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 activities but on the other hand, the
concept of government liability may have a chilling effect on such participation.
Therefore, a very delicate balance has to be drawn.1
Government Contracts, i.e. contracts between private individuals on one hand, and
the government, or some authority, on the other, have come to assume a very
significant place in the modern economy. In the modern times, the state is the source
of much wealth. Government has large funds at its disposal and has a huge
programme of undertaking developmental activities. It is consequently the biggest
purchaser of goods and employer of talent. Many individuals and businessman enjoy
largess in the form of government contracts. A large body of individuals seek to deal
with the government. The subject of government contract is thus becoming more and
more important day by day.2
It needs to be emphasised that although contract is basically a matter of private law,
the law pertaining to the government contracts is becoming, in modern times, in
many ways, distinct from the law pertaining to private contracts. In this area, there is
need to protect public interest and also to protect individuals against unfair exercise
of administrative power. Government contracts cannot be viewed purely as being
similar in all respects to the private contracts between two individuals, for here both
administrative and contractual powers intersect. Such contracts raise problems of
public law, such as, estoppels, natural justice, fundamental rights, writ jurisdiction

1 Massey,I.P. Administrative Law 6th ed., Eastern Book Company, Lucknow, 2007
2 Jain, M.P., Jain, S.N. Principles of Administrative Law 5 th ed., Wadhwa and
Company, Nagpur,2007

etc. In the French Jurisprudence, a different branch of law, contract administratifs,

has arisen to take care of the distinctive feature of the government Contracts.3
It is being realized that if the courts lay stress on contractual aspects ignoring public
law aspects of the Government contracts, then it may tantamount to letting public
authorities to use their powers as they like without the injured party having much an
opportunity to have any redress against improper exercise of power.4

3 Id, page 820

4 Divisional Forest Officer v. Ram Sanehi Singh, AIR 1973 SC 203

The concept of Liability

In India the state is made liable in contract and tort through the corporate entities of,
respectively, the Union of India and States of the Union. Like the British Crown, we donot
have a corporation sole which possesses an indivisible personality and embodies therein the
state. Because of the historical reasons, the Head of the State is not given a unified legal
entity in this country. The Union of India is a corporate aggregate, and is endowed with legal
personality. This position arises out of the constitutional developments in this country. This
position arises out of the constitutional developments in this country; and the lends sanction
to the pre-existing position in this respect.

Prior to the Commencement of the Constitution

Prior to the commencement of the Indian Constitution, the liability of the government for
breach of contract was recognised. It was essentially for commercial activities that the East
India Company was established in India. The factor that the East India Company also
exercised sovereign function didnot constitute them sovereign 5 and did not extend the
doctrine of sovereign immunity from being sued in its own Courts to the company. This point
was made clear as early as 1785 when the court held in Moodalay v Mortan6 that East India
company was subject to the jurisdiction of the Municipals Courts in all matters and
proceedings under them as a private trading company. Expounding the doctrine of liability of
the East India Company in contract, the court observed:
It has been said that the East India Company has a sovereign power, be it so; but
they may contract in a civil capacity; it cannot be denied that in civil capacity they may be
sued; in a case now before the court, they entered into a private contract; if they break their
contract they are liable to answer for it.7

5 Bank of Bengal v East India Comapny (1831) Bignell Rep.120

6 (1785) 1 Brocc 469.
7 Cited in State of Rajasthan v Vidyawati, AIR 1962 SC 933

Such liability of the government has been given statutory recognition as well. Thus,
provisions were made in the Government of India Acts of 1833, 1858, 1915 and 1935.8

English Position

In England, the government was never considered as an honest man. It is fundamental to the
rule of law that the Crown, like other public authorities, should bear its fair share of legal
liability and be answerable for wrongs done to its subjects. The immense expansion of
governmental activity from the latter part of the nineteenth century onwards

made it

intolerable for the government, in the name of the crown, to exemption from the ordinary law.
English law has always clung to the theory that the king is subject to law and accordingly, can
commit breach thereof. As far as 700 years ago, Bracton had observed: The king is not under
man, but under God and under the law, because it is the law that makes the King.9
Though theoretically there was no difficulty in holding the king liable for any illegal act,
there were practical problems. Rights depend upon the remedies and there was no human
agency to enforce law against the king. All the courts in the country were his courts and he
couldnt be sued in his court without his consent.
Thus, At the common law, before 1947, the crown could not be sued in a court on a contract.
This crown privilege was traceable to the days of feudalism when a lord could not be sued in
his own courts. Another maxim which was pressed into service in support of the privilege
was that The King can do no Wrong. A subject could, however, seek redress against the
Crown through a petition of right in which he set out his claim, and if the royal fiat was
granted, the action could then be tried in the court. The royal fiat was granted as a matter of
course but not as a matter of right, and there was no remedy if the fiat was refused. The
Crown Proceedings act, 1947 abolished this procedure and permitted suits being brought

