Contractual Liability of The Sta (As PDF

Contractual liability of the state
Friday, September 22, 2023 9:16 PM
In the modern era of a welfare state, government's economic activities are expanding and the
government is increasingly assuming the role of the dispenser of a large number of benefits. Today a
large number of individuals and business organisations enjoy largess in the form of
government contracts, licenses, quotas, mineral rights, jobs, etc. Thus the Constitution makes
the Union and the States as juristic persons capable for owning and acquiring property, making
contracts, carrying on trade or business, bringing and defending legal action, just as private individuals.
POSITION IN INDIA:
Art. 299(1) of the Constitution lays down 3 conditions, which the contracts made in the exercise of the
Executive power of the Centre or a State must fulfil to be valid. These conditions are:
1. It must be expressed to be made by the President or by the Governor of the State as the case may be,
2. It must be extended to on behalf of the President or the Governor as the case may be, and
3. Its execution must be by such person and in such manner as the President or Governor may direct or
authorise.
The word executed in Art. 299(1) indicates that the contract between the Government and any person
must be in writing. A mere oral contract is not sufficient for the purposes of Art. 299(1).
The Art. safeguards the Government from being saddled with liability for unauthorised contracts. This
means that a contract not couched in the particular form stipulated by Art. 299(1) cannot be enforced at
the instance of any of the contracting parties; neither the Government can be sued and held liable for
breach of such a contract nor can the Government enforce such a contract against the other contracting
party.
KP Chowdhary vs. State of MP

In this case, the Hon'ble Supreme Court has observed that in view of Art. 299(1) there can be no implied
contract between the Government and another person.
The Court took a strict stance on this issue because allowing implied contracts between the Government
and others would essentially render Article 299 useless. If someone had a contract with the Government
that didn't follow the specific requirements of Article 299(1), they couldn't escape those requirements
by claiming that an implied contract could be inferred from the situation.
However, it's important to understand that just because a contract isn't in writing doesn't mean it can't
be valid. A valid contract can still be formed through correspondence or through the process of making
an offer and having it accepted, as long as all the conditions of Article 299(1) are met.
RATIFICATION/ESTOPPEL:
Contracts made in violation of Article 299(1) are considered void and cannot be ratified. The Supreme
Court has emphasized that Article 299(1) is mandatory, making contracts contrary to it void and non-
ratifiable. The doctrine of estoppel cannot be applied in such cases, and parties to such contracts cannot
be estopped from questioning their validity due to the mandatory nature of Article 299.
Caselaw: State of UP vs. Murari Lal
• In this case, the Hon'ble Supreme Court has held that a contract entered into without complying
with conditions laid down in Art. 299(1) is void and that no question of ratification of such a
Constitutional Law -2 Page 1

with conditions laid down in Art. 299(1) is void and that no question of ratification of such a
contract could arise because being void it was not capable of ratification
CONTRACTUAL LIABILITY:
Article 299(2) provides immunity to the President, Governor, or any person acting on their behalf from
personal liability concerning contracts made for constitutional purposes or under any previous laws
related to the government of India.
It's essential to note that this immunity is individual and doesn't shield the government itself from
contractual obligations arising from a contract that complies with the conditions outlined in Article
299(1). In other words, government officials enjoy personal immunity, but the government is still
responsible for fulfilling valid contracts made in accordance with Article 299(1).
Service contracts
A contract of service with the Governments not covered by Article 299 of the Constitution. After a
person is taken in a service under the Government, his rights and obligations are governed by the
statutory rules framed by the Government and not by the contract of the parties. Service contracts with
the Government do not come within the scope of Article 299. They are subject to “pleasure”. They are
not contracts in usual sense of the term as they can be determined at will despite an express condition
to the contrary.
JUDICIAL VIEW:
The judicial attitude to Art. 299 has sought to balance 2 motivations:
1) On the one hand to protect the Government from unauthorised contracts; and
2) On the other hand to safeguard the interest of unsuspecting and unwary parties who enter into
contracts with Government officials without fulfilling all the formalities laid down in the Constitution.
RESTITUTION:
In order to protect innocent parties, the Courts have held that if Government derives any benefit under
an agreement not fulfilling the requisites of Art. 299(1), the Government may be held liable to
compensate the other contracting party u/s. 70 of the Indian Contract Act on the basis of a quasi-
contractual liability to the extent of the benefit received.
What s.70 of the Indian Contract Act prevents is unjust enrichment and it applies as much to individuals
as to corporates and Governments.
Similarly, if the Government has made any payments under a void contract, it can recover the same u/s.
65 of the Indian Contract Act.
State of West Bengal vs. BK Mondal

In this case, a contractor constructed a building at the request of an official who had accepted his
tender. The building was constructed and accepted by the Government but the contractor was not paid.
The Government argued that the request in pursuance of which the building was constructed was
unauthorised and so there was no privity of contract between the contractor and the Government. The
contract did not fulfil the requirements of Art. 299(1) and hence was unenforceable.
The Hon'ble Supreme Court held that though the contract was unenforceable as it did not fulfill the
requisites of Art. 299, yet the State was still liable to pay u/s. 70 of the Contract Act on a quasi-contract
for the work done by the contractor and accepted by the Government.
Constitutional Law -2 Page 2

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Contractual liability of the state

Friday, September 22, 2023 9:16 PM

KP Chowdhary vs. State of MP

Caselaw: State of UP vs. Murari Lal

Constitutional Law -2 Page 1

State of West Bengal vs. BK Mondal

Constitutional Law -2 Page 2

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