Government Contractual Liabilities

A Project on the topic Government’s Contractual Liabilities Submitted towards the partial fulfillment of I semester (summer-session) of MBA-MBL Degree for the subject General Principals of Contract Submitted by: Submitted to: Pavan Kumar Gupta Mr.

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Sourabh Bhattacharjee MBA-MBL(1st Semester)2009 Assistant Professor NLU, Jodhpur NLU,Jodhpur Roll no. 262 ACKNOWLEDGEMENT This project work would never have been an achievable task, had we not been under the great shelter of guidance of respected sir Asst.

Prof. Sourabh Bhattacharjee. His simplified teaching technique based on examples has helped me gain more understanding of the subject. The very essence of the project work is the linguistic precision which has an impact of conveying more details in least possible words. An ample use of various reference readings has been very frequently made while compiling data for this project. Such rich reading has been made available at hand by the treasure-like well maintained library of the National Law University, Jodhpur.

I am very much grateful to the library staff of the university for their unfailing co-operation. I am very much under obligation to mention here, the contributions of my batch mates who have, knowingly or unknowingly, provided me the competitive edge which is the driving force of the whole labour and extra labour put into the project. Finally, I feel very much gratified to the administration of the National Law University, Jodhpur for providing comfortable environment and rich infrastructure which has always been a facilitating stuff. List of cases

Name of Case page no. ?Bhikraj v. Union of India, AIR 1962 SC 113…………………………………………. 7 ? A. K. T. K. M. Sankaran Namboodripad v. State of Kerala,AIR 1963 Ker 278………… 7 ? Thawardas Perumal v. Union of India, AIR 1955 SC 468……………………………7 ? N. B. Banerji v. Dy. Commisioner…………………………………………………….. 7 ? Union of India v. A. L. Ralla Ram,AIR 1963 SC 1685………………………………. 7 ? (1997) 2 SCC 279:AIR 1997 SC 1879……………………………………………….. 8 ? THAKUR Dan Singh Bisht v.

State of U. P. ,AIR 1964 ALL 128……………………. 8 ? State of W. B. v. B. K. Mondal, AIR 1962 SC 779……………………………………. 8 ? State of Punjab v. Om Prakash Baldev Krishan, 1988 Supp SCC 722………………. 8 ? State of Bihar v. Karam chand Thapar & Bros. Ltd. ,AIR 1962 SC 110……………… 8 ? New Marine Coal Co. Ltd. v. Union of India, AIR 1964 SC 152……………………. 8 ? Laliteshwar Prasad v. Baleshwar Prasad, AIR 1966 SC 580…………………………8 ? State of W. B. v. B. K. Mondal,AIR 1962 SC779…………………………………….. 8 ? AIR 1964 SC 1714……………………………………………………………………8 ? AIR 1964 SC 152…………………………………………………………………….. ? K. P. Choudhary v. State of M. P. ,AIR 1967 SC 203,206…………………………….. 9 ? Mulamchand v state of M. P. AIR 1968 SC 1218……………………………………. 9 ? AIR 1984 SC 1326………………………………………………………………….. 10 ? Union of India V NK Pvt Ltd. AIR 1972 SC 915…………………………………… 10 ? Khazan Singh V State of UP AIR 1974 SC 669……………………………………. 11 ? RD Shetty v International Airport Authority, AIR 1979 SC 1682…………………. 11 ? LIC of India V Consumer education and Research Centre, AIR 1995 SC 1811……11 ? Delhi Science Forum V Union of India, AIR 1996 SC 1356……………………….. 11 ? State of H.

