Government as a Contracting Party

Sibani Panda, Research Associate

A Contract is an agreement enforceable by law which offers personal rights, and imposes personal obligations, which the law protects and enforces against the parties to an agreement. The general laws of contract is based on the conception, which the parties have, by an agreement, created legal rights and obligations, which are purely personal in their nature and are only enforceable by action against the party in default ((Moitra’s Law of Contract & Specific Relief; 5th ED; Page 4)).

Section 2(h) of the Indian Contract Act, 1872 defines a contract as “An agreement enforceable by law”. The word ‘agreement’ has been defined in Section 2(e) of the Act as ‘every promise and every set of promises, forming consideration for each other’. So contract is a promise enforceable by law and the promise may be to do something or to refrain from doing something. The making of a contract requires the mutual assent of two or more persons, one of them ordinarily making an offer and another one who is accepting. If one party fails to keep the promise, then the other is entitled to the legal recourse ((Contract.”Encyclopedia Britannica from Encyclopedia Britannica 2006 Ultimate Reference Suite DVD)).

A Government contract is a species of genus contract and is governed by Indian Contract Act, 1872. The Indian Contract Act, 1872 does not prescribe any form for entering into contracts. A contract may be oral or in writing. It may be expressed or be implied from the circumstances of the case and the conduct of the parties. Any contract to which Government is a party is considered to be a Government contract but the position is different in respect of Government Contracts in India. A contract entered into by or with the Central or State Government has to fulfill certain formalities as prescribed by Article 299 of the Indian Constitution.

In the case of State of Bihar v Majeed ((AIR 1954 SC 786)), the Hon’ble Supreme court held that “It may be noted that like other contracts, a Government Contract is also governed by the Indian Contract Act, yet it is distinct a thing apart. In addition to the requirements of the Indian Contract Act such as offer, acceptance and consideration, a Government Contract has to comply with the provisions of Article 299. Thus subject to the formalities prescribed by Article 299 the contractual liability of the Central or State Government is same as that of any individual under the ordinary law of contract.”

Article 299 lays down three conditions which the contracts made in the exercise of the executive power of the Centre or a State must fulfill to be valid:

  • The contract must be expressed to be made by the president or the Governor as the case may be;
  • These contracts made in the exercise of the executive power are to be executed on behalf of the President/Governor as the case may be; and
  • The execution must be by such person and in such manner as the President or the Governor of the case as the case may be, may direct or authorize.

There is hardly any distinction between a contract between private parties and Government contract so far as enforceability and interpretation are concerned yet some special privileges are accorded to the Government in the shape of special treatment under statutes of limitation ((Navrattanmal v State of Rajasthan , AIR 1961 SC 1704)). Some privileges are also accorded to Government in respect of its ability to impose liabilities with preliminary recourse to the courts. A private contract is only just to provide supplies or services but Government contract may provide livelihood and is an instrument for implementation of Governmental policies ((Ram Lal v State of Punjab AIR 1966 Pun 436)).

Though overriding the contractual obligations by a private party would amount to a breach of contract and render him liable for damages yet a similar Governmental step being necessary in public interest will not be wrongful and would not amount to a breach and will not render the Government liable to any damage. No party, once a contract is entered into, can change any provision of the contract. Such an act will result in breach of contract and can be a cause for damage ((Union of India V Anglo Afgan Agencies AIR 1968 SC 718)). However Government can unitarily at any point of time change the contract citing executive necessity.


  • REASONABLENESS: The principle of reasonableness and rationality which is legally as well as philosophically an essential element of equality or non-arbitrariness is projected by Article 14 and it must characterize every State Action, whether it be under the authority of law or in exercise of executive power without making of law. The state cannot , therefore , act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational an non- discriminatory. The action of the Executive Government should be informed with reason and should be free from arbitrariness. It is settled law that the rights and obligations arising out of the contract after entering into the same is regulated by terms and conditions of the contract itself ((Y.Konda Reddy v State of A.P.,AIR 1997 AP 121)). In a democratic society governed by the rule of law, it is the duty of the State to do what is fair and just to the citizen and the State should not seek to defeat the legitimate claim of the citizen by adopting a legalistic attitude but should do what fairness and justice demand ((M/s. Hindustan Sugar Mills v State of Rajasthan, AIR 1981 SC 1681)).
  • PUBLIC INTEREST: Appearance of public justice is as important as doing justice. Nothing should be done which gives an appearance of bias, jobbery or nepotism ((Shri Sachidanand Pandey v State of W.B., AIR 1987 SC 1109)). State owned or public owned properties are not to be dealt with at the absolute discretion of the executive. Certain principles have to be observed in accordance with the public interest.
  • EQUALITY, NON-ARBITRARINESS:  Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is violative of Article 14. The principle of reasonableness is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omni-presence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14 ((Maneka Gandhi v Union of India, AIR 1978 SC 597)).
  • CONTRACTUAL LIABILITY: In order to protect the innocent parties, the courts have held that if government derives any benefit under an agreement not fulfilling the requisites of Article 299(1), the Government may be held liable to compensate the other contracting party under S.70 of the Indian Contract Act, on the basis of quasi-contractual liabilities, to the extent of the benefit received. Section 70 lays down three conditions namely:
    1. a person should lawfully do something for another person or deliver something to him;
    2. in doing so, he must not intend to act gratuitously; and
    3. the other person for whom something is done or to whom something is delivered must enjoy the benefit thereof.

If under a contract with a government, a person has obtained any benefit, he can be sued for the dues under Section 70 of the Act though the contract did not confirm to Article 299 ((State of Orissa v Rajballav, AIR 1976 Ori 79))and if the Government has made any void contracts, it can recover the same under Section 65 of the Indian Contract Act ((Pannalal v Deputy Commissioner, AIR 1973 Sc 1174; see also Union of India v J.K Gas Plant, AIR 1980 SC 1330.)).


States cannot act arbitrarily while entering into contractual relationship with a third party and the action of the State must conform to some standards which is rational and non discriminatory. The action of the Government should be informed with reason and should be free from arbitrariness. The states, while entering into contracts must comply with all the legal requirements fairly and without any unfair procedure, and its action is subject to judicial review under Article 14 of the constitution. The doctrine that the powers must be exercised reasonably has to be reconciled with the no less important doctrine that the Court must not usurp the discretion of the public authority which the Parliament has appointed to take the decision. Within the bounds of legal discretion is the area in which the deciding authority has genuinely free discretion. If it passes the boundary, then it acts ultra vires. The decisions which are extravagant or capricious cannot be legitimate. But if the decision is within the confines of reasonableness, it is no part of the Court’s function to look further into its merits.