CONTRACTUAL LIABILITY OF THE STATE
QUESTION BANK
Q.1. Discuss the liability of the State in respect of a contract with reference to Art. 299 of the Indian Constitution.
Discuss the liability of the State in Contract.
Kinds of Government contracts.
I. Introduction
II. Position in England
III. Position in India
A. Mandatory Conditions for a Valid Government Contract
For a government contract to be valid, it must concurrently fulfill three conditions:
1. The contract must be in writing and expressed in the name of the President or the Governor
2. It must be executed by an authorized person
3. It must be expressed to be made "on behalf of" the President or the Governor
B. Adherence to Fairness and Tender Procedures
C. The Rigid Exclusion of Ratification and Estoppel
D. Exceptions to the Scope of Article 299(1)
1. Government Service Agreements
2. Statutory Contracts
IV. Contractual and Quasi-Contractual Liability
A. Personal Immunity vs. Institutional Liability
B. Quasi-Contractual Liability: The Doctrine of Unjust Enrichment
The modern welfare State has evolved far beyond its historical regulatory role to become a central economic actor: the largest employer, contractor, license provider, and distributor of state largesse. To implement diverse socio-economic welfare schemes, the State routinely enters into agreements with private citizens and corporate entities. Consequently, a vast portion of modern commerce, individual livelihoods, and business operations depends directly on government contracts, statutory licenses, quotas, mineral rights, and public employment.
While both the Union and State Governments have the legal capacity to enter into contracts similarly to private individuals, the State operates through human agencies using public funds. To safeguard public exchequers against unauthorized or collusive commitments made by public servants, the Constitution of India imposes strict formal prerequisites. These procedural rules
which exist in addition to the substantive elements required by the Indian Contract Act, 1872
are explicitly mandated under Article 299 of the Constitution.
For centuries, the fundamental maxim of English constitutional law was:
"The King can do no wrong."
This placed the Crown and ordinary litigants on completely different footings. Historically, the Crown could not be sued in its own courts for breaches of contract or torts committed by its servants, though it retained the right to sue its subjects. The King could be a plaintiff but never a defendant.
This feudal asymmetry was dismantled by the Crown Proceedings Act, 1947. This legislation placed the Crown in the position of an ordinary litigant, allowing the state to be sued directly as a defendant for breaches of contract and civil wrongs.
The Constitution of India explicitly recognizes the contractual capacity and liability of both the Union and State Governments. Article 298 extends the executive power of the Union and of each State to:
1. The carrying on of any trade or business;
2. The acquisition, holding, and disposal of property; and
3. The making of contracts for any purpose.
Article 299(1) dictates the precise constitutional framework for executing a government contract. The Supreme Court has repeatedly held that these provisions are mandatory, not directory. Non-compliance renders an agreement void and completely unenforceable against the government.
A valid government contract cannot be oral; it must be recorded in writing. If an agreement is executed on behalf of the Union of India, it must be explicitly made in the name of the President of India. If executed on behalf of a State, it must be made in the name of the Governor of that State.
Case Law: Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, AIR 1954 SC 236
Ruling: The Supreme Court held that an oral contract does not bind the Government. A contract that lacks the required written form cannot be enforced against the Union or State authorities.
Evolutionary Note: In Union of India v. Rallia Ram, AIR 1963 SC 1685, the Supreme Court clarified that in the absence of a rigid, specifically prescribed method, a valid contract under Article 299(1) can be inferred from a formal, signed series of letters or official correspondence, provided the execution clearly binds the government through an authorized officer.
The contract must be signed and executed exclusively by an officer who has been expressly or impliedly authorized by the President or the Governor for that specific purpose.
Case Law: Union of India v. N.K. (P) Ltd., AIR 1972 SC 915
Facts: The Director of Support and Disposals was the designated official authorized to enter into the contract on behalf of the President. Instead, the contract was executed by the Secretary of the Railway Board.
Ruling: The Supreme Court ruled the contract invalid, holding that it was executed by an officer lacking the specific constitutional authorization required to bind the Union.
Distinction: In State of U.P. v. M/s. Raza Buland Sugar Co. Ltd., AIR 2006 All 61,
Where the loan agreement bonds were executed by a Special Secretary and an Official Receiver possessing legitimate institutional authority, the court held that a valid, complete contract was established.
It is not enough for an authorized officer to sign a contract using their official title alone. The document must explicitly state that the contract is being executed "on behalf of the President of India" or "on behalf of the Governor of the State."