8 Upadhyaya, Dr. J.J.R. Administrative Law, 8 th ed. , Central law Agency,

Allahabad, 2014.
9 Thakkar

against the Crown in the ordinary courts to enforce contractual liability barring a few types of
contracts.10

10 Supra note 2, page 820

Constitutional Provisions for Government Contracts

Articles 294,298,299 and 300 complete the constitutional code of contractual liability of the
government.
Artile 294 makes provision for the succession by the present governments of the Union and
the States to property, assets, rights, liabilities and obligations vested in the former
governments.
Article 298 lays down that for the purpose of carrying out the function of the state,
government can enter into contracts. It expressly lays down that the executive power of the
Union and of each State shall extend to the carrying on of any trade or business and the
acquisition, holding and disposal of property and the making of contract for any purpose.
Article 299 contains essential formalities which a government contract must fulfil. It reads:
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 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 authorise.

Article 300 provides the manner in which suits and proceedings against or by the government
may be instituted.
However, the constitutional code for public contract is not complete, therefore, it is
supplemented by the provisions of the Indian contract Act, 1872. A Government contract in
order to be valid, besides satisfying the requirements of Article 299, must also fulfil the
requirements of section 10 of the Indian Contract Act dealing with the essentials of valid
contract.11 In the same manner the principles determining the quantum of damages in Section
73, 74 and 75 are also applicable in case of government contracts. Nevertheless all the
Provisions of the Contract Act are not applicable to government contracts. The provisions
rekation to the capacity as to age and ming have no relevance in such contracts.
11 State of assam v Keshab Prasad Singh, AIR 1953 SC 309, Kalyanpur Line
Works v State of Bihar, AIR 1954 SC 165.

Formation of Contract

Article 298 of the Constitution of India 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 of property and the making of contracts for any purpose

Proviso to Article 298 conditions the executive power of the Union or of the State,
as the case may be, to the laws of the Legislature within the legislative competence, the
subject matter in respect to which the trade or business carried on falls. Article 298, however,
does not restrict the power of the respective government, Union or a State, by the distribution
of legislative power between the Centre and the States. It means that the Central or the State
Government may enter into a contract whether or not the subject-matter of the contract is
within its legislative competence. Secondly, the government can enter into a contract, in
exercise of its executive power. So no statutory authority is needed for the purpose.12

Requirements
Reading the aforesaid provision, it admits the power of Union and of each State to enter into
contracts for any purpose. It lays down how government contracts, including assurances of
property are to be made and executed. A contract made with the Government Union or
State- must fulfil the following conditions and requirements :
(i) Every contract must be expressed to be made by the President or the Governor (as the
case may be);
(ii) Every contract must be executed by a person authorised by the president or the
(iii)

Governor (as the case may be);

Every contract must be expressed in the name of President or the Governor
(as the case may be).

The requirements are:

12 Kumar, Narendra Nature and Concepts of Administrative Law, Allahabad
Law Agency,2011.

1) Written Contract
A contract to be valid under Article 299(1), must be in writing. The words expressed to be
made and executed in this article clearly go to show that there must be a formal written
contract executed by a duly authorised person. Consequently, if there is an oral contract, the
same is not binding on the Government.
This is not a mere formality but a substantial requirement of law and must be fulfilled. It,
however, does not mean that there must be a formal agreement properly signed by a duly
authorised officer of the Government and the second party. The words expressed and
executed have not been literally and technically construed.
In Chatturbhuj Vithaldas v. Moreshwar Parasharam 13, speaking for the SC, Bose, J.
Observed :
It would, in our opinion, be disastrous to hold that the hundreds of Government officers who
have daily to enter into a variety of contracts, often of a petty nature, and sometimes in an
emergency, cannot contract orally or through correspondence and that every petty contact
must be effected by a ponderous legal document couched in a particular form..
In Union of India v. A.L. Rallia Ram14, tenders were invited by the Chief Director of
Purchases, Government of India. Rs tender was accepted. The letter of acceptance was
signed by the Director. The question before the SC was whether the provisions of Section
175(3) of the Government of India Act, 1935 (which were pari material with the Article
299(1) of the Constitution of India) were complied with. The court held that the Act did not
expressly provide for the execution of a formal contract. In the absence of any direction by
the Governor-General, prescribing the manner or mode of entering into contracts, a valid
contract may result from the correspondence between the parties.
Thus, it can be safely said that the Constitution does not require any formal document to be
executed on behalf of the Government and only then it would constitute a binding agreement.
Any form of offer and acceptance complying with Article 299 of the Constitution would be
a valid and binding contract.15
2) Execution by Authorised Person
13 AIR 1954 SC 236
14 AIR 1963 SC 1685
15 Supra note 9