P. v Ganesh Wood Products, (1995) SCC 363………………………….. 12 ? AIR 1968 SC 718……………………………………………………………………12 ? 1904 ILR 29 Bom 480 (1921) 3 KB 500s…………………………………………. 13 ? (1949) 1 KB 227……………………………………………………………………. 14 ? 1934 AC 176…………………………………………………………………….. 14 ? Union of India v Indo Afgan Agencies, AIR 1968 SC 718……………………… 14 ? 1 Term Rep 172…………………………………………………………………. 15 ? Tata Cellular v. Union of India, AIR 1996 SC 11………………………………. 15 List of Statutes ?Constitution of India •Article 299,298 ?The constitution(seventh amendment) Act,1956,S. 29. Section 29 ?Government of India Act, 1935, •section 175 (3) ?Indian contract Act,1978 •section 70 •section65 ?irrigation Act ?Punjab excise Act,1914 •Sections 59 and 60 ?Punjab liquor licence rules,1956 ?Import control order Act, 1955 Index S. no. Particulars Page no. 1Acknowledgement 1-1 2List of cases 2-3 3List of statutes4-4 4Chapter-1 Introduction 5-5 5Chapter-2 Government contracts6-11 6Chapter-3 Fairness in Government contracts 11-12 7Chapter-4 Article 299 and Equitable Estoppel12-14 8Chapter-5 Executive Necessity 14-15 Chapter-6 No Personal Liability15-15 10Chapter-7 Judicial review of contracts15-16 11Chapter-8 Conclusion16-16 12Chapter-9 Bibliography17-17 1. Introduction In any democratic country where Government assumes the role of a ‘Welfare and Service State’, the question of Government liability evokes a serious response. On the one hand the concept of an intensive form of government requires active participation of the state in Welfare and service but on the other, the concept of governmental liability may have a chilling effect on such participation.

Therefore, a very delicate balance has to be drawn. Article 299-Contracts (1)All contracts made 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 such assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor 1[***] by such persons and in such manner as he may direct or authorize. 2)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 to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof. 2. Government contracts The preceding article admits the power of the Union and of each of the States to enter in to contracts for any purpose.

This article lays down how Government contracts, including assurance of property, are to be made with the Government-Union or State-must satisfy three requirements: i. The contract must be executed by a person authorized by the President or Governor, as the case may be; ii. The contract must be executed by such person on behalf of the President or Governor, as the case may be; and iii. The contract must be expressed to be made by the President or the Governor, as the case may be.

The provisions of article 299 are mandatory and their non-compliance would render a contract void. It follows that no suit against the Government-Union or State-can be brought if the requirements laid down in this article are not complied with. Equally, the contract will not be enforceable by the Governments. Whether Article 299 has been compiled with is not a pure question of law but a question depending on investigation of facts. Article 299 does not reply to agreements which are not contracts within that article.

But it has been held that so long as all the requirements of section 175(3) of the Governments of India Act, 1935 (i. e. , Article 299 of the constitution) were fulfilled and were clear from the correspondence, Section 175(3) did not necessarily require the execution of any formal document. In Beharilal v. Bhumi Devi, the supreme court held that though the contract was not executed strictly in conformity with Article 299(1) but was in conformity with the rules approved by the Rajpramukh. Therefore, it was not void because in substance it was on behalf of the Governor.

The words “assurance of property” in clause (1) of Article 299 means any document of conveyance or the legal evidence of transfer of property. The reason for enacting Article 299 of the Constitution of India is that in order to bind a Government, there should be a specific procedure enabling the agents of the Government to make contracts. The public funds cannot be placed in jeopardy by contracts made by unspecified public servants without express sanction of the law. It is a provision made to save the State from spurious claims made on the strength of authorized contracts.

Article 299(1) is based on public policy. In case the executive engineer has signed the contract but nowhere in the contract it was offered and accepted or expressed to be made in the name of the Governor, it was held that it was not a valid and binding contract. Article 299 does not prescribe any particular mode in which authority must be conferred on a person to execute a contract. Normally, such conferment will be by notification in the Official Gazette but it can also be conferred ad hoc on any person.

Where a contract enter into with the government is void by reason of its non-compliance with the provisions of Article 299(1) of the constitution of India, but goods have been delivered by the contractor to the Government in pursuance of such a contract then an obligation is imposed upon the Government, under Section 70 of the Contract Act, to make compensation to the person delivering the goods , provided the conditions imposed under Section 70 are satisfied, namely, the promise must have acted lawfully and must not have acted gratuitously .

The contractor is also entitled to be restored back any advantage received by the Government as provided under Section 65 of the Contract Act, and if any amounts are paid to the contractor by the Government under such a contract, the contractor is, unless the amounts are specially paid towards particular items comprising such contracts entitled to approach such amounts so paid to his advantage. In Karamshi v.