Case Law: D.G. Factory v. State of Rajasthan, AIR 1971 SC 141
Facts: An agreement was signed by the Inspector General of Police in his official capacity, but the text failed to state that the agreement was being executed on behalf of the Governor.
Ruling: The Supreme Court held that because the contract failed to satisfy this structural requirement of Article 299(1), it was void and unenforceable.
Because the State distributes public resources and contracts, it cannot act with the unbridled autonomy of a private trader. It must adhere to the principles of administrative fairness, equality, and transparency enshrined in Article 14 of the Constitution.
Case Law: M/s. Ranjit Construction Co. Ltd. v. National Highways Authority of India, AIR 2004 Delhi 64
Ruling: The rejection of a tender bid on the grounds of being non-responsive (failing to follow specific sealing and duplicate documentation rules) was upheld. Bidders must adhere to structural tendering requirements to ensure equal treatment.
Case Law: Vijay Kumar Gupta v. State of Maharashtra, 2008 (3) All MR 240
Ruling: The High Court emphasized that when the State distributes public largesse, trade contracts, or commercial opportunities, it is structurally required to maintain fairness, parity, and transparency, avoiding arbitrary favoritism.
Because Article 299(1) was enacted as a matter of public policy to protect the public exchequer, its requirements cannot be waived or bypassed through the principles of estoppel or subsequent ratification.
Case Law: Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218
Ruling: The Supreme Court adopted a strict textual interpretation, holding that if a contract does not conform to the mandatory conditions of Article 299(1), it is void ab initio. Consequently, it cannot be validated later through executive ratification, nor can the government be estopped from asserting its nullity.
The strict requirements of Article 299(1) do not apply to two specific classes of state interactions:
Once a person is selected and appointed to a public post, their relationship with the State shifts from a purely contractual arrangement to a structural, constitutional status.
Case Law: Parshotam Lal Dhingra v. Union of India, AIR 1958 SC 36
Ruling: The Supreme Court observed that government employment is governed by the "pleasure doctrine" under Article 310 and detailed statutory rules enacted under Article 309. Because the conditions of service are defined by statute rather than a standard commercial agreement, public service appointments are excluded from the formal requirements of Article 299(1).
Contracts executed by public bodies in the exercise of explicit statutory powers
such as the issuance of a liquor license under an Excise Act, or a mining lease under a specific regulatory statute
are governed by that parent legislation rather than the general executive power of the State. Consequently, they do not fall within the scope of Article 299(1).
Article 299(2) provides distinct personal protection to the highest offices of the executive:
Neither the President of India nor the Governor of a State can be held personally liable for any contract executed in their name for the purposes of the Constitution or any active enactment. Furthermore, no public officer who signs or executes such an assurance on their behalf incurs personal financial liability.
This immunity is strictly personal. It shields individual public servants from personal lawsuits but does not absolve the Government itself from institutional liability. If a contract fully satisfies the tripartite requirements of Article 299(1), the Union or State Government remains fully liable for its performance or breaches.
While the strict voiding of non-compliant contracts protects the State from unauthorized liabilities, it can leave innocent private contractors vulnerable if they have already provided goods or performed services for the State in good faith. To balance these interests, courts look to Section 70 of the Indian Contract Act, 1872, which governs quasi-contractual obligations.
Section 70 establishes that where a person lawfully delivers goods or performs a service for another without intending to do so gratuitously, and the receiving party accepts and enjoys the benefit of that work, the receiving party is legally obligated to compensate the performer or restore the goods. This obligation rests on the equitable principle of unjust enrichment: no entity, including the State, should be allowed to enrich itself at the unfair expense of another.
Case Law: State of West Bengal v. B.K. Mondal & Sons, AIR 1962 SC 779
Facts: A contractor constructed office storage buildings at the explicit, non-gratuitous request of a Government officer. The administrative authorities accepted possession of the buildings and put them to public use. However, when the contractor submitted his invoice, the State refused to pay, arguing that because no formal contract had been executed in compliance with Article 299(1), the agreement was void.
Ruling: The Supreme Court agreed that the contract was technically void and could not be enforced. However, the Court ruled that the State was still liable to pay full compensation under Section 70 of the Indian Contract Act. Since the State had voluntarily accepted the buildings and enjoyed their benefits, it could not use a constitutional loophole to avoid its quasi-contractual duty to make restitution.
Prof. .S. D. Bhosale