The second requirement is that such a contract can be entered into on behalf of the
Government by a person authorised for that purpose by the President or the Governor as the
case may be. If it is signed by an officer who is not authorised by the President or the
Governor, the said contract is not binding on the government and cant be enforced against it.
In Union of India v. N.K. (P) Ltd.16, the Director was authorised to enter into a contract on
behalf of the President. The contract was entered into by the Secretary, Railway Board. The
SC held that the contract was entered by the officer not authorised to enter for this purpose
thus not binding and valid contract.17
In Bhikraj v. Union of India18, certain contracts were entered into by the government and the
plantiff firm. No specific authority has been conferred on the Divisional Superintendent, East
India Railway to enter into such contracts, the firm tendered a large quantity of food grains
and the same was accepted by the Railway administration. But after some time, the Railway
Administration refused to take delivery of goods. It was contended that the contract was not
in accordance with the provisions of Section 175(3) of the Government of India Act, 1935
and, therefore, it is not valid and binding on the Government.
The SC, appreciating the evidence- oral as well as documentary- held that the Divisional
Superintendent acting under the authority granted to could enter into the contracts. The court
rightly held that it was not necessary that such authority could be given only by rules
expressly framed or by formal notification issued in that behalf.
3) Expression in the name of President (Governor)
The last requirement is that such a contract must be expressed in the name of the President or
the Governor, as the case may be. Thus, even though such a contract is made by an officer
authorised on this behalf, it is still not enforceable against the Government if it is not
expressed to be made on behalf of the President or the governor.
In Karamshi Jethabhai v. State of Bombay 19 , the plantiff was in possession of a cane far. An
agreement was entered into between the plantiff and the Government for the supply of canal
16 AIR 1972 SC 915
17 Supra note9, page 423
18 AIR 1962 SC 113
19 AIR 1964 SC 1714

water to the land of the former. No formal contract was entered into in the name of the
Governor but two letters were written by the Superintending engineer. The SC held that the
agreement was not in accordance with the provisions of Section 175(3) of the Government of
India Act, 1935 and, consequently, it was void.
Similarly in State of Punjab v. Om prakash, the Executive Engineer, PWD, who was
authorised under the PWD Manual to enter into a contract accepted the tender of the
contracter for construction of bridge. The letter of acceptance was signed by the Executive
Engineer but was not expressed in the name of the Governor. The Supreme Court held that
there was no valid contract. Reiterating the principles laid down in earlier decisions and
holding the provisions of article 299 mandatory and in public interest, the court ruled that the
said formalities could not be waived or dispensed with.

Object
It has been held 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. The provisions of Article 299 are therefore, based on the ground of protection of the
general public.20
Article 299 (1) does not prescribe any particular mode in which authority must be conferred
on a person to execute a contract on behalf of the President or the Governor. Normally, such
conferment is done by notification in the Official Gazette. It can also be conferred ad hoc on
any person. However, grant of government contract, without publishing advertisement in the
newspaper having wide circulation, is held to be arbitrary.21

Effect of non-compliance
20 Mahabir Auto v. I.O.C., AIR 1990 AC 1031
21 Shakti Narain Singh v. Anoop Singh, AIR 2004 NOC 386 (All.)

Generally, the courts have taken the position that the provisions of article 299(1) are
mandatory and not directory and the must be complied with. In K.P. chowhdary v State of
M.P., 22the SC held that If the contract between the government and an other person is not in
full compliance with Article 299(1), it would be no contract at all and could not be enforced
either by the government or the other person as a contract. They are not inserted for the sake
of form, but to protect the general public. Their function is to protect the government from
being saddled with the liability or unauthorised contracts. If,in fact, a contract is unauthorised
or in excess of authority, the government must be safeguarded from being saddled with the
liability to avoid public funds being wasted. Therefore, if any of the aforesaid conditions is
not complied with, the contract is not in accordance with law and the same is not enforceable
by or against the Government.23

