A Project on
“liability of government in contracts ” Submitted towards the partial fulfilment of grading for the 5th semester of B.A. LLB(H.) course for the subject
ADMINISTRAT ADMINISTR ATIVE IVE LAW LAW
SCHOOL OF LAW Submitted To:
Submitted By:
r Hemant singh
shashan! gautam
Assistant Professor
"#gsol$%$&'
School of Law
(A)LL(*Hons)+&sem
TABLE ! "NTENTS • • • • • • • • •
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Introduction
Contractual Liability of the State In modern state, whatever be the form of government, the individual is aected in his everyday life and in the exercise of his civil rights by acts of the State and its ocials in various spheres and in dierent ways. Some of these acts are done by the State as the sovereign while others are done by the State and other capacities in the same manner as a private individual does. !ence, the sub"ect of government contracts has assumed great importance in the modern times. In the modern era of a welfare state, government#s economic activities are expanding and the government is increasingly assuming the role of the dispenser of a large number of bene$ts. %oday a large number of individuals and business organisations en"oy largess in the form of government contracts, licenses, &uotas, mineral rights, "obs, etc. %his raises the possibility of exercise of power by a government to dispense largess in an arbitrary manner. %herefore, there is a necessity to develop some norms to regulate and protect individual interest in such wealth and thus structure and discipline the government discretion to confer such bene$ts. ' contract is an agreement enforceable by law, which oers personal rights, and imposes personal obligations, which the law protects and enforces against the parties to the agreement. %he 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 ()h* of the Indian Contract 'ct,+( de$nes a contract as -'n agreement enforceable by law-. %he word -agreement- has been de$ned in Section ()e* of the 'ct as -every promise and every set of promises, forming consideration for each other.- ' contract to which %he Central overnment or a State overnment is a party is called a -overnment Contract-. overnment contracts have been accorded Constitutional recognition /. %he Constitution, under 'rticle (0+ 1, clearly lays down that the executive power of the 2nion and of each state extends to -the carrying on of any or business and to the ac&uisition, holding and disposal of property and the ma3ing of contracts for any purpose-. %he Constitution therefore, provides that a government may sue or be
(asu5 0) 0)5 Administrati6e Law5 7th 3d)5 8amal Law House5 8ol!ata5 at p) #'"
( A6atar Singh5 Contract and Specific /elief5 "$th 3d)5 3astern (oo! Compan95 Luc!now5%$$atp)7 / Sathe5 Section P)5 Administrati6e Law5 'th 3d)5 Le;is -e;is (utterworths5 -ew 0elhi %$$< atp)&' 1
%4) .he e;ecuti6e power of the 1nion and of each State shall e;tend to the carr9ing on of an9 or business and to the
ac=uisition5 holding and disposal of propert9 and the ma!ing of #o$tr%#t s for an9 purpose
sued by its own name. ' similar provision is found in the Code of Civil 4rocedure 05+ under Section 0 6.
4osition in other Countries 7ritain 'ccording to Common Law, before 01, the Crown could not be sued in a Court on a contract. %his privilege was traceable to the days of feudalism when a lord could not be sued in his own courts which had arisen out of the theory of irresponsibility of the State as propounded by 8oman Law. 9 'nother maxim which was pressed into service was that the -:ing can do no wrong-. ' sub"ect could, however, see3 redress against the Crown through a petition of right in which he set out his claim, and if the royal $at was granted, the action could then be tried in the Court. %he royal $at was granted as a matter of course and not as a matter of right, and there was no remedy if the $at was refused. %he Crown 4roceedings 'ct,01, abolished this procedure and permitted suits being brought against the Crown in the ordinary courts to enforce contractual liability, a few types of contracts being, however, excepted. It follows, therefore, that regular proceedings now lie against the Crown for breach of contract, in those cases in which the petition of right earlier lay. ++
2nited States of 'merica in the 2nited States, the principle of immunity of the State as a sovereign power was imported from ;ngland. 0 %his led the Congress to enact the o6ernment: ,n a suit b9 or against the >o6ernment5 the authorit9 to be named as plaintiff or defendant5 as the case ma9 be5 shall be? *a+ in the case of a suit b9 or against the Central >o6ernment5 @the 1nion of ,n dia5 and *b+ in the case of a suit b9 or against a State >o6ernment5 the State)
9
(asu5 0) 0)5 Administrati6e Law5 7th 3d)5 8amal Law House5 8ol!ata5 at p) #'"
Bain5 ) P)5 Outlines of ,ndian legal Constitutional Histor9 b9 )P) Bain5Wadhwa and Co) -agpur5 -ew 0elhi5 %$$7 at p) "$"
+ Windsor Annapolus /9) Co) 6) Counties /9) Co)5 *"7+ "" App) Cas) 7$' 0 Supra -ote < at p #'&
further liberalised by the =udiciary in various cases li3e !athley v. 2.Section 5, 8ayonier v. 2.Section , India %owing Co. v. 2.Section ( etc.
