressly laid down in unqualified terms. This doctrine has
thus clearly been accepted into law and applies both to the Crown and other statutory
authorities, invested with discretion- ary powers, because there is as much impingement on the
"public good" in commercial contracts as there is in such matters as the defence of the realm
involved in Amphitrite itself. It is gratifying to note that this doctrine has no application in India.

6. Contractual obligation and the constitutional power of the government. A contract cannot clog
the government's constitutional power of eminent domain. In the same manner, the legislature
 acting within the scope of its legislative competence may vary the terms of a contract. In Secy. to
Govt. Public Works and Transport Deptt. v. Adoni Ginning Facts when the electricity rates were
enhanced, contrary to the provision in the contract for the supply of electricity, the court held
that the existence of a Contract cannot foreclose the authority of the legislature to legislate on
sub- jects within its competence. The courts in England have also held that it is not within the
competence of the Crown to make a contract which would have the effect of limiting the
executive power in future.

7. Government contracts and doctrine of waiver.-"Waiver" means abandonment of right and it may
be either expressed or implied from the conduct, but its basic requirement is that it must be an
intentional act with knowledge. Waiver is a question of fact and it must be properly pleaded and
proved. No plea of waiver can be allowed to be raised unless it is pleaded and a factual
foundation is laid for it. In Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P.27 (Motilal
Padampat Sugar Mills), the court did not allow the government to raise the plea of waiver for the
first time at the hearing of the writ petition because it had not been taken in its affida- vits. In
the case, the court also held that in the absence of any substantial evidence to show that the
appellant intentionally abandoned the right of a sales tax holiday, mere acceptance of the
concessional rate of tax would not amount to waiver of such right. Since the requirements of
Article 299 are mandatory, these cannot be waived by the government. In A.L. Rallia Ram², the
Supreme Court held that even if the contention that the arbitration agreement did not satisfy the
requirements of Article 299 was not raised before the arbitrator, it can be raised in the judicial
proceedings and the doctrine of waiver shall not apply. In a welfare state, the government
undertakes to provide various ser- vices for the benefit of the people. A question may generally
arise regarding the applicability of the Contract Act, 1872 in governing the relationship between
an individual and a public service instrumentality. This question of far-reaching practical
significance came before the Supreme Court in Union of India v. Mohd. Nazim². In this case, an
Indian resident had sent a value payable post (VPP) to an addressee in Pakistan. The Pakistan
gov- ernment, though realised the amount, did not remit it to the Government of India because
it had suspended the VPP service between the two countries. The appellant sued the Union of
India for the amount. The Supreme Court ruled that the Post Office, which had been established
under the Post Office Act, 1898, is not a common carrier or an agent of the sender for postal arti-
cles, It is a branch of public service providing postal service. The Pakistan government for that
matter is not a sub-agent and the money received by it cannot be said to have been received by
the Government of India. Under the arrangement, entered into between two sovereign powers,
none of them could be said to be employed by, or acting under the control of the other. This
settles at least one point of public law of contract.

8. Whether a writ can be issued for the enforcement of contractual Wheth The jurisdiction of the
Sunt of fundamental tits under Article 32 is confined only to enforcement of fundamental rights,
therefore, Are Supreme Court cannot issue writ for the enforcement of a contractual obligation.
The power of the High Court to issue grits under Article 226 obligah wider than that of the
Supreme Court. A High Court can issue writ for the enforcement of fundamental rights and also
for the enforcement of private rights. Normally, a civil suit remedy is available for the
enforcement privattractual obligation, therefore, a High Court will not exercise its writ
jurisdiction in such matters. Nevertheless, in some cases where the State or its instrumentalities
commit a breach of contractual obligations, the High Court may issue a writ.
Cases involving breach of contractual obligation by the State or its authorities and agencies may be
divided into four categories:

(1) Where promissory estoppel applies against the State.

(2) Where breach of a statutory rule or regulation is alleged by the

petitioner.

(3) Where public law element is involved which the party seeks to invoke.

(4) Where breach of a contractual obligation is alleged which arises only out of the
terms of the contract.

In the first three cases, a High Court may exercise its writ jurisdiction. The Supreme Court in Gujarat
State Financial Corpn. v. Lotus Hotels (P) Ltd. held that the writ of mandamus can be issued against
the government or its instrumentalities for the enforcement of contractual obligations because
promissory estoppel applies against the government. In this case, Lotus Hotels had entered into a
contract with the State Financial Corporation for a loan of 30 lakhs for the construction of a hotel.
Based on this agree- ment, the petitioner had incurred certain liabilities. However, acting on two
pseudonymous letters attacking the character of the proprietors, the loan was refused which had
been previously sanctioned. The highest Bench ruled that it is too late in the day to contend that the
government can com- mit breach of a solemn undertaking on which the other side has acted, and
then contend that the party may sue for damages in a civil court and cannot compel specific
performance of the contract through mandamus. 34 In the same manner, the Supreme Court held in
K.N. Guruswamy v. State of Mysores that where a liquor contract has been given in violation of a
statutory provision, the aggrieved party can question the action through a writ petition.

In the fourt the government or is here neither any promissory estoppel applies against the claim is
only a tethere a violation of any statutory rufe and the basis of the claims only a term of a contract,
the court held tule and petitioner cannot invoke the writ jurisdiction under Article held that
chforcement of a pure contractual obligation because the proper 16 for the such cases is a civil suit.
Therefore, in Har Shanker v. Excise and emedy in Commr., when the liquor contractors challenged the
demand made by the department through a writ petition under Article 226, the Supreme Court held
that the writ jurisdiction of the High Court is not intended to facil itate avoidance of obligations
voluntarily incurred. However, the recent trend of cases show that in situations where petitioner
alleges arbitrariness, absence of fair play, and the breach of natural justice, the writ jurisdiction of
the court can be invoked. Thus, in Mahabir Auto Stores v. Indian Oil Corpn.", the Supreme Court
observed that even though the rights of the citizens are in the nature of contractual rights, the
manner, the method, and motive of a decision of entering or not entering into a contract are subject
to judicial review on the touchstone of relevance and reasonableness, fair play, natural justice,
equality and non-discrimination. 38 In this case, the Indian Oil Corporation had abruptly stopped
supply of material, with- out any notice and hearing, to the petitioner firm which was carrying on
business of sale and distribution of lubricants for the last 18 years. In the same manner, normally the
contract of personal service cannot be enforced through writ, but when the statutory bodies act in
breach of mandatory obligation imposed by a statute, the writ can be issued. 39 Keeping in view the
liberalisation and globalisation of the economy, the Supreme Court in Food Corporation of India v.
SEIL Ltd.40 held that contractual disputes involving public law elements are amenable to writ juris-
diction. In this case, supply of sugar was made in terms of a statutory order under Essential
Commodities Act, 1955 and there was no factual dispute also. Thus, court held that writ petition is
maintainable for securing payment arbitrarily withheld. In contrast, the Supreme Court was of the
opinion in Chaman Lal Singhal v. Haryana Urban Development Authority that if allotment is cancelled
and earnest money is forfeited in terms of the contract because the contracting party did not
perform his part under the contract, writ jurisdiction cannot be exercised because no question of
public law is involved.