Liability of State in Contract and in

Torts

Dr. Mohd. Imran

Assistant Professor
School of Law and Constitutional Studies,
Shobhit Institute of Engineering and Technology
(A Deemed to be University), Meerut
 Liability of State in Contract and in Torts – Bare
Provisions
 Article 298 provides that the executive power of the Union and of each State shall
extend to the carrying on of any trade or business and to the acquisition holding and
disposal property and the making of contracts for any purpose.
 Article 299 (I) lays down the manner of formulation of such contract. Article 299
provides that all contracts in the exercise of the executive power of the union or of a
State shall be expressed to be made by the President or by the Governor of the State,
as the case may be, and all such contracts and all assurances of property made in the
exercise of that power shall be executed on behalf of the President or the Governor by
such persons and in such manner as he may direct or authorize.
 Article 299 (2) makes it clear that neither the President nor the Governor Shall be
personally liable in respect of any contract or assurance made or executed for the
purposes of this Constitution or for the purposes of any enactment relating or
executing any such contract or assurance on behalf of any of them be personally liable
in respect thereof. Subject to the provisions of Article 299 (1), the other provisions of
the general law of contract apply even to the Government contract.
A contract with the Government of the Union or State will be valid
and binding only if the following conditions are followed:
1. The contract with the Government will not be binding if it is not
expressed to be made in the name of the President or the
Governor, as the case may be.
2. The contract must be executed on behalf of the President or the
Governor of the State as the case may be. The word executed
indicates that a contract with the Government will be valid only
when it is in writing.
3. A person duly authorized by the President or the Governor of the
State, as the case may be, must execute the contract.
The above provisions of Article 299 are mandatory and the contract
made in contravention thereof is void and unenforceable.
 Quasi-Contractual Liability
According to section 70 of ICA 1872:
where a person lawfully does anything for another person or delivers anything to him
such other person enjoys the benefit thereof, the latter is bound to make compensation
to the former in respect of or to restore, the thing so done or delivered. If the
requirements of Section 70 of the Indian Contract act are fulfilled, even the Government
will be liable to pay compensation for the work actually done or services rendered by
the State.

Section 65 of the Indian Contract Act, 1872:

If the agreement with the Government is void as the requirement of Article 299 (1) have
not been complied, the party receiving the advantage under such agreement is bound
to restore it or to make compensation for it to the person form whom he has received it.
Thus if a contractor enters into agreement with the Government for the construction of
go down and received payment therefore and
the agreement is found to be void as the requirements of Article 299 (1) have not been
complied with, the Government can recover the amount advanced to the contractor
under Section 65 of the Indian Contract act.
 Liability of Administration in Tort

 To what extent the administration would be liable for the torts

committed by its servants is a complex problem
 The liability of the government and administration in tort is
governed by the principles of public law inherited from British
Common Law and the Provisions of the Constitution.
 The whole idea of vicarious liability of the state for the torts
committed by its servants is based on 3 principles.
• Respondeat Superior (Let the principal be liable).
• Qui-Facit per Alium Facit per se (He who acts through
another does it himself).
• Socialization of Compensation.
 RELATED CASE LAWS

The first judicial interpretation of State Liability during the East India
Company was made in -
John Stauart’s case, 1775. - It was held for the first time that
Governor-General in Council had no
immunity from Court’s jurisdiction in cases involving the dismissal of
Government Servants. In Moodaly v. The East India Company
1775 (1 Bro-CC 469), the Privy Council expressed the opinion that
Common law doctrine of sovereign immunity was not applicable to India.