'ustralia %he =udiciary 'ct, 09/ lays down the law relating to government liability. In the case of Sargood 7ros. v. Commonwealth /it was held that an action lies against the Commonwealth in contract or tort, in the ordinary manner, by a sub"ect or a state. Similarly, in the case of Commonwealth v. >ew South ?ales 1, it was held that a State may be sued in contract or in tort without its consent. %hus the maxim, the :ing can do no wrong, has not been applied in 'ustralia.
%he Indian 4osition %he words #had not this Constitution been enacted# in 'rticle /55)* 6 indicate that %!; 7'SIS @< sueability of the state in India is historical. 9 In order to appreciate the signi$cance of these words, we must trace the history of the Indian 'dministration from the time of the ;ast India Company, when the Court was of the view that even though the ;ast India Company has sovereign powers, if it contracts in civil capacity and if it brea3s its contract it would be held answerable. Later the overnment of India 'cts )Section /5 of 'ct of 06 and Section6 of 'ct of 0/6* 5 *"4&7+ #&" 1)Section "'# *"4&7+ #&% 1)Section #"& ( *"4&&+ #&$ 1)Section 7" / *"4"$+ " CL/ %& 1 *"4%#+ #% CL/ %$$ 6
Article #$$ pro6ides that: .he >o6ernment of ,ndia ma9 sue or be sued b9 the name of the 1nion of ,ndia and the
>o6ernment of a State ma9 sue or be sued b9 the name of the State and ma95 subject to an9 pro6isions which ma9 be made b9 Act of Parliament or of the Legislature of such State enacted b9 6irtue of po wers conferred b9 this Constitution5 sue or be sued in relation to their respecti6e affairs in the li!e cases as the 0ominion of ,ndia and the corresponding Pro6inces or the corresponding ,ndian States might ha6e sued or been sued if this Constitution had not been enacted)
9
Supra -ote < at p) #$
oodala9 6) 3),) Co)5 *"'&+ " (ro) C)C) <74
expressly empowered the overnment to enter into contracts with private individuals and the corresponding provision in the Constitution is 'rticle (00)*. In all these 'cts it was provided that the person ma3ing the contract on behalf of the overnment would not be personally liable in respect thereof. %he Indian Contract 'ct, +( does not prescribe any form for entering into contracts. ' 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. 7ut the position is dierent in respect of overnment Contracts. ' contract entered into by or with the Central or State overnment has to ful$ll certain formalities as prescribed by 'rticle (00 of the Indian Constitution. In the case of State of 7ihar v. Aa"eed+, the !on#ble Supreme Court held that B -It may be noted that li3e other contracts, a overnment Contract is also governed by the Indian Contract 'ct, yet it is distinct a thing apart. In addition to the re&uirements of the Indian Contract 'ct such as oer, acceptance and consideration, a overnment Contract has to comply with the provisions of 'rticle (00. %hus sub"ect to the formalities prescribed by 'rticle (00 the contractual liability of the Central or State overnment is same as that of any individual under the ordinary law of contract.-. 's regards the interpretation of contract, there is no distinction between the contracts to which one of the parties is the overnment and between the two private parties. 0 %hough there is hardly any distinction between a contract between private parties and overnment contract so far as enforceability and interpretation are concerned, yet, some special privileges are accorded to the overnment in the shape of special treatment under statutes of limitation. (5Section ( of the Limitation 'ct, 09/ contains provision for longer period of limitation of suits on or behalf of the State. %he longer limitation period was based on the common law maxim nulla tempus occurit regi i.e. no time aects the Crown. ( Some privileges are also accorded to overnment in respect of its ability to impose liabilities with preliminary recourse to the courts. %his probably is because of doctrines of executive necessity and public interest. ((
+ A,/ "4&< SC '7 0 /am Lal 6) State of Punjab5 A-1DPHD$$7D"477: A,/ "477 Punj <#7 (5 -a6rattanmal 6) State of /ajasthan5 A-1DSCD$$#&D"47": A,/ "47" SC "'$< (
Andhra Pradesh 6) Challa /am!rishna /edd95 A-1DSCD$#7D"%$$: *%$$$+ & SCC '"%
%he executive power of the 2nion of India and the States to carry on any or business, ac&uire, hold and dispose property and ma3e contracts is armed by 'rticle (0+ of the Constitution of India. If the formal re&uirements re&uired by article (00 are complied with, the contract can be enforced against the 2nion or the States. %he issue in 'dministrative Law mainly arises where the epartmental 'uthorities and public ocials, owing to their inertia or ignorance, enter into informal contracts which do not comply with the re&uirements of 'rticle (00)*. %here has been a plethora of cases on this point, yet the law is still not well settled.