State of Bombay , the appellant firm entered in to contract with the minister of the Public Works Department, where under the appellant was entitled to irrigate his land holdings. Subsequently the canal officer, under instructions of the Government repudiatates the agreements and their main defense was that all contracts must be expressed in the name of the Governor who represents the State. A Minister or for that matter anyone, could not contract to bind the state unless authorized under Article 299.

The appellant on the other hand, pleaded for specific performance of the contract which compiled with the provisions of the Irrigation Act. Alternatively, it claimed damages for the breach. Subba rao, J. was emphatic in dismissing the appeal solely upon the preliminary ground of non-compliance of the mandatory constitutional requirements of Section 175(3) of the Government of India Act, 1935 corresponding to Article 299 of the present constitution. In new marine coal company v.

Union of India , a contract entered in to by the appellant with the Government of India for the supply of coal to the railway administration was found to have been made in contravention of section 175(3), therefore void or unenforceable between the parties. But since the appellant had performed his part and the Government of India had received the benefit of the performance of the contract by the appellant, section 70, Contract act was applied and the Government of India was held bound to make compensation.

In view of Article 299(1) there can be no implied contract between the Government and another person, the reason being that if such implied contracts between the Government and another person were allowed they would in effect make Article 299(1) useless, for then a person who had a contract with the Government which was not executed at all in the manner provided in Article 299(1) could get away by saying that an implied contract may be inferred on the facts and circumstances of the particular case.

This is, of course, not to say that if there is a valid contract as envisaged by Article 299(1), there may not be implications arising out of such a contract. The provisions of Article 299(1) are mandatory in character and the contravention of these provisions nullify the contracts and makes them void. There is no question of estoppels or ratification in such a case. The reason is that Article 299(1) has not been enacted for the sake of mere form but has been enacted for safeguarding the Government against unauthorized contracts.

If the plea regarding estoppels or ratification is admitted, that would mean in effect the repeal of an important constitutional provision intended for the protection of the general public. In State OF Haryana v. Lal Chand , the Supreme Court held that “there is a distinction between contracts which are executed in exercise of the executive powers and contracts which are statutory in nature”. Article 299(1) applies to a contract made in the exercise of the executive power of the Union and the State.

Such a contract becomes nullified and becomes void if the contract is not executed in conformity with the provisions of Article 299(1) and there is no question of estoppels or ratification in such cases. Nor can there be an implied contract between the Government and another person. But Article 299(1) has no application to a case where a particular statutory authority as distinguished from the Union or the States enters in to a contract which is statutory in nature. This case related to the Punjab Excise Act 1914, Sections 59 and 60 and Punjab Liquor License Rules,1956. The court held that the grant of exclusive privilege of liquor vend by auction-sale in exercise of statutory powers give rise to a contract of statutory nature, distinct from that excluded under Article 299(1) and therefore compliance with Article 299(1) is not required in such cases.

Where the tender notice issued by the Ministry of Railways in the Government of India in respect of sale of surplus released serviceable and scrap rails invited offer to be addressed to the President of India through the Director of Railway Stores, Railway Board and in the general conditions the seller was defined to be the President of India acting through the Director of Railway stores, and in the default clause it was provided that where the buyers fails to execute the contract, the seller has power under the hand of the Director of Railways Stores, to declare the contract at an end the draft contract showed that the contract was to be executed by the President of India acting through the Director of Railway Stores as the seller, it was held that there is little doubt that the only person authorized to enter in to contract on behalf of the President is the Director of Railway Stores There is nothing in Article 298 to show that the trade or business carried on by a state must be restricted to the areas within its territorial limits. On the contrary, the Article envisages the carrying on of the trade and business by a state without any territorial limitations. The only restrictions on the executive power of the State in this respect is contained in clause (b) of the proviso to that Article. According to that clause, the executive power of the State shall, insofar as such trade or business is not one with respect to which the State legislature may make laws, be subject to legislation by Parliament 3. Fairness in Government Contracts

Although ordinarily, subject to the applicable law of contract the Government as a contracting party must stand in the same position as any other party to a contract, through a series of cases it has been established that even as contractor the Government must comply with certain requirements of public law such as the rule of law and fundamental rights, particularly right to be non-government contracting parties . It is being emphasized time and again that government bodies or statutory authorities even when acting within the range of private law area such as contract must observe the propriety of fairness in consonance with the Preamble of the Constitution, fundamental rights and the directive principles of State policy .

