GOVERNMENT CONTRACTS

Abstract

The Government (whether the Union of India or a State) plays a very important role in entering into contracts of many kinds with individuals and business entities. Since the contracting role of the Government could possibly put public resources at stake, the Constitution of India carefully limit the practice of contracting power by the Government.

Although matters of government contracting might at first blush appear to be somewhat procedural and accepted, they have strike a great deal of controversy more lately due to intense judicial activity in the field. The discussion about   government contracts may be divided into two parts. The first part of the article deals with the formation of contracts to which the Government is a party. Being somewhat correct, this part considers the situation when the Government has validly entered into a contract to make up  its binding contractual obligation. The second part deals with more concrete aspects as to the manner in which the Government decides to enter into  a contract with  a specific individual or business entities, and whether that decision has been arrived at aimlessly  or not. This discussion gives rise to the more controversial question regarding the nature and degree of judicial review of government contracting. The objective of this chapter is to provide an outline  of the constitutional position relating to both the formation of contracts as well as considerable elements of government contracting. This study will highlight and discuss the key issues  related to and controversies in both these areas.

The modern state has expanded beyond the realm of customary sovereign functions such as governance. It is now a key player in the commercial arena and engages in myriad activities such as trade and commerce (either as a procurer or supplier of goods and services). It also adopts a larger societal role in the guardianship and distribution of public goods such as natural resources. In doing so, the government is required to enter into contracts of various kinds with individuals and businesses.[1]

This raises the obvious question of whether the government as a contracting party ought to be treated differently  from any private contracting party. The dichotomous position that emerges suggests that for contract law purposes the government is akin to any private contracting party, but since the contracting role of the government could potentially put public resources at stake, the Constitution of India carefully circumscribes its exercise of contracting power. Although matters of government contracting might at first blush appear somewhat procedural and formalistic, they have stoked a great deal of controversy more lately due to frenetic judicial activity in the field.

The discussion in this chapter surrounding government contracts is divided into three parts. Part I relates to the contracting power of the government, which the Constitution vests in it without the necessity of underlying legislation. Part II deals with the formation of contracts to which the government is a party.

Being somewhat formalistic, this part considers the circumstances when the government can validly enter into a contract  to constitute its binding contractual obligation. Part III deals with substantive aspects as to how the government decides  to enter into (or award) a contract with (or to) a specific individual or business. This discussion gives rise to the more contentious issue regarding the nature and extent of judicial review of government contracting. Part IV concludes.

Key words- Contracts, Governmental Contracts, Agreements.

Introduction:

Governments Contracts is a type of  contract in which Government, State government  or some authority is one party and private individual is the other party. Government Contracts have come to presume a very important place and great significance in the  modern economy. “To-day the Government, is a welfare state, are  the governor ,organizer  and provider of special services and dispenser of a large number of benefits and profits, including jobs contracts, licenses, quotas, rights etc.. The valuables given  by Government take many forms, but they all share one single characteristic. They are constantly   taking the place of traditional forms of wealth. ” Now the question has arisen which have  a very great importance, How Government can form contracts with the private individuals in order to dispense such huge wealth for public purpose?

In other words we can say the growth of the nation will reduce or slow down up to great extent. Aronson and Whitmore singled out some characteristics features of government contracts which are:

  1. The policies looked for  to be achieved by the contracts;
  2.  The importance from a public interest point of view of the subject matter, and of the need for     versatility, adaptability and control; and
  3. Large amounts of public money are  often involved . Thus there is a need to develop some rules and regulations  to protect the individual’s  interest in such wealth. The basic question is to control and manage structure and discipline government judgment  to confer such benefits and wealth.[2]

Q. How is a Government contract under Article 299[3] different from a general contract made under Indian Contract Act?

Formation of Contract:

The law regarding  Government contracts is provided under Article 299 of the Constitution of India. [4]

Article 299 (1) is described as : “All the contracts made in the exercise of the executive power of the union or a state shall be expressed to be made by the President, or by the Governor of the state as the case may be, and such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of President or the Governor by such persons and in such manner as he may direct or authorize.”

