INTRODUCTION
Government of a country and of individual states play a very vital role in the economy. When looked at from the wider definition of state given in Article 12, one can infer that the role played by the government and its various ancillaries are extremely vast as it functions in the segments of Business to Consumer, Business to Business and Intergovernmental transactions as well.
In current times, government plays a very expansive role in the trade and commerce within and outside a country. Contracts which were in earlier and less developed times seen only as tools for private entities have grown in stature with the expansion of the role of the government. One must also look at it from the concept of the modern government which practices socialist-marketism. Such nations and their governments have to indulge in extensive contracting with commercial entities in order to take care of the economy and also contract with the citizens in order to fulfil its populist schemes.
Moreover, state plays a vital role in dealing with goods and services which are public in nature and often times involves state monopoly and also ensuring that material and natural resources do not get accumulated in the hands of few individuals. In order to accomplish these actions, government enters into a wide variety of contracts. The presence of such wide duties and corresponding rights can result in governments doling out lucrative resources to private entities in an arbitrary manner. This requires formulations of rules, principles and regulations within which governments will be allowed to enter into and conduct themselves within the framework of a contract.
However, being involved in such extensive acts of contracting, does bring along certain complications. The foremost issue will be with respect to the way in which government is to be treated vis-a-vis a an individual with respect to contracts entered into by them respectively. It is perhaps keeping such an eventuality in mind that the Constitution of India prescribes the boundaries of Indian governments contracting power. The hon’ble Supreme Court in a case had stated that though at a prima facie level, a government contract is not much different from any contract made under the Indian Contracts Act, however, there are certain differences as well. Contracts entered into by the government have to satisfy provisions of Article 299 as well as the Contracts Act.
The discussion in this chapter will revolve around a descriptive analysis of the method in which the Indian Constitution deals with government contracts as well as other important elements of government contracts, the method of formation of government contracts and the various types of government contracts. .
At this juncture, it is pertinent to first deal with the method of formation of government contracts as it is important to look into the various facts and circumstances which are involved before government can be bound in contractual obligations. For this purpose, it is important to first look into Article 298 which imbibes the Union government and the State government to indulge in any trade or business and also deal in property. This Article talks about the capacity of the government to enter into contracts. As held in Constituent Assembly Debates, it is only natural for the executive to wield the power of entering into contracts (as mentioned in Article 298) when seen in light of the principle of separation of powers. Moreover, in the case of Ram Jawaya Kapoor vs State of Punjab it was held by the hon’ble Supreme Court that while taking an action which is in the realm of decision making of the executive, the said decision need not always find its footing in a legislation. This ratio was added onto Article 298 post amendment.
Article 299 on the other hand provides one with 3 important conditions which must be complied with in order for there to exist a valid contract in which government is a party. These conditions are:
1. Contracts shall be expressed to be made by the President or the Governor.
2. Such contracts are executed on behalf of the President or Governor.
3. Execution must be by duly authorized person.
In a landmark decision, the Hon’ble Supreme Court held that the use of the terms “executed” and the use of “expressed to be made” clearly indicates that there is a requirement for a written contract and that it is compulsory to follow the provisions of Art 299(1) failing to do which will result in nullification of the contract. Furthermore, contracts which fail to fulfill provisions of Article 299 will be void and the government cannot be sued nor can it sue. The court observed that the very purpose of the presence of Article 299 in the Constitution of India is to ensure that there is no arbitrariness in commercial dealings of the government and that the government does not enter into any unauthorized contracts. However, it was clarified by the hon’ble Supreme Court in a case that provisions of Article 299 will not be applicable to any contract made under a specific statute (statutory contract) as they will governed by the statute itself.
Furthermore, it was observed by the hon’ble Supreme Court in a case that considering the provisions of Article 299 of the Constitution of India it is not possible for an implied contract to exist between the government and an individual. Such an implied contract, if allowed by the courts would result in nullification of provisions of Article 299. Such contracts would strike at the very letter and spirit of Article 299 and would give impetus to arbitrary contracting by the government. In the same breathe, the hon’ble Supreme Court also mentioned that it will not be possible for an oral contract between government and an individual. By making it compulsory to follow the provisions of Article 299, one can ensure that arbitrariness is eliminated and transparency is introduced.