The issue of fairness are acquiring special attention in view of liberalization and privatization of economy in which the state is getting more and more work done through contractors rather than doing it departmentally. On the one hand the courts have approved the constitutionality of such policy , which means acknowledgement of the fact that the government is one of the parties to the contract and has the liberty which a party to the contract has in entering in to contracts. On the other hand the government represents the people and their interests. Therefore, it is expected to act on their behalf and in their interest even in matters of contract. In this respect its position is different from any other party to a contract.

Its actions, even in matters of contracts, have, therefore, to be justified by standards which may not apply to private contracting parties. These standards may not be and are not be and are not exactly the same as applicable to State action when the State is acting in its capacity other than a contracting party. But some minimum standards have to be observed so that the government does not deviate from the path of acting in the public interest. Thus, admitting time and again, that the government must have necessary flexibility in the matter of contracts so that it may get its work done efficiently and expeditiously, the courts have held that the government must also observe certain minimum standards of public behavior.

They have repeatedly held that though normally they will be reluctant to intervene in the exercise of contractual power by the government, they will not hesitate to intervene if such exercise is unreasonable or arbitrary, actuated by mala fides, affected by bias or is in disregard of the prescribed mandatory procedures. The courts will not readily entertain such allegations against the government, but if they can be proved, they will act in the interest of justice 4. Article 299 and Equitable Estoppel – It is open to a party which has acted on a representation made by the Government shall be bound to carry out the promise made by it even though promise is not recorded in the form of a contract as required by Article 299 of the constitution.

For the application of this principal, it is necessary to establish that there has been a promise or representation on the part of the Government relying on which the citizen has acted to his detriment. Thus in Union of India v. Indo-Afgan agencies , the central Government under the control of Export Control Scheme made under the Import Control Order Act,1955, declared that import licenses would be granted for materials up to 100% of the f. o. b. value of the goods exported. The petitioner had acted on the representation and made export of good of certain value. The Government did not grant the import certificate for the full value of the goods exported.

On a writ petition by the importer, Indo-Afgan agencies, it was contended on behalf of the Union of India, inter alia, that there being no formal contract as contemplated under article 299, the Government could not be compelled to fulfill its eerier declaration. Rejecting the contention of the Government, the court held that the petitioners were not seeking to enforce any contractual right. There claim was founded on the equity which arises in the favour as a result of a representation made on behalf of the Union of India in the Export Promotion Scheme, and the action taken by the respondents acting upon that representation under the belief that the Government would carry out the representation made by it. The court cited with approval the decision of the Bombay High court in the city of Bombay v. secretary of state .

In that case answer to a requisition of the Bombay, addressed to the municipal commissioner, to remove certain fish and vegetable markets to facilitate the construction of an arterial road, the municipal commissioner offered to remove the structures if the Government would agree to rent the municipality other land mentioned in his letter at a nominal rent. The Government accepted to the proposal and sanctioned the application for a Site for establishing the new markets. The municipal commissioner then took possession of the land so made available and constructed stables, workshops, etc.. twenty-four years thereafter, the Government of Bombay served t notice on the municipal commissioner terminating the tenancy and requesting the commissioner to deliver possession of the land occupied by the markets and to pay in the meantime rent at the rate of Rs. 12,000 per annum.

The municipality contested the claim of the Government on the plea that the events which had transpired had created an equity in favour of the municipality and accordingly they could not be ejected. The court accepted the plea of the municipality since an equity was created in favour of the municipality and held that in equity the Government could not enforce any claim against it. Jenkin, C. J. delivering the judgment of the court, said: “the doctrine involved in this phase of the case is often treated as one of Estoppels, but I doubt whether it is correct, though it may be a convenient name to apply…. the doctrine with which I am now dealing takes its origin from the jurisdiction assumed by the courts of equity to intervene in the case of or to prevent fraud. ” 5. Executive Necessity

It has been claimed that in England the Crown cannot bind itself so as to fetter its future executive action, and therefore, the Government may refuse to carry out the contract made by it if the altered circumstances necessitated such action. The justification is the executive necessity. The well known case relied in support that the Crown cannot fetter its future action is of Rederiak-tiebolaget Amphitrite v. King . In that case , during the First World-War, certain neutral ship-owners obtained an undertaking from the British Government that if the ship-owners sent a particular ship to the united Kingdom with a specific cargo, she shall not be detained. On the face of that undertaking, the owners sent the ship to a British port with that specific cargo. The British Government withdrew their undertaking and refused her clearance.