Article 299 (1) of the Constitution derives its Source from Section 173 (3)[5] of The Government of India Act 1935 . Article 299 (1) lays down three essentials conditions for the formation of Government Contacts which are as follows,

  1. All the Contracts shall be expressed to be made by the President or by the Governor as the case may be.
  2. All such Contracts and assurances of the property made in the exercise of the executive power shall be executed on the behalf of the President or the Governor as the case may be.
  3. All such Contacts must be executed by such person and in such a manner as may be authorised or directed by the President or Governor.

“It is clear that the Parliament intended in working out  the provision contained in  Section 175(3) and  that the State should not be burdened with liability for unauthorized contracts and with that object provided that the contracts must show on their fact that they are made on behalf of the State, either  by the Head of the State and executed on his behalf and in the manner prescribed by the person authorised.

Contract Must Be In Writing:

 In order to be valid and legal under Article 299(1) of the Constitution, a contract has to be in writing. In Article 299 (1) word “executed” is used which written Contract is highly  necessary and duly prescribed. Thus oral contract is no contract at all for the purpose of Article 299 (1). Now the question here arises is  whether the contract should be written on a formal document or mere agreement  through letters or written offer and acceptance is sufficient. In Union of India v. A. L. Rallia Ram[6], Supreme Court upheld the validity of a contract entered into between the government of India and Respondent through mere writing.[7]

Executed by Authorised Person:

Under Article 299 (1) Contract must be entered on the behalf of the Government by the person authorised for that purpose by the President or Governor as per the requirement. A contract executed by a person not authorised for that purpose is no contract, hence null and void.The government can only held bound by the contracts which are entered and operated  by the authorised authority.

Article 299 (1) does not give  any particular way  to confer authority on a person to operate the contract on the behalf of the government. Contracts not in Conformity with Article 299 (1): The general proposition is that no legal relationship will result   from a contract that  is not in conformity of article 299 (1) such a contract is void and unenforceable on  both sides of the contract.[8]

Neither Government nor the Private Contracting party is bound by the contract which does not comply with Article 299(1) of the Constitution.

However there arises two very vital questions. First is that whether government can affirm the contacts not in conformity with article 299 (1).

And second is that whether a contract not in conformity with article 299 (1) can be enforced against the officer assenting  the contract because of section 230 (3)[9] of the   Indian Contract Act. Earlier a view was expressed that when a contract was not in conformity with article 299 (1), the exemption of 299 (2) would not apply to the officer executing the contract and it could be enforced against him under section 230 (3).

In Chatturbhuj Case[10] Supreme Court ruled that “There can be no reasonable doubt that the Chairman of the Board of Administration acted on behalf of the Union Government and his authority to contract in that capacity wasn’t questioned.

Restitution: One very vital  which requires  a consideration here is that whether one can recover any payment made by him to the Government under a contract that  isn’t  in conformity with Article 299 (1). What’s the bottom  of the  restitutory claim against the government.. For example  a person pays tax under a tax law (jurisprudence) which is ultra vires, whether he can claim to  refund  the  number paid under a void statute? These cases relate restitution to the general  public law doctrine of Ultra Vires. No charge  will be levied by the administration without the authority of law so any payment in response to an unlawful official demand should  be refunded unless there is really good reason to the contrary. For few a time however the courts are moving away from  the broad ultra vires principle to the narrow principle of restitution as contained in section 72 of Indian Contract Act there’s no distinction made under section 72 between mistake of fact and mistake of law.

However Supreme Court in S. T. O v. Kanhaiya Lal Mukand Lal Saraf[11] ruled that the expression “Mistake” under section 72 is vast enough subject  to incorporate both mistake of fact and mistake of law.

