Contractual Liability of the Administration in India

Introduction

Contractual liability of the administration arises when the government is a party to a contract. The Indian Constitution addresses this through legal principles that hold the government accountable for its contractual obligations.

In today's welfare state, the government's role in economic activities has expanded significantly. The government now manages and distributes a wide range of benefits, including contracts, licenses, and quotas, which are often seen as privileges. These contracts have become increasingly important as they represent new forms of wealth in society.

When the government takes on the role of a welfare state, the question of its contractual liability becomes crucial. The government is bound by law and cannot act outside its legal limits. This raises the issue of whether individuals who suffer harm or loss due to government actions have the right to seek remedies from the state. The goal is to ensure that the government's discretion in granting benefits is regulated, structured, and exercised fairly.

What is a Contract?

A contract, as defined by Section 2(h) of the Indian Contract Act, 1872, is "an agreement enforceable by law." An "agreement," according to Section 2(e) of the Act, is "every promise and every set of promises, forming consideration for each other."

When the central or state government is involved in a contract, it is referred to as a government contract.

Contractual Liability of the Administration in Britain

Before 1947, under Common Law, it was not possible to sue the Crown in a court of law for a contract. This privilege dates back to feudal times when no one could sue a lord in his own courts. If someone had a grievance against the Crown, they could file a petition to present their claim. If the royal permission (royal fiat) was granted, the case could be tried in court. However, if the permission was denied, there was no legal remedy available.

This rule changed with the enactment of The Crown Proceedings Act, 1947, which allowed lawsuits to be brought against the Crown to enforce contractual obligations.

Contractual Liability of the Administration in India

A. Formation of Contracts by the Administration

Article 299(1) of the Indian Constitution outlines specific requirements that must be met for contracts made by the central or state government to be valid. These requirements are:

• Contracts must be explicitly stated to be made by the President or the Governor, depending on the level of government.
• These contracts must be executed on behalf of the President or Governor.
• The manner of execution and authorization of these contracts must be directed or approved by the President or Governor.
• The term "executed" in Article 299(1) indicates that the contract must be in writing. Oral contracts are not sufficient under this article.

In the case of K.P. Chowdhary v. State of Madhya Pradesh, the Supreme Court ruled that there cannot be an implied contract between the Government and another person under Article 299(1). If a contract does not fully comply with Article 299(1), it is not considered a contract at all and is unenforceable by either the Government or the other party.

The judicial approach to Article 299 aims to balance two key objectives:

• Protecting the Government from unauthorized contracts.
• Safeguarding the interests of individuals who enter into contracts with government officials, even if the formalities required by the Constitution are not fully met.

According to Article 299(1), for a contract between the government and a private party to be enforceable, it must be expressed in the name of the President or Governor. Even if an authorized person makes the contract, it is unenforceable against the government if it is not expressed as being made on behalf of the President or Governor.

The Supreme Court has also ruled that when the government deals with the public by entering into contracts or issuing licenses, it must do so fairly and transparently, following the law and based on clear, well-defined policies communicated to the public.

B. Ratification of Contracts by the Administration

Before 1968, it was believed that even if the government could not be sued for informal contracts, it could accept responsibility for them through ratification.

In the case of State of West Bengal v. B.K. Mondal, the Supreme Court observed that a contract not conforming to Article 299(1) was not "void" in a technical sense and could be ratified by the government.