No Personal Liability
Clause (2) of Article 299 immunizes the President or the Governor, or the person executing
any contract on his behalf, from any personal liability in respect of any contract executed for
the purposes of the Constitution or for the purpose to any enactment relating to the
Government of India.
However, in case of arbitrary exercise of power, the principle of public accountability applies
and in cases of loss to the state, the concerned Minister would be liable to compensate.
In Subhash R. Acharya v State of Maharashtr 24,.there was a contract with the pentitioner for
the recovery of entrance fee from vehicle drivers entering check nakas. The concerned
Minister granted the extension of the contract for further period of three years by giving
concession of 5% increase of royalty and by waiving important condition of creating liability
upon contractor in event he was incapable of performing his part of contract.
It was found that the decision of the Minister was arbitrary and contrary to the
note of Department and taken without complying with instructions and procedure provided
by the Rules of Business.
22 AIR 1967 SC 203
23 Chaturbhuj Vithaldas v. Moreshwar Parasharan, AIR 1954 SC 236
24 AIR 2008 (NOC) 2760 Bom.

Stating that the State action in contractual matters would be subject to judicial review on the
touchstone of article 14 of the Constitution, the Bombay HC set aside the order of the
minister granting extension of the contract. Holding that the functioning of Minister in
Government was governed by the doctrine of public trust, the court said that the loss suffered
by the state due to arbitrary extension of contract, would be recovered from the concerned
minister.

Ratification of an invalid contract

Formerly, the view taken by the SC was that in case of non- compliance with the provisions
of Article 299(1), a suit could not be filed against the Government as the contract was not
enforceable, but the government could not accept the liability by ratifying it. In Chaturbhuj,
adopting a mild attitude the supreme court held that contracts are not void simply because the
union government could not have been sued on them by reason of Article 299(1). Thus, the
Supreme court rules that there should be nothing to prevent the ratification of contract by the
government especially if that was for the benefit of the government. Reiterating the same
view in Mandal25, the Supreme Court said that a contract not conforming with article 299(1)
was not void in the technical sense that it could not be ratified. In Karam Chand Thaper26,
the Supreme Court ruled that when a contract was entered into by an unauthorised person, it
could be ratified by the Government particularly if it was for its benefit. In Latiteshwar27, the
court held that a contract not conformable to Article 299(1) as void and unenforceable, but
at the same time it did go into the question whether it was ratified by the government or not
and found that it was not ratified by the government. But in Mulamchand v. State of M.P.28,
the Supreme court changed its view by holding that if the contract was not in accordance with
the Constitution provisions, in the eye of law, there was no contract at all and the question of
ratification did not arise.
25 State of W.B. v. B.K. Mandal, AIR 1962 SC 779
26 AIR 1962SC 110
27 Laliteshwar Prasad v. Bateshwar Prasad, AIR 1966 SC 580
28 AIR 1968 AC 1218

Enforcement of liability
The question then arises that if a government contract is void for its non-compliance with the
provisions of Article 299(1) and it could not be ratified either ,can in these circumstances the
party claim the benefit of section 70 of the Indian Contract Act,1872. In New Marine Coal
Co. v. Union of India29, coal supplied by the company was consumed by the government.
The Supreme Court held that the government must make compensation for the coal so
supplied, even though the contract does not comply with the requirements of Article 299(1)
of the Constitution.
In State of W.B.v.B.K.Mandal30, some construction works were executed by the respondent at
the request of the government officer. The building constructed by the contractor was
accepted and used bt the government. But no payment was made to the contractor. It was
contended that as the requirements of Article 299(1) had not been complied with, the contract
was not enforceable. Holding that the contract was unforceable, the Supreme Court ruled that
the government was laible to pay to the contractor under section 70 of the Indian Contract
Act,1872 for the work done by him and benefit derived under the valid contract by it.
Thus, in State of U.P. v. Murari Lal and Bros31., an officer of the government department of
agriculture who was not authorised to enter into contract on behalf of government contracted
for a space in the cold storage for potatoes from the agriculture Department, which did not
come. A suit was filed by the proprietors for the damages suffered for keeping the space
vacant. The Union of India held that as the provisions of Article 299 were not complied with,
the contract was void and section 70 of Contract Act was not applicable because the
government had not derived any benefit under the contract. Thus, the position that emerges is
that the contracts which do not comply with the provision of Article 299 are absolutely void,

29 AIR 1964 SC 152

30 AIR 1962 SC 770
31 AIR 1971 SC 2210.

not even capable of ratification, and the concerned party shall have no claim against the
government except where the government has taken any benefit under such contract.