However, the courts have in various instances observed that a very strict interpretation of Article 299 is not always in the interest of the government or the individuals. The court observed that having very rigid conditions with respect to Article 299 can tie the hands of the government and impair its freedom to take part in commercial transactions. Keeping this view in minds, the courts have taken liberal stand in various cases with respect to analysis of Article 289. In a case, the hon’ble Supreme Court observed that even if correspondence is exchanged between government and the other contracting party, if the terms involved in such correspondence conform to the provisions of Article 299, a valid contract will be formed. Therefore, courts have wavered between either a liberal interpretation of Article 299 or a rigid interpretation based on facts and circumstances of each case and has more or less adopted a purposive interpretation.
It is important to now look at the various types of contracts which are entered into by the government. These contracts have different procedures and rules and methods of formation. The examples of such contracts are:
A. Fixed Price Contracts:
In such contracts, a prior amount is fixed by the promisor at the very outset and the promisee agrees to finish the contract within the price so set by the promisor. Such contracts are usually resorted to when the parties have a clarity on the various nitty gritties of the work involved which enables them to arrive at an amount which can be considered as the maximum price. Such contracts are usually resorted to for low risk works wherein the promisor and promisee have an exact idea of the value of inputs which must be used to complete the task. They are generally the most common type of contracts which government enters into due to the transparency of the same.
Type of Fixed Price Contracts:
1. Firm Fixed Price Contract: In such contracts, once entered into no change in the maximum price is permissible. In such contracts, the complete risk falls on the promisee to accomplish the task within the stipulated cost.
2. Level of effort Contract: In such contracts, certain stipulated amount of effort has to be done by the promisee in exchange for a fixed price. Such contracts are usually resorted to in cases involving R&D. The amount to be paid to the promisee is fixed as per the amount of effort to be put in rather than the end product achieved.
3. Material Reimbursement Contract: Usually resorted to in contracts involving repair of capital good in which the promisee is paid money in way of reimbursement for the cost of materials used.
4. Award fees contract: Such contracts involve providing the promisee with a certain amount as an award on top of regular fixed amount. This award is granted if the promisee accomplishes the task on the basis of certain set parameters.
5. Economic Price Adjusted Contract: In such contracts, the maximum amount agreed to by the parties can fluctuate on the basis if change of price of the inputs. These adjustments can be on the basis of either appreciation of actual price or appreciation of index prices.
B. Cost Reimbursement Contract:
In such contracts, the promisee does not agree on a pre fixed maximum price. Instead, the final price is arrived at after computing for the total cost of inputs which has been invested into the work including a margin for the promisee. In contrast to fixed price contracts, such cost reimbursement contracts are resorted to when the actual price cannot be easily ascertained by prior calculation. The promisor takes the brunt of escalation of input costs.
Type of Cost Reimbursement Contracts:
1. Cost contracts: In such contracts, just the final and total cost incurred by the promisee is reimbursed. There is no concept of profit involved and hence is used by the government is works involving a socialist agenda.
2. Cost reimbursement & fixed fee: In such contracts, along with total cost, a prefixed fee is also paid to the promisee which acts as the profit.
3. Cost reimbursement & Incentive: In such contracts, along with the cost incurred, incentives are paid on the basis of the quality of work accomplished by the promisee.
C. Time & Materials Contract:
It is a combination of both Fixed price contract and cost reimbursement contract. Such contracts are undertaken when there is absolutely no way of ascertaining either the cost or time or any of the parameters involved in the task at hand. Such contracts are usually avoided by government due to the lack of transparency.
D. Indefinite Delivery Contracts:
Such contracts are resorted to when the promisor does not have a way of ascertaining he exact quantity of services required or in situations where continuous supply of services are required. These contracts are open ended with respect to the total amount of goods/services one needs to provide and the promisee can either be asked to deliver a definite quantity but in indefinite time intervals or be asked to deliver indefinite quantity in definite or indefinite time intervals.
CHAPTER 2
In the preceding chapter, we looked at the basics of government contracts, their formation and their type. The present chapter will deal with the multiple ways in which courts have interpreted the various aspects of government contracts. In doing so, the judiciary has set basic principles which must be contained in all contracts in which government is a party and thus has established basic norms of interpretation. Several principles of government contract have been laid down, mostly by the judiciary to deal with interpretation of government contracts. These principles are as below:
1. Government contracts should be Reasonable and Fair:
It is well established that the principle of equality contained in Article 14 of the Constitution of India espouses virtues of non-arbitrariness and reasonableness which must permeate every government action. It is therefore only natural that such principle finds its presence in the realm of government contracts. The government while entering into contracts must ensure that there is an environment of reasonableness and fairness.