In State of Madhya Pradesh v. Bhailal Bhai[12] sales tax was being charged by the Government which the petitioner made the payment of tax later, the tax was held to be unconstitutional and illegal. Applicability of Doctrine of  Estoppel to Government Contracts: So far law has been made clear that if effect is given to the contract which is not in conformity with Article 299 (1) it will amount to by-passing a very important Constitutional provision. A contract that is not in compliance  with article 299 (1) is void, it cannot be enforced against any party either government or private party . If the contention of the respondent regarding the ratification and Estoppel is accepted that would render a very important provision useless, which is a safeguard for the  public in general.[13]

Q. Whether Governor or President is personally liable under Article 299?

No Personal Liability:

 Article 299 (2) of the Constitution protects the President and also the Governor from personal liability. It says that “Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the needs of this Constitution, or the needs of any enactment referring  to the Govt. of India heretofore in force, nor shall anyone  making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof ”.

The Government’s Power of Contracting

A threshold question from the purview of contract jurisprudence relates to the capacity of persons to enter into a contract. This encompasses not only natural persons but also juristic persons such as corporations and even the government. The core capacity or power of the state to enter into a contract can be traced to Article 298 of the Constitution.1 Viewed from the paradigm of the separation of powers within the state, the contracting function would fall quite naturally within the purview of the executive rather than the legislature (or the judiciary).2 While this ought to be a relatively straightforward matter, the constitutional provision was subject to significant debate within the first few years of its functioning.

A controversy arose under the previous version of the article-3 as to whether the power of the executive can be exercised without owing its existence to the  underlying legislation. In an early decision,4 the Supreme Court5 asserted that certain executive actions (in this case the nationalization of an industry) could not be undertaken unless they were supported by appropriate legislation.[14]

This position, however, did not receive support in Ram Jawaya  Kapoor v.  the State of Punjab, where the Court held that executive action need not always be supported by legislation. It necessitated an amendment to the Constitution that introduced the current version of Article 298. This position provides a flexible and pragmatic approach as it allows the executive to enter into contracts from time to time without awaiting legislative intervention, and is in tune with the ground realities pertaining to government contracting (that need to be carried out in a timely and efficient manner).[15]

Although no prior legislative basis is necessary for the executive to enter into contracts, such powers are subject to applicable legislation. The scheme under the proviso to Article 298 stipulates that where the subject matter of the contract falls within the legislative competence of any State, then the contracting power of the Union executive is subject to such legislation. Similarly, the contracting power of any State’s executive is subject to the legislation of Parliament on matters where it has the competence to legislate. This scheme provides the requisite balance between the Parliament and State legislatures in enabling them to moderate the contracting functions of either the Union or State executives.

However, what Article 298 does not expressly cover is the relation of the executive and legislative powers of the States with one another.

Barring the initial debate surrounding the separation of powers between the executive and the legislature, which has since been settled, the essence of the contracting power of the government under the Constitution has been fairly clear. Greater judicial attention has been focused on the manner in which various officers of the government can enter into contracts on its behalf so as to bind it, a matter to which this chapter now turns.

Q. What are the consequences of an implied contract with the Government under Article 299?

Implied Contract with the Government

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 fact  make Article 299(1) inoperative, for then a person who had a contract with the government which was not executed at all in the manner provided under Article 299(1) could get away by saying that an implied contract may be concluded on the facts and the circumstances of the particular case.[16]

It was held by the Hon’ble Supreme Court in the case of K.P.Chowdhary v State of Madhya Pradesh[17]  that,

“In view of the rules laid down in  Article 299(1) there is no chance for any implied contract. Thus no contract can be implied under this article. if the contract between the Government and a person is not inexorability with Article 299(1), it would be no contract at all and would not be enforceable  and work  as a contract either by the Government or by the person.”