In action for damages for breach of contract, it was held that the Government’s undertaking was not enforceable in a court of law, it not being within the competence of the Crown to make a contract which would have the effect of limiting its power of executive action in the future. The doctrine has been subsequently doubted in Robertson v. Minister of pensions and Reilly v. King . The doctrine of executive necessity has no application in India. The supreme court has said: “we are unable to accede to the contention that the executive necessity releases the Government from honoring its solemn promises relying on which citizen have acted to their detriment . ” 6. No personal liability

Though Government contracts are made in the name of the President and in the States in the name of the Governor, these persons are not personally answerable in respect of any contract. Similarly the officers who contract on the behalf of the Government are not personally liable since they are acting for the Government and not for themselves. The same law is in the England. In Macbeath v. haldimand which arose out of supplies of stores for a fort under the control under the Government of Quebec, it was held that public officers can not be sued, either personally or in their official capacity, for contracts made by them in their official capacity. 7. Judicial review of contracts

While exercising the power of judicial review, in respect of contracts entered into on behalf of the state,the court is concerned primarily as to whether there has been any infirmity in the “decision making process. ” By way of judicial review Court can not examine the details of the terms of the contract which have been entered in to by the public bodies or the state. Court have inherent limitation on the scope of any such enquiry. But at the same time the Courts can certainly examine whether “decision making process” aws reasonable,rational, not arbitrary and violative of art: 14 of the Constitution. In Sterling Computers Ltd. v. M/s. M & N Publications Ltd. nd Others, the Supreme Court held that the supplemental aggrement was really a fresh agreement with fresh terms and conditions which has been entered by MTNL without inviting any tender for the same. The supplemental agreement had been entered to benefit the parties who were admittedly defaulters. Once the process through which the supplemental agreement was executed was held to be against the mandate of Article 14 of the constitution, the supplemental agreement shall be deemed to be void. 8. Conclusion If any Person has been wronged or made to suffer any loss there may be two courses open to him. He may either proceed against the officer concerned or hem ay sue the government on whose behalf the officer was acting.

Early common law firmly recognised the principles of liability of the officer concerned because they were treated nothing more than as ordinary citizens. With the growth of governmental powers, the shift has been from the ‘officer’s liability’ to ‘State liability’, on whose behalf he acts. The main reason for such a shift could be the apprehension that the concept of ‘officers liability’ may dampen the independence and initiative of the officers. However recent trend indicates a judicious mix of both these concepts. 9. Bibleography 1. Mahendra P. Singh ,V. N. Shukla’s Constitution of India, tenth edition, EBC publishing (P) ltd. Lucknow,2002,(pp. 730-736) 2. I.

P Massey, Administrative Law, seventh Edition, EBC Lucknow,2008, (pp. 460-472) 3. S. R. Bhansali, The Constitution of India (India Publishing House, Jodhpur, First Edition 2007, Vol II, (pp. 1130-1134) 4. P. M Bakshi. , “The Constitution of India”,Ninth Edition,2009, Universal Law Publishing Co. Pvt. Ltd. , Delhi,(pp243) 5. J. Beatson Ed. ,Anson Law of Contract, Oxford University Press,2003 6. Mulla and Pollock, Law of Contracts (Lexis Nexis Butterworth, New Delhi,2001, Vol II 7. Negative Covenants And Agreement In Restraint Of Trade-an Insight Into Indian Laws, http://articles. manupatra. com/PopOpenArticle. aspx? ID=264fdfb0-bb02-416b-9eed-4ca76ca1ee46=CONTRACT,last accessed on 3sept,2009 8. Indian