In a democracy like India, the government must as a rule, abjure arbitrariness in its executive decisions. Especially while entering into contracts the government must ensure that there is no arbitrariness as common resources of the citizens are involved. As observed in Ramana shetty vs IAAI be it granting of a special right or denying the same by contract, there must not be arbitrariness. The principle of reasonableness and non arbitrariness and fairness ensures that the government does not indulge in favouritism by selectively picking the parties or individuals it enters into contract with and ensures that subject to certain restrictions, every individual has an equal right to contract with the government. Even a government contract formed under a special statute must be fair and non arbitrary. It has been held in multiple cases that in government contracts, just like in administrative actions the basic requirements laid down in the case of Pyrites Chemicals ltd vs. Bihar Electricity Board:
Must be in good faith.
- There should not be any bias.
- All relevant considerations must be considered and irrelevant considerations discarded.
- Must be non arbitrary and non perverse.
2. Government Contracts should be in Public Interest:
The hon’ble Supreme Court in the case ‘Sachidanand Pandey vs. State of West Bengal’ the hon’ble Supreme Court observed that the government in carrying out its duties shall ensure that it does not indulge in robbery or shades of nepotism or be biased. Government Contracts substantially involve public property and hence must always be in the interest of the general people at large.
Even in special situations wherein a slight departure is necessary from the norm of ensuring public interest, special care is to be taken to ensure that there are compelling reasons to do so. While interpreting a government contract, the courts must ensure that its is in the public interest and it is reasonable and non arbitrary or it is well within the power of the judiciary to quash the contract.
3. Ratification of Government Contracts and Promissory Estoppel:
It is a well established concept in contract law that the principal can ratify the action of an agent when the latter has acted bereft of any authority. In the case of government contracts, this principle needs to be analysed in the light of provisions of Article 299 which sets forth the provisions of government contract formation.
In the case ‘Chatturbhuj Jasani vs Parashram’ the hon’ble Supreme Court specifically allowed the government to ratify contracts especially when such contracts are meant for the general interest of the public. However, the aforementioned case was held not to be good law for cases wherein Article 299 was involved as the facts of the case were in relation to elections. Therefore, the hon’ble Supreme Court in the case ‘Mulamchand vs State of Madhya Pradesh’ stated that as far as government contracts are concerned, no ratification of any kind is allowed and instead a fresh contract has to be drafted.
Similarly, in the case of promissory estoppel, if the provisions of Article 299 has not been fulfilled, doctrine of promissory estoppel will not be applicable.
4. Liability of government in contracts:
In the case ‘State of Bihar vs Abdul Majeed’ the hon’ble Supreme Court observed that in case of contracts, the liability of the government is analogous to that of a private person. Moreover, the judiciary has in several cases observed that just because by reason of non-fulfilment of Article 299 of Constitution of India, the government cannot be exempted from all liability arising out of a contract especially when some benefits have been received from the other contracting party. Government can still be held liable under Section 70 of the Indian Contracts Act and be ordered to compensate for benefits received on the basis of quasi contracts.
Similarly, if it is the government which has provided benefits by way of goods or services to the other contracting party, it can sue for compensation. This principle has been favoured by courts in multiple cases to ensure that in the current world wherein government indulges in numerous contracts through its vast network of officers, no individual or party contracting with the government should be unreasonably made to provide goods or services for no compensation because of non fulfillment of legal technicalities.
5. Judicial review of Government Contracts:
Previously in this chapter, certain important principles were espoused which must inherently be a part of government contracts. Principles like reasonableness, non arbitrariness and fairness are essential to a government contract. However, this introduces the issue of enforcement of these principles and the question of power of judicial review with respect to government contracts. While discussing the court’s power of judicial review with respect to government functions, one must consider the scope of intervention which the judiciary can indulge in; the merits of the issue; methodology in which decisions were taken. Specifically with respect to judicial review of government contracts, in the case ‘Tata Cellular vs Union of India’ the hon’ble Supreme Court observed that it is well settled that the modern nation state must have wide reaching power of contracting in order to fulfill its duties under the ever evolving definition of sovereignty. However, such freedom must be subject to Wednesbury Principle of Reasonableness as well as being free from arbitrariness and unreasonableness and bias.
While wielding the power of judicial review, the courts in pursuit of analysis of government contract must concern itself with the decision making process employed by the government. It is not within the ambit of power of review to look into the minute details of the government contract. The courts have a duty to analyse whether the government contract was within the principles enunciated by Article 14 or not. It was observed in the case ‘Sterling computers ltd vs M&N publications ltd’ that it is well established that the court cannot substitute its judgment for the commercial wisdom of the government. The court must balance the need to verify whether the government contract is reasonable and non arbitrary with the need to avoid judicial overreach.
