Government , as a contracting party & its liability
📜 Government as a Contracting Party and Its Liability
✅ 1. Introduction
In India, the Government (both Central and State) frequently enters into contracts for public works, procurement, services, and development projects. These contracts are legally enforceable like those between private parties but are governed by constitutional provisions as well as the Indian Contract Act, 1872.
However, special rules apply when the government is a contracting party, especially concerning:
Authority to contract
Formalities under Article 299 of the Constitution
Public interest considerations
Liability for breach or damages
📌 2. Constitutional Framework – Article 299 of the Constitution
Article 299 lays down the procedural requirements for a valid government contract:
✅ A valid government contract must:
Be expressed to be made by the President or Governor, as the case may be.
Be executed on behalf of the President or Governor by a person authorized by them.
Comply with all prescribed formalities.
📌 3. Consequences of Non-compliance with Article 299
A contract that does not comply with Article 299 is void and unenforceable, even if fully performed.
However, the government may still be liable under Section 70 of the Indian Contract Act (Quasi-contractual liability) for benefits received.
✅ 4. Liability of the Government under Contract Law
The Government, like a private person, can be held liable for:
Breach of contract
Delay or failure to perform
Improper termination
Violation of statutory procedures
However, sovereign immunity is not available in commercial contracts.
⚖️ 5. Important Case Laws
🧑⚖️ (1) Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram (1954) SCR 817
Facts:
The government entered into a contract without complying with the formalities of Article 299.
Held:
The Supreme Court held that non-compliance with Article 299(1) renders a contract void, regardless of whether it was acted upon.
Significance:
Reaffirmed strict compliance with Article 299 as mandatory.
Clarified that estoppel does not apply against the government in such cases.
🧑⚖️ (2) State of Bihar v. Karam Chand Thapar & Bros Ltd. (AIR 1962 SC 110)
Facts:
The Bihar Government entered into an oral agreement without written formalities as required.
Held:
The Supreme Court held the contract unenforceable due to lack of compliance with Article 299.
Significance:
Oral contracts with the government are invalid, even if performed.
Reinforced the importance of written and properly authorized contracts.
🧑⚖️ (3) Bhikraj Jaipuria v. Union of India (AIR 1962 SC 113)
Facts:
The Government of India accepted delivery of goods under an invalid contract.
Held:
Though the contract was void, the court held the Government liable under Section 70 of the Indian Contract Act, which deals with quasi-contractual obligations.
Significance:
Introduced the idea that the government may still be liable to compensate for benefits wrongfully obtained, even without a valid contract.
🧑⚖️ (4) Mulamchand v. State of Madhya Pradesh (AIR 1968 SC 1218)
Facts:
The appellant sought enforcement of a contract with the State that did not meet Article 299 requirements.
Held:
The contract was void, and the State could not be sued even though performance had begun.
Significance:
Clearly stated that even partial performance does not validate an improperly executed government contract.
No estoppel or equity against the state in such matters.
🧑⚖️ (5) K.P. Chowdhary v. State of Madhya Pradesh (AIR 1967 SC 203)
Facts:
An individual carried out work for the government based on informal arrangements.
Held:
The court ruled that there was no valid contract under Article 299(1), but compensation could be claimed under Section 70 if benefit was received.
Significance:
Government may be liable on quasi-contractual grounds, even when formal contract is void.
🧑⚖️ (6) R.D. Shetty v. International Airport Authority of India (AIR 1979 SC 1628)
Facts:
The government arbitrarily denied a contract despite the petitioner meeting all criteria.
Held:
The Court ruled that arbitrariness in awarding contracts violates Article 14 of the Constitution.
Significance:
Government cannot act arbitrarily in contracting.
Introduced the idea that constitutional norms apply even in contractual matters.
🧑⚖️ (7) Tata Cellular v. Union of India (1994) 6 SCC 651
Facts:
Concerned award of telecom licenses by the government.
Held:
The Supreme Court held that government contracts are subject to judicial review if decisions are arbitrary, mala fide, or unreasonable.
Significance:
Reinforced transparency and fairness in government contracts.
Wednesbury unreasonableness test applies to administrative decisions in contract matters.
📊 6. Summary Table of Key Principles
| Principle | Case | Legal Effect |
|---|---|---|
| Strict compliance with Article 299 | Chatturbhuj Vithaldas, Mulamchand | Void if not complied |
| No oral contracts | Karam Chand Thapar | Oral contracts are unenforceable |
| Quasi-contractual liability | Bhikraj Jaipuria, K.P. Chowdhary | Compensation under Section 70 of ICA |
| No estoppel against invalid contract | Mulamchand | State not bound by defective contracts |
| Constitutional fairness | R.D. Shetty, Tata Cellular | Contracts must be fair and non-arbitrary |
✅ 7. Conclusion
While the government enjoys certain privileges in contracting, it is not above the law. Its contractual conduct is governed by:
Constitutional requirements (Article 299)
Statutory principles (Indian Contract Act)
Judicial scrutiny, especially for fairness and non-arbitrariness
The courts have consistently held that strict procedural compliance is mandatory, but they have also evolved doctrines like quasi-contracts and judicial review to ensure the government is held accountable for unjust enrichment or abuse of power.
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