Effect of a Valid Contract

If the requirements of Article 299(1) are satisfied, the contract is valid and it can be enforced
by or against the Government and the same is binding on the parties thereto. Article 299(1)
lays down that neither the President nor the Governor shall be personally liable in respect of
any contract executed for the purpose of the Constitution or for the purpose of any enactment
relating to the Government of India. It also makes immune a person making or executing any
such contract on behalf of the President or the Governor from personal liability.
In Life Insurance Corporation of India v. Consumer Education and Research Centre 32, the
Supreme Court has enforced government contract against State instrumentality as well. In
this case the Supreme Court laid down that in the matter of State action in contractual field,
the action of State instrumentality or public authority having a public event, must be just, fair,
reasonable, in public interest and in consonance with constitutional conscience and socioeconomic justice. Hence the terms and conditions of the insurance policies issued by the Life
Insurance Corporation of India cannot restrict a policy to a class of persons only and deny its
benefits to others. Consequently, the policy under Table 58 restricting it only to salaried
persons in government, quasi-government or reputed commercial firms was held
unconstitutional.

32 (1995) 5 SCC 445

Estoppel and Government Contract

The general rule is that if a contract between the government and a private person does not
fulfil the requirements of article 299(1), it cant be enforced against the government even by
invoking the doctrine of estoppels.33
In Mulam Chand v. State of Madhya Pradesh,34 the Supreme Court held that where a
contract between Union of India and a private person is not in the form required by article
299(1), it is void and it cant be enforced against the government. Contravention of article
299(1) makes the contract void as article 299(1) is mandatory and therefore estoppels is not
applied in case of contracts not in accordance with the form prescribed under the
Constitution. There is no question of estoppel or ratification in such a case. The reason is
that if the plea regarding estoppel or ratification is admitted, that would mean in effect the
repeal of an important Constitutional provision intended for the protection of general public.
In Ramanath v. State of Kerala,35 the government appointed the petitioner to a civil post for a
fixed period but abolished the post before the expiry of his term. The Court held that the
government cannot be estoppes from abolishing the post. The cases stands for the proposition
that the government cannot be estopped from commiting a breach of its contractual
obligations.

33 Upadhaya, Dr. J.J.R, Administrative Law, Central Law Agency, Ninth Edition,
2014, p.311
34 AIR 1961 SC 1218
35 AIR 1974 Pat. 267

Doctrine of promissory estoppels applies in case of written and un-written government

contracts even though the requirements of Articles 298 and 299 of the Constitution are not
satisfied. In this case assurance was extended but subsequently it was curtailed. It was held
that it would attract promissory estoppels against the government. It was, therefore that when
the government revised the terms of contract from back date to the detriment of the other
party, the principle of promissory estopple would apply because the party could not revise the
price from a back date and recover the amount from the purchasers to whom goods were sold
at a fixed price.36
In Nathumal v. State of Rajasthan,37 the petitioner was granted a right for collection of some
forest produce for 10 years by the government. He made the necessary deposit and executed a
contract on the prescribed form, though not in accordance with the provisions of Article
299(1). After some time, the government wanted to cancel the contract. The petitioner moved
the Court by filing a writ petition challenging the governments order on the ground that he
was not given an opportunity of being heard before cancelling the contract. Accepting his
plea, the Court issued writ. There was no written contract as required by article 299(1).
The doctrine of estoppel can however be applied in case of statutory contracts as they do not
come under the pureview of Article 299(1). In support of this proposition, reference may be
made to Gujarat State Financial Corporation v. Lotus Hotels Private Ltd.,38 in this case the
Court observed that:
It is too late in the day to contend that the instrumentality can commit breach of a solemn
undertaking on which the other side has acted and then contend that the party suffering by the
breach of the contract may sue for damages but cant compel specific performance of
contract. In the instant case, an agreement to advance a loan was entered into in performance
of the statutory duty cast on the corporation by statute under which it was created and set up.
Mandamus was therefore issued to enforce the contractual obligation on the basis of estoppel.

36 Upadhaya, Dr. J.J.R, Administrative Law, Central Law Agency, Ninth Edition,
2014, p.311
37 AIR 1976 Raj. 12
38 AIR 1983 SC 848

Statutory Contracts

Article 299 of the Constitution applies to a contract made by the Government in exercise of
executive powers and not in exercise of statutory powers. Thus, there is a distinction between
contracts entered into between Government and a private party in exercise of executive
powers and in exercise of statutory powers of the State. 39 The rights and liabilities of the
parties in a contract entered into between Government and an individual in exercise of
executive powers of the State are governed by Article 299 of the Constitution but the rights
and liabilities of the parties in a contract government by a statutory provisions are governed
by the relevant statute under which such contract is entered into Article 299 of the
Constitution has no application to such contracts.40
In U.P. State Electricity Board v. Lakshmi devi Sehgal,41 a term in a contact between a
consumer and the Electricity board making the consumer liable for the cost of replacement of
the transformer stolen in rural areas outside his premises was held to be invalid. The board
39 Kumar, Narendra, Administrative Law, Allahabad Law Agency, 2011, p.419
40 A. Damodaran v. State of Kerala, 1976 3 SCC 61
41 AIR 1977 All. 499

was a statutory body. Under the statutory provisions, the Board was not entitled to demand
the replacement cost of the transformer. The aforesaid condition was held to be unlawful as
being against public policy as it was so obviously inimical to the interests of the community
that it offends almost any concept of public policy.