Some judgments during British Rule India, do tell us, how the law of
administrative tortious liability
evolved in Indian conditions.
 Other Case Laws
• P.and O.Steam Navigation Co.v.Secy.Of State for India [(1861) 5 Bom HC Report, Appendix ‘A’]
• State of Rajasthan v.Vidyawati (Mst.) [AIR 1962 SC 933]
• State of India-in-Council v. HariBhanji. [(1882) ILR 5 Mad 273].
• State of Rajasthan v.Vidyawati (Mst.) [AIR 1962 SC 933]
• Kasturi Lal v. State of U.P. [AIR 1965 SC 1039]
• Khatri (II) v. State of Bihar [AIR 1981 SC 928]
• Rudul Shah v.State of Bihar, [AIR 1983 SC 1086],
• Nilabati Behra v.State of Orissa [AIR 1993 SC 1960]
• Bhim Singh v.State of J.K.[1985 4 SCC 677],
• Mahavir Singh v.State of Rajasthan [1987 2 SCC 342]
• SAHELI,AWomen’sResource Centre v.Commr.Of Police [1990 1 SCC 422]
• N.Nagendra Rao& Co.v.State of A.P.[1994 6 SCC 205],
• Lucknow Development Authority v.M.K.Gupta[1994 1 SCC 243]
• Chairman Railway Board v.ChandrimaDas [2000 2 SCC 465]
• For Details of the case laws,
please refer the supplementary
notes
FREEDOM OF TRADE, COMMERCE AND
INTERCOURSE
 Introduction
 Part XIII of the Indian Constitution deals with the trade, commerce
and intercourse with in the territory of India
 Trade, commerce and intercourse can be of domestic and
international nature.
 The provisions relating to trade, commerce and intercourse in the
Indian Constitution relates to the Domestic trade and commerce
alone which is restricted to the territory of India.
 Domestic trade and commerce hence includes :
1. Intra – state
2. Inter - state
 Aim of any federal structure is to minimize the inter-state
barriers so that people may feel they are residents of any
units of the Union.
 All states are not self- sufficient. Some may be depending
solely upon agriculture or industry.
 Some states may have the raw materials and hence they
may enter into transactions with other states which have
cheap labour, better energy resources ad facilities.
 In cases like this some states due to their narrow and
parochial view may impose restrictions through legislations.
Due to this there is a trade barrier.
Such legislations hamper the national economy also.

 Constitution framers also desired to promote free, flow of

trade and commerce in India. This desire could be found
from the following :

• Guaranteeing to any citizen the freedom of movement

and residence throughout the country
[Art. 19 (1) (d) & (e)]

• Guaranteeing to all citizens the right to practice any

profession/ carry on any occupation or trade
[Art. 19(1) (g)]
 Trade, Commerce & Intercourse
The main provisions relating to the trade and commerce is
dealt from Arts 301- 307

According to these provisions:

 Trade : buying or selling of goods

 Commerce: all forms of transportation of those goods

 Intercourse: movement of goods from one place to

another Art. 301 – Subject to the other provisions of this
Part, trade, commerce and intercourse throughout the
territory of India shall be free
Atiabari Tea Co v. State of Assam AIR 1961 SC 232
 The company carried on the business of growing of tea, and
sending it to Calcutta via Assam.

 The legislature of Assam passed a law, the Assam Taxation Act,

1954, which provided for the

 imposition of a tax on goods carried by road or inland waterways

in the State of Assam
 The Supreme Court held that the tax imposed on the goods
directly restricted their transport or movement in an
unreasonable manner, hence the motive behind the legislation
was found to be faulty.

 Hence it was held that the legislation was void as it was against
the purpose of the Art. 301
 Atiabari Tea Co v. State of Assam AIR 1961 SC 232

 Gajendragadkar J, explained the kind of restriction from which the

freedom is given under Art. 301 adopting the Direct & Immediate
Test.