The Court justified this strict view by saying that if implied contracts between the government and other persons were allowed, they would in effect, make Article 299(1) a dead letter, for then a person who had a contract with the government which was not executed at all in the manner provided under Article 299(1) could get away by claiming  that an implied contract be  concluded  from the facts and circumstances of the case

However, the Courts have also realized that demand on a  too rigid inspection of all the conditions laid down in Article 299 may not always be practical. Hundreds of government officers daily enter into a variety and a  large number of contracts, often of a petty, small nature, with private individuals and  parties. At times, contracts are entered through written agreement or even orally. It would be extremely difficult from  an administrative point of view if it were demanded  that each and every contract must be made  by a cumbersome  legal document expressed  in a particular form.[18]

Q. How Judiciary showed their active participation in balancing the two folds i.e. Government and other party under Article 299 of the constitution?

Judicial Review of Government Contracts

In the case of private contracting, parties with the requisite legal capacity are free to enter into contracts, and courts seldom question the wisdom or motivation behind the decision to enter into the contracts. Matters are, however, not as simple in the case of government contracts, primarily due to the public interest element involved thereon. The establishment of contractual relationships may not only put public funds at risk, but the manner in which the relationships are established may be subject to public scrutiny given that multiple parties may be vying for the same contract with the government. In such a scenario, the process through which the contracting party is chosen may itself have larger implications. Since contracts are entered into by the executive arm of the government, the obvious question relates to whether they are subject to judicial review and, if so, to what extent.

The scope of judicial review of government contracting gives rise to fundamental conceptual issues that distinguish it from private contracting. It brings to the fore the tension between freedom of contract and public interest. Freedom of contract (which is generally enjoyed by private parties) is necessary to enable the contracting party to exercise full discretion to strike the bargain that it deems most suitable to its interests. Contrast this with government contracting where such discretion is subject to review by the courts thereby curtailing contractual freedom. This situation is justified due to the public implications of government contracting, and the varied interests that may be affected thereby. In a competitive scenario, this restrains the flexibility of the government in striking contractual bargains, while private parties are subject to no such limitations.

This also raises the broader issue of whether the judiciary is best equipped to turn out a finding on the executive’s decision-making on government contracts, which are not only complex but require technical and commercial judgments to be made.[19]

Given this varied set of factors at play, it is not surprising that the scope and extent of judicial review of government contracts have  captured significant attention of the Supreme Court over the last few decades. This is because the scope of judicial review has been moulded by the courts on an ongoing basis and, as this chapter demonstrates, stretched in different directions. The Court’s opinion has oscillated between displaying utmost judicial restraint in government contracts and, on some occasions, exercising significant judicial intervention in the government’s contract decision-making. Between these two extremes, there appears to be a rational mid-range.[20]

The remainder of this chapter surveys the leading judgments of the Supreme Court along this spectrum, and seeks to distill the broad principles that are likely to guide the court going forward.

Given the elusiveness of a consistent approach on the question of judicial review of government contracts, it is proposed to embark upon a chronological sojourn of the Court’s thought process by categorizing the developments under three different phases. Within each of these phases, the varying opinions of the Court will be weighed so as to derive the more prominent outcome.

 Judicial Review of Government Contracts

During the initial decades of the Constitution, the concept of judicial review of government contracts was non-existent. The government’s enjoyed substantial discretion and flexibility in entering into contractual relationships.

In the early case of C.K. Achuthan v.  the State of Kerala[21], the Supreme Court noted that the government had the freedom to choose a contracting party to fulfill contracts, and that an aggrieved party who was not chose n cannot claim discrimination and therefore the protection of Article 14[22]. In that sense, the government’s position was similar to that of any private contracting party. This position ensued for a number of years without any seeming concern.

It was only in 1975 that the need to view the government’s contracting powers through a different lens emerged, albeit somewhat mildly.

 In Erusian Equipment & Chemicals Ltd.v. State of West Bengal[23], the Supreme Court clarified that the executive powers of the state under Article 298 (including to enter into public contracts) is subject to the principle of equality of opportunity under Article 14 of the Constitution.