Government Contract And Article 14, 19 (1)(G)

Art. 14 of the Constitution of India prohibit the Government from arbitrarily choosing a
contractor at its will and pleasure. It has to act reasonably, fairly, and in public interest in
awarding contracts. At the same time, no person can claim a fundamental right to carry on
business with the Government. All that he can claim is that in competing for the contract, he
should not be unfairly treated and discriminated against, to the detriment of public interest.
Government contracts are highly valuable assets and the court should be prepared to enforce
standards of fairness on the Government in its dealings with tenders and contractors.
Before 1979, the position was that the Government enjoyed lots of discretion in the matter of
awarding contracts to whomsoever it liked. The contractual freedom of the government was
equated practically to that of a private person. The Apex Court observed that when one
person is chosen rather than another, the aggrieved party cannot claim the protection of
Art.14 because the choice of the person to fulfill a particular contract must be left to the

government. It is perfectly open to the Government even as it is to a private party to choose a

person to their liking to fulfill a contract which they wished to perform. 42
But in course of time, the judicial attitude has undergone a sea change on this question. The
Supreme Court observed that the government is not and should not be as free as an individual
in the matter of entering into contracts and that whatever its activity, the government is still
the government. But at the same time, the award of contract, whether it is by a private party
or by a public body or the State, is essentially a commercial transaction. In arriving at a
commercial decision, considerations which are paramount are commercial considerations.
The State can choose its own method to arrive at a decision. It can fix its own terms of
invitation of tender and that is not open to judicial scrutiny.
Further it was observed in Ramana Dayaram Shetty v. International Airport Authority of
India,43 It was held that where the Government is dealing with the public, whether by giving
of jobs or entering into contracts or issuing quotas or licenses or granting other forms of
largesse, the Government cannot act arbitrarily at its sweet will and like a private individual,
deal with any person it pleases, but its action must be in conformity with standard or norms
which is not arbitrary, irrational or irrelevant.
The main principles that emerged out of Ramana are:

The Government does not have an open and unrestricted choice in the matter of

awarding contracts to whom so ever it likes.

The Government is to exercise its discretion in conformity with some reasonable non-

discriminatory standards or principles.

The Government is bound by the standards laid down by it.
The Government can depart from these standards only when it is not arbitrary to do so
and the departure is based on some valid principle which in itself is not irrational,
unreasonable or discriminatory.

In order to ensure that the Government exercises its power to award contracts in a nondiscriminatory manner, the Supreme Court has from time to time has laid down following
guidelines:

42 http://manupatra.com/roundup/335/Articles/Contractual%20Liability%20of.pdf
43 AIR 1979 SCR (3)1014

The Government must lay down some norms or standards if eligibility. These
standards ought to be rational and non discriminatory. A democratic government
cannot lay down arbitrary and capricious standards for the choice of persons with

whom alone it will deal.

The government must adhere to, and must not deviate from, the standard laid down by

it.
The Government ought not to be award the contract to someone not fulfilling the
prescribed conditions of eligibility. If the authority does so, its action becomes
discriminatory since it excludes other persons similarly situate from tendering for the

contract and that would be plainly arbitrary and without reason.

The terms and conditions issued in the advertisement inviting tenders cannot be
altered to the advantage of a particular person having regard to the fact that if such
favourable terms and conditions were known to all other participants, they would

have participated in the tender.

For execution of any work, tenders must be invited. The contract must be awarded to
one of with the lowest tender except when, in a specific case, there are some rational
and reasonable grounds.

