Contractual Liability of State

CONTRACTUAL LIABILITY
Liability of the Government

Liability of the Government Prior to
commencement of the Constitution
Before commencement of the Constitution also, the
liability of the government for breach of contract was
recognised. The East India Company was established
in India, essentially for commercial activities. As early
as in 1785, in Moodalay v. Morton, The Supreme
Court of Calcutta held that the east India Company
was subject to the jurisdiction of Muniucipal Courts in
all matters and proceedings contd….
Contd…
Undertaken by them as a private trading company.
In a number of Statutes also, such liability of
the government had been recognised. Thus the, the
provisions were made in the Government of India Acts
of 1833, 1858, 1915 and 1935.
Constitutional Provisions relating to
Contractual Liability
Contractual liability of the Union of India and the
States is recognised by the Constitution itself in the
Articles- 294, 298, 299 and 300. Article 298
expressly provides that the executive power of the
Union and of each State shall extend to the carrying
on of any trade or business and the acquisition,
holding and disposal of property and the making of
contracts for any purpose.
Execution of Contracts-Mode & Manner
Article 299(i) prescribes the mode and manner as

following way-
All contracts made in the exercise of the executive power of the
Union or of 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 persons and in such manner as
he may direct or authorise.
Consequences of Contracts not being in
Conformity with Article-299(1)
General Proposition- A ‘contract’ not in conformity with Article-299(1)
is not as such enforceable either against the government or the
contracting party as no rights accrue thereunder in favour of one party
nor any liability is incurred by the other.
In Uttar Pradesh v. Murari Lal AIR 1971 SC 2210 Supreme Court ruled
that a contract not complying with 299(1) being void and ‘ no contract
in the eye of the law’, Section 230(3) of the Contract Act could not
become applicable. In this case the horticulturist in the department of
Agriculture, govt. of U.P. negotiated with the plaintiff for storing
government potatoes in his cold storage. The plaintiff reserved the
requisite space for the purpose but no potatoes were sent.
Contd……
Contd…..
He sued the government and the horticulturist for
the rent. The state defence was that there was no
contract conformable with Art. 299(1) and so it was
not liable. On appeal S.C. held that if there is no
contract in eye of law s. 230(3) could not become
applicable. The same is true of s. 235.
In Union of India v. N.K. Private Ltd. An
application by the contracting party under s. 20 of
the Arbitration Act for reference of a dispute to
contd..
Contd……
arbitration under a contract with the government was held
not maintainable as there was no valid and binding
contract, the letter of acceptance of the offer of the party
being signed by a person not authorised to execute
contracts for and on behalf of the President.
In Timber Kashmir Pvt. Ltd. V. Conservator of Forests
AIR 1977SC 151 the Kashmir Government filed 3
applications under the Arbitration Act to refer disputes
arising out of three agreements between it and the
contd…..
Contd…..
appellant company to arbitration under the
arbitration clauses of the said agreements. The
company objected on the ground that the arbitration
clause was, in each case, a part of an agreement
which was not duly executed in accordance with
constitutional provision. (S. 122(1) of the Jammu and
Kashmir Constitution which is equivalent to Article
299(1) of the Indian Constitution) The Supreme Court
overruled the objection as it found the said contracts
to be valid.
Quasi-contractual liability
The provisions of Article 299(1) of the Constitution are
mandatory and if they are not complied with, the
contract is not enforceable in a court of law at the
instance of any of the contracting parties. In these
circumstances, with a view to protecting innocent
persons, courts have applied the provisions of Section
70 of the Indian Contract Act, 1872 and held the
government liable to compensate the other contracting
party on the basis of quasi-contractual Liability.
Section 70 of Indian Contract Act,
1872
Section 70 provides that if the goods delivered are
accepted or the work done is voluntarily enjoyed, then
the liability to pay compensation for the enjoyment of
the said goods or the acceptance of the said work
arises.
Thus, where a claim for compensation is made
by one person against another under Section 70, it is
not on the contd…..
Contd……
basis of any subsisting contract between the parties,
but on the basis of the fact that something was done
by one party for the other and the said work so done
has been voluntarily accepted by the other party.
Object of Sec.-70 and the conditions
precedent for the applicability
Object- The object of Section 70 is to prevent “unjust
enrichment”.
Conditions must be fulfilled- 1. A person must have
lawfully done something for another person or
delivered something to him.
2. He must not have intended to do such act
gratuitously.
3. The other person must have accepted the act or
enjoyed the benefit.
The case State of W.B. v. B.K. Mondal
AIR 1962 SC 779 and s.- 70
At the request of a government officer, the contractor
constructed a building. The possession was obtained
by the officer and the building was used by the
government, but no payment was made to the
contractor. It was contended that as the provisions of
Art. 299(1) of the Constitution had not been complied
with, the contract was not enforceable. The S.C. held
that the contract was unenforceable contd…..
Contd…..
but the government was liable to pay to the
contractor under Section 70 of the Indian Contract
Act, 1872 on the basis of quasi-contractual liability.
The principle laid down in B. K. Mondal has
been followed in several cases thereafter.
Some relevant cases of Unjust
Enrichment and holding of the court
In Shiv Shankar Dal Mills v. State of Haryana AIR 1980
SC 1037, market fee was collected under the
provision which was struck down by the Supreme court
in an earlier case. A prayer was, therefore, made by
the traders to refund the amount collected from them.
The court held that though collection of market fee
from traders was illegal, they could demand only such
amount that had not passed on to the customers.
Contd….
Contd….
In Godfrey Phillips India Ltd. V. State of U.P., (2005) 2
SCC 515 the Constitution Bench of Supreme Court
held that the State Govt. had no power to impose
luxury tax. The action of levy of luxury tax on
tobacco and tobacco products was, therefore
declared illegal and ultra vires beyond the legislative
competence of the State legislature. Regarding refund
of tax collected by State Government, however the
court observed that if the dealers had collected the
amount from consumers or customers, they could not
retain the said amount.
Contract of Service
A contract of service between State and a private
person is not governed by Article 299 of the
Constitution. At the initial stage of appointment in a
government service, no doubt there is a contract
between the parties. There is an offer and acceptance
of employment. But once a person is appointed, he or
she acquires a status and the relationship is no more
governed by a contract, but by an appropriate
legislation or rules under proviso to Article 309 of the
Constitution.

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CONTRACTUAL LIABILITY

Liability of the Government

Article 299(i) prescribes the mode and manner as

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