6. Doctrine of Legitimate Expectation and government contracts:
The Doctrine of Legitimate Expectation which states that certain actions can be expected from the administration based on actions in the past, is well established. The doctrine strives to introduce predictability and a high degree of certainty in the actions of the government based on which individuals can make their own decisions. It is generally observed that in the course of interpretation of government contracts on the basis of Doctrine of Legitimate Expectation, the courts have taken a very liberal approach. In the case ‘Food Corporation of India vs Kamdhenu cattle industries’ the hon’ble Supreme Court observed that the government has to strictly abide by the provisions set forth in Article 14 with respect to government contracts. The court also observed that it is of utmost importance to ensure that the doctrine of legitimate expectation finds its presence in the realm of government contracts as it is vital for individual parties who enter into contracts with the government to have a reasonable expectation as to the practices which will be adopted by the government.
However, the courts have also gone against the doctrine in few cases wherein the doctrine of legitimate expectation was held not to apply. Instances wherein following the doctrine would result in damage to the public interest have been held to be reasonable exceptions to abrogate the doctrine.
7. Doctrine of Executive Necessity and Government Contracts:
The Doctrine of Executive Necessity states that the executive cannot impose much fetters on the parliament and administration as they need to take quick decisions on the basis of general public interest. This doctrine cannot be imported completely to the realm of government contracts as the courts have in various cases observed that the executive have a tendency to rescind contracts based on the doctrine which affects the common contracting individuals. The executive should not be given such unfettered power which could enable them to act arbitrarily with respect to government contracts and thereby import uncertainty and non- reasonableness.
CONCLUSION
In summation of the discussion done in this paper, the role played by government contracts in the economy of a country has been duly explained and dealt with in detail. It is clear that there are multiple types of government contracts which can be resorted to depending upon the requirements and circumstances.
Government contracts though similar in form to normal private contracts, import a wider scrutiny upon them as common resources are involved. Before entering into contracts, the provisions of Article 298 of the Constitution of India which deals with the power conferred on the government to enter into contracts must be satisfied and after that the provisions given in Article 299 of the Constitution of India which deals with the process to be followed in government contracts needs to be satisfied. The various aspects have been clearly discussed with the help of multiple case laws.
Moreover, the paper analysed some of the core issues and principle involved in Interpretation of Government contracts. While awarding government contracts, the government must be extremely careful and must act in a very non-arbitrary, fair and reasonable manner as public interest and property are at stake. Considering the fact that the definition of sovereignty and public interest and law regarding government’s contracting power are changing continuously, it is safe to say that interpretation of government contracts will be going through a phase of interesting evolution in the coming years.
BIBLIOGRAPHY
Acts
Constitution of India.
- Indian Contracts Act, 1872.
Cases
- State of Bihar vs Majeed AIR 1954 SC 786
- Ram Jawaya Kapoor vs State of Punjab AIR 1955 SC 549
- Bhikaraj Jaipuria vs UOI AIR 1962 SC 113
- Chatturbhuj vs Moreshwar AIR 1954 SC 236
- Karam Thapar vs State of Bihar AIR 1962 SC 110
- State of M.P VS K.P Choudary AIR 1967 SC 2013
UOI VS Ralia Ram AIR 1963 SC 1685
- Ramana shetty vs IAAI 3 SCC 489
- Pyrites Chemicals ltd vs. Bihar Electricity Board AIR 1996 PAT 1
- Sachidanand Pandey vs. State of West Bengal AIR 1987 SC 1109
- Chatturbhuj Jasani vs Parashram AIR 1954 SC 236
- State of Bihar vs Abdul Majeed AIR 1954 SC 245
- Tata Cellular vs Union of India AIR 1996 SC 11
- Sterling computers ltd vs M&N publications ltd AIR 1996 SC 51
- Food Corporation of India vs Kamdhenu cattle industries 1991 SCC 71
Articles & Books
- Umakanth Varottil “Government Contracts” Oxford University Press
- Jay D. White “The Hermeneutics of Government Contracting” Taylor & Francis Ltd
- Vinod K. Agarwal “Government Contracts: Law and Procedure” Eastern Book Company
- T.R. Desai “Tenders and Government Contracts” Universal Law Publishing Co
- M.P Jain “Indian Constitutional law” LexisNexis
AUTHOR
ADVOCATE VISHNU T MENON