According to the Apex Court, the Court can review administrative discretion in awarding a
contract on the following grounds: 44

Illegality
Irrationality
Procedural Impropriety

44 http://manupatra.com/roundup/335/Articles/Contractual%20Liability%20of.pdf

Contracts and Writs

When it comes to exercise of contractual powers by governmental authorities, the function of

the courts is to prevent arbitrariness and favoritism and to ensure that the power is exercised
in public in public interest and not for a collateral purpose. This has been a question of debate
whether one could resort to the writ jurisdiction for imposing contractual obligations on a
public authority. The question of breach of contract is one which primarily falls within private
law under contact Act, and that the remedy therefore lays in a civil court and not under writ
jurisdiction. The implementation and interpretation of a clause in a contract cannot be the
subject matter of a writ petition. The contracting parties are not governed by any
constitutional provision but by the provisions of the contract act which would determine the
rights and obligations of the concerned parties. No question arises regarding the violation of
Art.14 or any of the other constitutional provision, when the government acts within the
contractual field.
The Supreme Court ruled that a party could not claim under Art.226
enforcement of contractual obligation and recover damages. Proper relief for the part would
lie to seek specific performance of contract or damages in a civil court. One of the main
reasons for this judicial stance was that question of breach of contract would depend on facts
and evidence, such seriously disputed question regarding breach of contract ought to be
investigated and determined on the basis of evidence which may be led by contesting parties.
This can be done in a properly instituted civil suit rather than in a writ petition. 45
But then in ShrilekhaVidyarthi v. State of Uttar Pradesh,46 the view started to
change. The court observed that Art. 14 strikes at arbitrariness in governmental action
and ensures fairness and equality of treatment.
The position now is that where the dispute lies within the contractual field pure
and simple a writ petition is not maintainable. The relation between the parties is governed by
the contract. But contractual obligations may fall under judicial review if there is some public
45 http://www.oiirj.org/oiirj/March2014-special-issue/58.pdf
46 AIR 1991 SC 537

law involved therein. The action of the State, its instrumentality, any public authority or
person whose actions bear insignia of public law element or public character are amenable to
judicial review and validity of such an action would be tested on the avail of Art. 14.
Thus, when the matter falls with the realm of public law rather than of private law, the High
Court can take cognizance of the same under Art. 226. If the government takes unreasonable
and arbitrary decisions while acting in pursuance of a contract, the matter would fall under
the writ jurisdiction. There is the duty on the State to act fairly in respect of a contract as well.
A writ petition is maintainable to challenge action by a public administrator when it is
exercising statutory or administrative power even within the frame of contractual relationship
between the authority and the person concerned. There is now a growing body of cases where
writ petitions have been held maintainable where contract has been statutory flavor, or where
some question of public law is involved.47
In Premjit Bhai Parmar v. Delhi Development Authority,48 the Supreme Court dismissed the
writ petition filed under Article 32 and held that Article 32 was not a proper remedy for
reopening of concluded contracts with a view to getting back a part of the purchase price paid
and benefit taken . The petitioner, a purchaser of a flat had filed the petition contending that
the surcharge collected by the DDA was illegal and violative of article 14.

47 http://www.oiirj.org/oiirj/March2014-special-issue/58.pdf
48 AIR 1980 SC 738

Grant of State Largess

The modern State is no more a Police State. It has become Welfare State and in that role, it
has undertaken several commercial activities. A private individual, no doubt, has an absolute
right whether to enter into contract with the State. The State has equally a right to enter or not
to enter an agreement with any person. The said right, however, is not absolute, unlimited or
unqualified particularly in granting State largess.49
In the leading case of Erusian Equipment & Chemicals Ltd. v. State of W.B.,50 the Supreme
Court stated:
The Government is a government of laws and not of men. It is true that neither the
petitioner nor the respondent has any right to enter into a contract but they are entitled to
equal treatment with others who offer tender or quotations for the purchase of the goods. This
privileges arises because it is the Government which is trading with the public and the
democratic form of Government demands equality and absence of arbitraries and
discrimination in such transactions. The activities of the Government have a public element
and, therefore, there should be fairness and equality. The State need not enter into any
contract with any one but if it does so, it must do so fairly without discrimination and without
unfair procedure.
It was observed that in dealing with State largess, two important factors should be borne in
mind by the Government: (i) Every individual is entitled to trade with the Government and
(ii) Every individual is entitled to a fair and equal treatment with others who are similarly
situated. Exclusion of a member of public from dealing with the State, therefore, must be
based on reason and rationale.51

