Contractual Liability of the State

Why the form is insisted on

The requirements look technical, and a student should be able to say why they exist. There are three reasons.

1. To protect the public revenue. If any officer could bind the Government, public money would be exposed to unauthorised commitments.
2. To fix responsibility. A contract expressed to be made by the President identifies who is bound and who authorised it.
3. To ensure deliberation. The requirement of authorisation means somebody with authority has considered the transaction.

The consequence of non-compliance

The provisions are mandatory, not directory. A contract that does not satisfy all three requirements is void, and no suit lies on it against the Government.

That produces three well known consequences.

There is no ratification. A void contract cannot be ratified by subsequent conduct, because there was never a contract to ratify.

There is no estoppel. The Government cannot be estopped from pleading the invalidity of a contract that fails Article 299, because to allow the plea would be to enforce what the Constitution says is void. This is the point where [Estoppel and Waiver against the Government] meets this chapter.

But there is restitution. This is the practical answer and it is what saves the innocent contractor.

Section 70 of the Contract Act: the way round

Section 70 of the Indian Contract Act 1872 provides, in substance, that where a person lawfully does anything for another, or delivers anything to him, not intending to do so gratuitously, and the other enjoys the benefit of it, the latter is bound to make compensation in respect of, or to restore, the thing so done or delivered.

Applied here: if a contractor supplies goods or does work under an agreement void for want of compliance with Article 299, and the Government has taken the benefit, the Government must pay compensation for what it received.

Three points about the remedy, and each is examinable.

1. It is not a claim on the contract. The contract is void; the claim is quasi-contractual, for the value of the benefit received.
2. The measure is the benefit, not the contract price. The contractor recovers what the work or goods were worth, not necessarily what he had agreed to charge.
3. The Government must have enjoyed the benefit. If the goods were never delivered or the work never accepted, section 70 does not assist.

This is the balance the law strikes: the constitutional form is protected, and the honest contractor is not left to bear a loss the Government has profited from.

Article 299(2): personal immunity

Article 299(2) provides 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 the Constitution, or for the purposes of any enactment relating to the Government of India previously 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 of it.

The purpose is straightforward: an officer who signs a contract on behalf of the Government is not making himself a party. The immunity is from personal liability on the contract; it does not protect an officer from disciplinary action, or from liability for a tort or a criminal offence.

The public law dimension

A modern answer should not stop at Article 299, because much of the litigation about government contracts is not about the form at all.

Government contracts are subject to Article 14. The State cannot award contracts arbitrarily, or refuse to deal with a person for irrelevant reasons. The requirements of a fair and transparent tender process, equal treatment of bidders and reasons for rejection all follow from Article 14 and from Maneka Gandhi v. Union of India, AIR 1978 SC 597, which held that Article 14 strikes at arbitrariness in State action and that equality and arbitrariness are sworn enemies.

A writ may lie in the contractual field, at the pre-contract stage. The award of a tender is an administrative decision and may be challenged under Article 226 for arbitrariness or mala fides. Once the contract is concluded, a dispute about its performance is ordinarily a matter for a civil suit or arbitration, not for a writ petition, though the line is not absolute.

Legitimate expectation may arise from a published tender policy, in the sense discussed in [The Doctrine of Legitimate Expectation].

A worked example

The Public Works Department invites tenders for repairing a school building. Ashwin Kamble's tender is accepted by a letter from the Executive Engineer which reads "Your tender is accepted. Commence work immediately." No formal agreement is executed and the letter does not state that the contract is made by the Governor.

Is there a valid contract? No. The letter is not expressed to be made by the Governor and is not executed on his behalf, so Article 299(1) is not satisfied and the contract is void.

Ashwin completes the repairs and the school is used. Can he recover? He cannot sue on the contract, but he can claim under section 70 of the Indian Contract Act 1872: he lawfully did work for the Government, not gratuitously, and the Government has enjoyed the benefit. He recovers the value of the work.

Can he recover the agreed price of eight lakh rupees? Not necessarily. The measure is the benefit conferred, so if the work was worth six lakh he recovers six lakh.

Can the Government be estopped from pleading Article 299? No. The requirements are mandatory and a constitutional invalidity cannot be cured by estoppel.

Can the Executive Engineer be sued personally on the contract? No. Article 299(2) protects a person executing a contract on behalf of the Governor from personal liability.

