Government liability in commercial undertakings
✅ Government Liability in Commercial Undertakings
I. Introduction
Traditionally, the government was immune from liability in certain actions under the doctrine of sovereign immunity. However, with the modern welfare state, the government now engages in commercial and business activities — running industries, manufacturing, trading, transport, etc.
In such situations, the question arises:
Can the government be held liable for acts done in the course of commercial undertakings, just like a private entity?
The courts in India have held that:
In commercial activities, the government has no special immunity.
The government is liable in tort and contract, just like any private party, when acting in a commercial or non-sovereign capacity.
II. Nature of Government Functions
| Type of Function | Examples | Liability |
|---|---|---|
| Sovereign | Police, military, taxation | Immune (in most cases) |
| Non-sovereign / Commercial | Running a business, factories, railways | Liable like private parties |
III. Legal Basis of Government Liability
Article 300 of the Indian Constitution – Provides that the Union or a State can sue or be sued in the name of the Union of India or State.
Tort Law – Government is liable for tortious acts in non-sovereign functions.
Contract Law – Under Indian Contract Act, 1872, the government is liable for breach of contract in commercial engagements.
Case Law – Judicial interpretations have evolved the doctrine in India.
✅ Key Case Laws Explained in Detail
1. P & O Steam Navigation Company v. Secretary of State (1861)
(Privy Council – Landmark Pre-Constitution Case)
Facts:
An employee of the government (acting negligently) caused injury to the plaintiff’s horse and carriage. The plaintiff sued the government for damages.
Held:
The Court distinguished between sovereign and non-sovereign functions:
Sovereign functions = No liability
Non-sovereign/commercial functions = Government can be sued like a private party.
Since the act was done in connection with commercial transport, the government was liable.
Significance:
First case to introduce the doctrine of sovereign immunity vs. commercial liability in India.
2. State of Rajasthan v. Mst. Vidyawati (1962 AIR 933, SCR Supl. (1) 989)
Facts:
A government jeep, driven negligently by a government employee (driver of a collector), killed a pedestrian. The widow sued the State of Rajasthan.
Held:
The Supreme Court held that the act of the driver was in connection with a non-sovereign (ordinary) function and hence, the government was vicariously liable for the wrongful act.
Significance:
Sovereign immunity does not apply to ordinary or commercial activities.
This was a post-Constitutional affirmation that government is liable in non-sovereign functions.
3. Kasturi Lal v. State of Uttar Pradesh (1965 AIR 1039, SCR (1) 375)
Facts:
The plaintiff was arrested by police, and his gold (lawfully held) was seized and kept in police custody. The police negligently allowed it to be stolen. He sued the government for compensation.
Held:
The Supreme Court ruled that since the act was done in the course of a sovereign function (police action), the State was not liable.
Significance:
Reinforced the sovereign immunity doctrine for police and law enforcement.
Criticized later for being outdated in light of a welfare and commercial state.
4. Union of India v. Satyavati (1977 AIR 1749, SCR (3) 179)
Facts:
A motor vehicle owned by the government and driven by a government servant (off duty) killed a person due to rash driving. The widow claimed damages.
Held:
The Court ruled that the government vehicle was not being used for sovereign purpose, and hence, the government was liable.
Significance:
Recognized that when government vehicles or services are used for non-sovereign purposes, the State must bear liability like any other employer.
5. Nagendra Rao & Co. v. State of Andhra Pradesh (1994 AIR 2663, SCC (6) 205)
Facts:
Goods of the petitioner were seized by the State and later got destroyed due to negligence. The petitioner sued for compensation.
Held:
The Supreme Court ruled that:
"In a welfare state, the distinction between sovereign and non-sovereign functions has no relevance where the State engages in commercial or non-governmental activity."
Significance:
Marked a shift away from rigid sovereign immunity.
Asserted that the State is liable for negligence in commercial or administrative functions.
✅ Summary Table
| Case | Function Involved | Held | Significance |
|---|---|---|---|
| P & O Steam Navigation (1861) | Commercial (transport) | Government liable | Introduced sovereign vs non-sovereign distinction |
| Vidyawati (1962) | Non-sovereign (jeep driver) | Government liable | Affirmed liability in routine activities |
| Kasturi Lal (1965) | Sovereign (police action) | Government not liable | Upheld sovereign immunity |
| Satyavati (1977) | Use of govt vehicle (non-official) | Government liable | Expanded liability in personal injury |
| Nagendra Rao (1994) | Seizure of goods (admin negligence) | Government liable | Criticized sovereign immunity, pushed for accountability |
✅ Conclusion
Government is fully liable for tortious or contractual acts done in the course of commercial or non-sovereign functions.
Immunity exists only in core sovereign functions (e.g., defense, law enforcement, foreign affairs).
Courts have increasingly limited the scope of sovereign immunity to protect citizens and ensure fairness.
The modern trend is toward greater accountability of the State in all its dealings, especially commercial undertakings.
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