Exclusion of implied contracts from the purview of government contracts

Introduction

Government contracts are entered into for purposes like construction, management, manpower supply, maintenance and repairs, IT-based projects, etc. When either party is the government, the contract becomes a government contract. Government Contract is also governed by the Indian Contract Act 1872, yet it is distinct a thing apart. The union and the state have been vested with the power to enter into contracts under Article 298 of the Indian Contract Act 1872. It can carry on any trade or business, acquire, hold, and dispose of property and make contracts. If the formal requirements of Article 299 are complied with, the contract can be enforced against the Union or the States.

In addition to the requirements of the Indian Contract Act 1872 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 the same as that of any individual under the ordinary law of contract.

Article 299(1) states that there cannot be an implied contract between the government and another person. It has been enacted for safeguarding the government against unauthorized contracts. The formalities stated in the said provision cannot be waived or dispensed with, or circumvented by invoking doctrine of estoppel or ratification.

Implied contracts and governments contracts-

A government contract should be made in the exercise of the executive power of the Union or of a State, it should be expressed to be made by the President, or by the Governor of a State and should be executed on behalf of the President or the Governor. The object of Article 299 is to enhance public interest by protecting the government from being saddled with liability for entering into unauthorized contracts. As all the conditions prescribed in Article 299 (1) are mandatory, therefore, there can be no implied contract between the government and another person.

A valid contract with the Government in compliance with the provisions of Article 299 (1) binds both parties to the contract and can be enforced by them. However, the President or the Governor cannot be made to be personally liable under government contracts. It is the Government that becomes a party to such contracts. And accordingly, contracts couched in terms of Article 299 (1) are enforced by and against the Government. Even the apex court observed that given Article 299 (1) there could be no implied contract with the Government because if such implied contracts with the government were allowed, it would in effect make the provision meaningless.

The Constitution itself recognizes the Union of India and the state governments’ contractual responsibilities in matters involving government contracts. The executive power of the Central government and each state government shall extend to the conduct of any trade or business, the purchase, possession, and disposition of property, and the formation of contracts for any purpose, according to Article 298 of the Constitution. The Constitution does not require any formal document to be executed on behalf of the Government for it to be considered a binding agreement. Any form of ‘offer and acceptance’ complying with Article 299 of the Constitution would be a valid and binding contract.

Effect of non-compliance

If the provisions of Article 299(1) are complied with, the contract is valid and it can be enforced by or against the Government and the same is binding on the parties thereto. The provisions of Article 299(1) are mandatory and not directory and they must be complied with. The objective is to protect the Government against unauthorized contracts. If a contract is unauthorized or over authority, the Government must be protected from being saddled with the liability to avoid public funds being wasted. Therefore, if any of the aforesaid conditions is not complied with, the contract is not by law and the same is not enforceable by or against the Government.

Key take away

A government contract should follow the principles of transparency, economy, responsibility, and contractual balance. Before 1947, in common law, the crown could not be sued in court on a contract. The Crown Proceedings Act, of 1947 abolished this procedure and permitted suits being brought against the crown in ordinary courts to enforce contractual liability barring a few types of contracts.

However, in India, this view was never accepted and the government was liable as an ordinary litigant in court. Section 175(3) of the Government of India Act, 1935 prescribes the requirements for government liability in contractual obligations, which is reincorporated in Article 199(1) of the Constitution of India. To bind the government in contractual liability the three requisites must be there, which include a written contract, execution by an authorized person, and expression in the name of the President. Earlier the Apex Court took the rigid view that these requirements are mandatory and must be complied with. However, in recent times the Court has taken a lenient view in respect of the mandatory requirements of Article 299(1).