Suppose instead the tender was rejected and given to a bidder who quoted higher, with no reasons. Now the issue is not Article 299 but Article 14: the award of a tender is administrative action and arbitrariness in it is reviewable under Article 226.

Distinctions worth having straight

What it does NOT mean

It does not mean the Government cannot contract. Article 298 gives it a wide power.

It does not mean an oral government contract can never bind. It means it cannot bind under Article 299, and the remedy lies in restitution under section 70.

It does not mean the officer is personally liable. Article 299(2) says the opposite.

It does not mean government contracts are outside public law. The award of a contract is administrative action subject to Article 14.

Quick revision

1. Article 298: power to carry on trade and to contract for any purpose, as part of the executive power.
2. Article 299(1): three requirements. Expressed to be made by the President or Governor; executed on his behalf; by a person authorised by him.
3. The requirements are mandatory. Non-compliance makes the contract void; there is no ratification and no estoppel against the Constitution.
4. Section 70 of the Indian Contract Act 1872 allows recovery of the value of the benefit conferred, which is quasi-contractual and measured by benefit rather than by the contract price.
5. Article 299(2): neither the President nor the Governor nor the person executing the contract on their behalf is personally liable on it.
6. Reasons for the form: to protect the revenue, to fix responsibility, and to ensure deliberation.
7. Government contracts are also subject to Article 14, so the award of a tender may be challenged for arbitrariness under Article 226: Maneka Gandhi v. Union of India, AIR 1978 SC 597.

Test yourself

1. State the requirements of a valid government contract under Article 299. Three. The contract must be expressed to be made by the President in the case of the Union, or by the Governor in the case of a State; it must be executed on behalf of the President or the Governor; and it must be executed by a person whom the President or Governor has directed or authorised to do so, in the manner directed. All three are mandatory, and a contract that fails any of them is void and unenforceable against the Government. Article 299(2) adds that neither the President nor the Governor, nor the person executing the contract on their behalf, is personally liable in respect of it.

2. What is the effect of non-compliance with Article 299(1), and what remedy has the contractor? The contract is void. It cannot be enforced against the Government, it cannot be ratified by subsequent conduct because there was never a contract to ratify, and the Government cannot be estopped from pleading the invalidity, since estoppel cannot make valid what the Constitution declares void. The contractor is nevertheless not without remedy: if he has lawfully done work or delivered goods, not intending to do so gratuitously, and the Government has enjoyed the benefit, he may recover compensation under section 70 of the Indian Contract Act 1872. That claim is quasi-contractual, and the measure is the value of the benefit conferred rather than the price agreed under the void contract.

3. Why are the requirements of Article 299 held to be mandatory? Because their purpose would be defeated if they were directory. They exist to protect the public revenue from unauthorised commitments made by officers without authority, to fix responsibility by identifying on the face of the contract who is bound and who authorised it, and to ensure that a person with authority has applied his mind to the transaction. If substantial compliance sufficed, any officer's letter could bind the Government, and the safeguard would be worthless.

4. Can the Government be sued for arbitrariness in awarding a contract? Yes, at the stage of award. The decision to accept or reject a tender is administrative action by the State, and it is subject to Article 14, which, as Maneka Gandhi v. Union of India, AIR 1978 SC 597, holds, strikes at arbitrariness in State action, equality and arbitrariness being sworn enemies. A tender process must therefore be fair and transparent, bidders must be treated equally, and a rejection for irrelevant reasons or for an improper purpose may be challenged by writ petition under Article 226. Once the contract has been concluded, a dispute about its performance is ordinarily for a civil suit or arbitration rather than for a writ court.

5. Distinguish the contractual liability of the State from its tortious liability. Contractual liability rests on Articles 298 and 299, which are provisions of the Constitution itself: Article 298 confers the power to contract and Article 299 prescribes the form, non-compliance with which makes the contract void, with a restitutionary fallback under section 70 of the Indian Contract Act 1872 and personal immunity for the executing officer under Article 299(2). Tortious liability rests on Article 300(1), which lays down no rule of its own but carries forward the pre-Constitution position through the Government of India Acts, so that the peculiar defence is the sovereign function immunity rather than want of form, and the modern fallback for a claimant is compensation in public law under Articles 32 and 226 where a fundamental right has been violated.