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Contractual Liability of the State

The subject of government contracts has assumed great importance in the modern times. Today the state is a source of wealth. In the modern era of a welfare state, government's economic activities are expanding and the government is increasing.

Today a large number of individuals and business organizations enjoy largess in the form of government contracts, licenses, quotas, mineral rights, jobs, etc. This raises the possibility of exercise of power by a government to dispense largess in an arbitrary manner. It is axiomatic that the government or any of its agencies ought not to be allowed to act arbitrarily and confer benefits on whomsoever they want.

Therefore there is a necessity to develop some norms to regulate and protect the individual interest and at the same time to create working environment to exercise the discretion of the Government to extend the contractual benefits to the other parties to the contract.

Meaning of Contract

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 the agreement. The general law 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.

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’.

Government Contract

A contract to which the Central Government or a State Government is a party is called a 'Government Contract'. 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.But the position is different in respect of Government Contracts. 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.

Contracts and Government contracts

It is true that in respect of Government Contracts the provisions of Article 299(1) must be complied with, but that does not mean that the provisions of the Indian Contract Act have been superceded.

In the case of State of Bihar v Majeed, the Hon'ble Supreme court has 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 be complied 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 the same as that of any individual under the ordinary law of contract.”

As regards the interpretation of contract, there is no distinction between the contracts to which one of the parties is the Government and between the two private parties.

Article 299 of the Constitution

  1. All contracts made in the exercise of 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 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 person and in such manner as he may direct or authorize.
  2. Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purpose of any enactment relating to Government of India hereto before in force , nor shall any such contract or assurance on behalf of any of them be personally liable in respect thereof.

Thus Article 299 lays down three conditions which the contracts made in the exercise of the executive power of the Center or a state must fulfill to be valid

Expressed to be made by the president or the Governor

The contract must be expressed to be made by the president or the Governor as the case may be;

In Union of India v. SSH Syndicate1). It was observed that the contract with the Government will not be binding if it is not expressed to be made in the name of the President or the Governor, as the case may be.

Executed on behalf of the President/Governor

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;

In Union of India V. N.K.Ltd2) the Director was authorized to execute contract on behalf of the president, but the contract was entered into by the secretary. The contract was declared invalid as it was entered by an officer who was not authorized for this purpose.

Execution by such person in such manner as the President or the Governor authorize

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.

It has been held by the Hon'ble Supreme Court in the case of Bhikaraj Jaipuria vs Union of India that it is clear from the words “expressed to be made” and “executed” that there must be a formal written contract…The provisions of Article 299(1) are mandatory in character and any contravention thereof nullifies the contract and makes it void. The provisions of Article 299(1) have not been enacted for the sake of mere form but they have been enacted for safeguarding the Government against the unauthorized contracts. The provisions are embodied in the constitution on the ground of public policy on the ground of protection of general public and these formalities cannot be waived or dispensed with.“

Where a contract is made by tender and acceptance, the acceptance must be made by a duly authorized person and on behalf of the President, and a valid contract may result from correspondence.

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 effect make Article 299(1) useless, 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 inferred on the facts and the circumstances of the particular case.

It was held by the Hon'ble Supreme Court in the case of K.P.Chowdhary vs State of Madhya Pradesh that

In view of the provisions of Article 299(1) there is no scope for any implied contract. Thus no contract can be implied under this Article.if the contract between the Government and a person is not incompliance with Article 299(1), it would be no contract at all and would not be enforceable as a contract either by the Government or by the person.“


The reason for enacting Article 299 of the constitution of India is 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 the contracts made by unspecified public servants without express sanction of the law. It is a provision made to save the state from spurious claims made on the strength of unauthorized contracts.

AIR 1976 SC 879
AIR 1972 SC 915