49 Takwani, C.K., Administrative Law, Eastern Book Co.,p.430

50 (1975) 1 SCC 70: AIR 1975 SC 266
51 Supra 14

In the leading case of R.D. Shetty v. International Airport Authority,52 the Court reiterated
the same principle by observing that it is unthinkable that in a democracy governed by the
rule of law the executive government or any of its officers should possess arbitrary power
over the interests of the individual. Every action of the executive government must be
informed with reason and should be free from arbitrariness. That is the essence of the rule of
law and its bare minimum requirement.
In Punnam Thomas v. State of Kerala,53 the Court observed that the Court observed that
Government cant be permitted to say that it will give jobs or enter into contracts or issue
quotes or licenses only in favour of those having grey hair or belonging to a particular
political party or professing a particular religious faith. The Government is still the
Government when it acts in the matter of granting largess and it cannot act arbitrarily. It does
not stand in the same position as a private individual.
The Court in Delhi Science Forum v. Union of India,54 said that provisions while vesting
power in authorities enjoined a fiduciary duty to act with restraint to avoid implaced
philanthropy or ideology. As such, the State is expected to put such conditions while
granting largess which would safeguard public interest and interest of the Nation. Such
condition, the Court said, should commensurate with the obligations that flow while parting
with the privilege which had been exclusively vested in the Central Government by the Act in
question.

52 AIR 1979 SC 1628

53 AIR 1969 ker 81
54 AIR 1996 SC 1356

Contract of Service

A contract of service between State and a private person is not governed by Article 299 of the
Constitution. At the initial stage of appointment in a Government service, no doubt, there is a
contract between the parties. There is an offer and acceptance of employment. But once a
person is appointed, he/she acquires a status and the relationship no more governs by a
contract, but by an appropriate Legislation or Rules under proviso to Article 309 of
Constitution.
In the leading case of Roshan Lal Tandon v. Union of India,55 the Constitution Bench of the
Supreme Court stated; It is true that Article 311 imposes constitutional restrictions upon the
power of removal granted to the President and the Governor under Article 310. But it is
obvious that the relationship between the Government and its servant is not like an ordinary
contract of service between a master and servant. The legal relationship is something entirely
different, something in the nature of status. It is much more than a purely contractual
relationship voluntarily entered into between the parties. The duties of status are fixed by the
law and in the enforcement of these duties society has an interest. In the language of
jurisprudence status is a condition of membership of a group of which powers and duties are
exclusively determined by law and not by agreement between the parties concerned.

55 AIR 1967 SC 1889

Unconscionable contracts

If a contract between an individual and a Government contains a clause which is arbitrary,

unreasonable, unconscionable or opposed to public policy, it cannot be enforced by court of
law.
Thus, a condition in a service contract that service of a permanent employee can be
terminated by paying three months salary cant be enforced. 56 Similarly, a provision in a
contract of service empowering the employer to terminate services of an Air Hostess on her
first pregnancy must be held to be extremely arbitrary, unreasonable and abhorrent to all
notions of civilized society.57 Again en messe termination of all Government Counsel without
assigning any reason is violative of Article 14 of the Constitution even if the action is in
accordance with a term of the contract.58 On the sme principle, all allotments made in favour
of several persons granting licence to run petrol pumps cant be cancelled.59 Even in
contractual matters, the Government cannot act unreasonably.60

56 Central Inland Water Transport Corpn. V. Brojo Nath Ganguly, (1986) 3 SCC
156: AIR 1986
57 Air India v. Nergesh Meerza, (1981) 4 SCC 335
58 Shrilekha Vidyarthi v. State of U.P. (1991) 1 SCC 212
59 Onkar Lal Bajaj v. Union of India, (2003) 2 SCC 673
60 Mahabir Auto Stores v I.O.C. (1990) 3 SCC 752

Conclusion

It is therefore clear that the Government is as much capable as a person to enter into a
contract. But it may be noted that the contracts entered into by the government as a party and
all other kinds of contracts cannot be said to be on the same level. This is because of a simple
reason that Government is loaded with special duties and responsibilities and hence it shall
act in a more sensible way, its functioning is to be regulated in a proper way. Hence whenever
Government enters into any contract, such contracts shall comply with some extra
requirements that have been enumerated in Art. 299 of the Constitution of India. Noncompliance to such requirements will render such contract null and void. In many of its
judgments the Apex Court has made its intentions clear as to strict adherence of the
provisions. The present position is that the extent of compliance depends on case to case basis
and substantial compliances have been accepted by the Court. There is not much difference as
to the contractual liability pertaining to the government contract as they are in normal
contracts. Both Section 70 and Section 65 are applicable when either party makes any default
in its contractual obligation. Government is not immune and suits can be filled against the
government for specific performance of contract or else for compensation as per Indian
Contract Act, 1872. The government is vested with a lot of duties and responsibilities and at
the same time has been conferred with various powers. Hence, it needs to be act nonarbitrarily in its approach while entering in any contract. Government is not as free as an
individual to decide the other party to its contracts. It is not its discretionary power to enter
into any contract with anyone. Article 14 is applicable in these contracts. Hence Government
contracts are to be awarded on merit and not on any arbitrary decision without giving
opportunity to all on the same stand.