However, it was in Ramana Dayaram Shetty v. International Airport Authority of India[24]  that the Supreme Court expounded on the judicial review of government contracting. Applying principles of administrative law given the expansion of the state’s functions, the court took upon itself the role of stepping in “to structure and restrict the power of the executive Government so as to stop  its arbitrary application or exercise”. This was extended to the contracting power of the government as well because  the government could wield the significant power of granting and withholding contracts and licenses in a manner that would have considerable impact on the lives of individuals and businesses. In stark contrast to its earlier approach, the court carved out a significant distinction between government contracts and private contracts. It clarified that the government does not enjoy the freedom and discretion of a private party in entering into contracts and that it cannot act arbitrarily, “but its action must be in conformity with standard or norms which is not arbitrary, irrational or irrelevant”.

Conclusion

Government contracts are distinct from private contracts as they are subject to greater inspection in public the interest. This inspection takes two forms. One is more formal in nature that considers the power of the government to enter into contracts (Article 298)[25] and the process that has been followed to authorize the contracts and enter into the same (Article 299). The constitutional provisions on this score are very clear and the case law surrounding them has been largely compatible in recent years. The second type of inspection / scrutiny is more substantive in nature. Undertaken entirely by the judicial arm of the government, in the exercise of its broader constitutional mandate under Articles 14 and 21 of the Constitution, the power of judicial review confers considerable powers on the courts.[26]

The separation of powers under the Constitution is subject to intense testing with the judiciary seeking different approaches in reviewing executive action in contracting, which ranges from judicial restraint to wide-ranging judicial interference. While the Court has been mainly  adopting the approach of restraint, with limited review in case of the existence of specific grounds (such as arbitrariness, mala fides or unreasonableness), it has occasionally strapped  up a storm by exceeding its traditional boundaries. This has made it difficult to foresee the future so as to induce a greater sense of certainty. One may have to settle with some level of uncertainty given the larger public interest facing government contracts.


[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2953560

[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2953560

[3] Article 299 in The Constitution Of India 1949

[4] https://indiankanoon.org/doc/1084525/

[5] Government of India Act,1935

[6] AIR 1963 SC 1685.

[7] https://indiankanoon.org/doc/1084525/

[8] https://indiankanoon.org/doc/1084525/

[9] 230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal.—In the absence of any contact to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. —In the absence of any contact to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.” Presumption of contract to contrary.—Such a contract shall be presumed to exist in the following cases:—

(1) where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad;

(2) where the agent does not disclose the name of his principal;

(3) where the principal, though disclosed, cannot be sued.

[10] AIR 1954 SC 236.

[11] 1959 AIR 135, 1959 SCR Supl. (1)1350

[12] 1964 AIR 1006, 1964 SCR (6) 261

[13] https://indiankanoon.org/doc/1084525/

[14] https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/recent_issues_pdf/2015/February/February_2015_1422883409__79.pdf

[15] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2953560

[16] https://advocatespedia.com/ARTICLE_299_OF_THE_INDIAN_CONSTITUTION

[17] 1967 AIR 203, 1966 SCR (3) 919

[18] https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/recent_issues_pdf/2015/February/February_2015_1422883409__79.pdf

[19] https://advocatespedia.com/ARTICLE_299_OF_THE_INDIAN_CONSTITUTION

[20]https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/recent_issues_pdf/2015/February/February_2015_1422883409__79.pdf

[21] AIR 1959 SC 490.

[22] CK Achuthan, para. 8 (n 43).

[23] AIR 1975 SC 266. This case involved the blacklisting of a potential contracting party by the government.

[24] AIR 1979 SC 1628.

[25] Article 298 in The Constitution Of India 1949

[26]https://advocatespedia.com/ARTICLE_299_OF_THE_INDIAN_CONSTITUTION

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s