 Restrictions in the sense those which are directly and immediately

restricting or impeding the free flow of trade / movement

 Indirect and remote restrictions are possible for application like

traffic regulations, licensing of vehicles, prescribing minimum
wages of the employees etc.
 Automobile Transport Ltd. v St. of Rajasthan AIR 1962 SC 1406
• By virtue of Sec 4 of Rajasthan Motor Vehicles Taxation Act, 1951,
no one could use or keep for use a motor vehicle in Rajasthan
without paying an appropriate tax for it and anyone failing shall be
made liable to the penalties imposed under Sec. 11 of the Act.
• The Supreme Court held that the Tax is compensatory in nature
hence did not violate Art. 301.
• Das J, speaking for the majority said that they accept the Direct and
Immediate Test and said that regulatory measures or compensatory
taxes for the use of trade will not / do not come within the purview
of restrictions in Art. 301.
• Art. 301 is best possible in an orderly society. The other provisions
mentioned in the Part XIII must considered as a means to that order
mentioned in Art. 301.
• Justice Das, laid down certain tests for adjudicating the validity of a
law on the grounds of Art. 301:
1. A measure which operates on trade,
commerce and intercourse indirectly and
remotely is not violative of Art. 301 (Contd………)
2. A measure which operates which directly and immediately is violative
of Art. 301.
3. A measure which operates which directly and immediately may not
be violative of Art. 301 provided if it is,
A) a Regulatory measure B) a Compensatory measure
• So now we have to determine when a tax will become Compensatory
in nature:
• 1. Whether the traders were having the use of facilities for better
conduct of their business?
• 2. Whether they are paying through the penalty a huge amount
more than what will be for providing the facilities?
• 3. Re-compensate Theory or the Wear and Tear Theory was
accepted by the court. Here the court accepted the argument
that the taxes could be levied for the purpose of maintaining the
roads which are used by the public.
The limitations imposed upon the above freedom by the other
provisions of Part XIII are:

1.Art. 302 – Non- discriminatory restrictions may be imposed by

Parliament in public interest

2.Art. 303 (1) – Neither Parliament nor the State legislature shall
have power to make any law

giving or authorizing the giving of any preference to one State

over another or making or authorizing the making of any

discrimination between one State and another.

 Art. 301 was inspired by the Sec. 92 of the Australian Constitution
regarding the free trade,
commerce and intercourse

1. Art. 301 also keeps certain reservations by using the terms ‘Subject
to the other provisions of this Part’to the free trade, commerce and
intercourse. These reservations were borrowed from the American
Constitution.

2. Hence Part XIII is an amalgamation of two constitutions. This

amalgamation brings out the difference between regulatory and

taxing powers. This is how the concept of ‘Payment for revenue’

and ’Payment for Regulation’ arose.

(Contd…….)
3 Art. 303 (2): Discriminatory/ preferential provisions may be
made by Parliament for the purpose of dealing with a scarcity
of goods arising in any part of India.

4 Art. 30 4(a): Non- discriminatory taxes may be imposed by a

state on goods imposed from other States / UTs similarly as on
intra- state goods.

5 Art. 304 (b): Reasonable restrictions may be imposed by a

State ‘in the public interest’
Art. 304 (b) 3 conditions need to be satisfied in passing an Act
1. Previous sanction of the President must be obtained
2. The legislation must be in the public interest
3. It must impose restrictions which are reasonable. Khyerbari Tea
Co. v. St. of Assam AIR 1964 SC 925

Difference between he two decisions was noted regarding the use of

Art. 304 (b)
1. Atiabari Tea Co. Case
• Tax imposed under Art. 304 (b) – validity if is impeached- state
can plea for public interest, Reasonable Restriction,
Compensatory Taxes etc.
2. Automobiles Transport Case:
• Compensatory taxes do not fall under Art 301 hence application
of Art. 304 need not be inserted
State of Bombay v. RMDChamarbaughwala AIR 1957 SC 699

 Supreme Court held that gambling not trade but res extra
commericium

 Bombay Lottery and Prize competition Control & Tax (Amendment)

Act, 1952 was impugned.

 The Act was challenged on the ground that it put restrictions on

prize competitions, and thus violate of Art. 19 (1) (g) & 301

 The Court held that prize competitions being of gambling nature

they could not be regarded as trade or commerce hence it is not
protected under Art. 19 (1) (g) or 301
 The RMDC case is applied and followed in case of state run
lotteries.

B.R. Enterprizes v State of UP AIR 1999 SC 1867

 State run lotteries are no different from private run lotteries-
gambling nature
 Assignment:
What do you mean by freedom of trade commerce and intercourse?

Compare this freedom with other federal countries. Also discuss

the restrictions on freedom of trade under a state law? Is the

restriction of freedom of trade, commerce and intercourse prevailed

in the present scenario duo to COVID -19 is reasonable? Give your

opinion?