'rticle (00 of the Constitution provides B -)* 'll contracts made in the exercise of executive power of the union or a state shall be expressed to be made by the 4resident or by the overnor 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 4resident or the overnor by such person and in such manner as he may direct or authorise. )(* >either the 4resident nor the overnor shall be personally liable in respect of any contract or assurance made or executed for the purpose of any enactment relating to overnment 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-. It has been held by the !on#ble Supreme Court in the case of 7hi3ara" =aipuria v. 2nion of India (/ B -it is clear from the words -expressed to be made- and -executed- that there must be a formal written contract... %he provisions of 'rticle (00)* are mandatory in character and any contravention thereof nulli$es the contract and ma3es it void. %he provisions of 'rticle (00)* have not been enacted for the sa3e of mere form but they have been enacted for safeguarding the overnment against the unauthorisedcontracts. %he 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. %he provisions have been embodied to protect the general public as represented by the government. %he terms of the 'rticle have therefore been held to be mandatory and not merely directory. In 09(, the Court repelled the foregoing view ta3en in the case of Chaturbhu" v. Aoreswar (1 and came to lay down in the case of 7hi3ara" v. (( Supra -ote # at p) #% (/ A-1DSCD$$<&D"47" : A,/ "47% SC ""# (1 A-1DSCD$$4%D"4&< :*"4&<+ SC/ "' *#&+
2nion of India (6 that the provisions of 'rticle (00 are mandatory and a contravention thereof, would render the contract void. If so, the pettiness of the contract or the administrative practice was of no avail. In view of 'rticle (00)* 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 eect ma3e 'rticle(00)* useless, for then a person who had a contract with the government which was not executed at all in the manner provided under 'rticle (00)* could get away by saying that an impliedcontract may be inferred on the facts and the circumstances of the particular case. (9 It was held by the !on#ble Supreme Court in the case of :.4.Chowdhary v.State of Aadhya 4radesh(( that B -In view of the provisions of 'rticle(00)* there is no scope for any implied contract. %hus no contract can be implied under this 'rticle.if the contract between the overnment and a person is not incompliance with 'rticle (00)*, it would be no contract at all and would not be enforceable as a contract either by the overnment or by the person. %he Court "usti$ed this strict view by saying that if implied contracts between the government and other persons were allowed, they would in eect, ma3e 'rticle (00)* a dead letter, for then a person who had acontract with the government which was not executed at all in the manner provided under 'rticle (00)* could get away by pleading that an implied contract be inferred from the facts and circumstances of the case. !owever, the Courts have also realised that insistence on too rigid observance of all the conditions stipulated in 'rticle (00 may not always be practicable. !undreds of government ocers daily enter into a variety ofcontracts, often of a petty nature, with private parties. 't times, contracts are entered through correspondence or even orally. It would be extremely inconvenient from an administrative point of view if it were insisted that each and every contract must be eected by a ponderous legal document couched in a particular form. (+ (6 A-1DSCD$$<&D"47" : A,/ "47% SC ""#) (9 1nion of ,ndia 6) /allia /am5 A-1DSCD$$$#D"47# : A,/ "47# SC "7& ( A-1DSCD$$%#D"477 : A,/ "47' SC %$#: *"477+# SC/ 4"4 see also Chandra (han Singh 6) State of (ihar5 A,/ "47' P at "&
(+ Supra -ote <)
%he "udicial attitude to 'rticle (00 has sought to balance two motivations @n the one hand, to protect the overnment from unauthorised contractsD and @n the other hand, to safeguard the interests of unsuspecting and unwary parties who enter into contracts with government ocials without ful$lling all the formalities laid down in the Constitution. 2nder 'rticle (00)*, a contract can be entered into on behalf of the overnment by a person aurhorised for the purpose by the 4resident, or the overnor, as the case may be. %he authority to execute the contracton behalf of the government may be granted by rules, formal noti$cations, or special ordersD such authority may also be given in respect of a particular contract or contracts by the 4residentEovernor to an ocer other than the one noti$ed under the rules. 'rticle (00)* does not prescribe any particular mode in which authority must be conferredD authoriFation may be conferred ad hoc on any person. (0 'rticle /55 provides that B )* %he overnment of India may sue or be sued by the name of the 2nion of India and the overnment of a State may sue or be sued by the name of the State and may, sub"ect to any provisions which may be made by 'ct of 4arliament or of the Legislature of such State enacted by virtue of powers conferred by this Constitution, sue or be sued in relation to their respective aairs in the li3e cases as the ominion of India and the corresponding 4rovinces or the corresponding Indian States might have sued or been sued if this Constitution had not been enacted. )(* If at the commencement of this Constitution B )* any legal proceedings are pending to which the ominion of India is a party, the 2nion of India shall be deemed to be substituted for the ominion in those proceedingsD and )(* any legal proceedings are pending to which a 4rovince or an Indian State is a party, the corresponding State shall be deemed to be substituted for the 4rovince or the Indian State in those proceedings. 4rinciples 2nderlying Contractual Liability of State )* 8easonableness, fairness B %he principle of reasonableness and rationality which is legally as well as philosophically an essential element of e&uality or nonG arbitrariness is pro"ected by 'rticle 1 and it must characteriFe every State 'ction , whether it be under the authority of law or in exercise of executive power without ma3ing of law.
(0 State of (ihar 6) 8aram Chand .hapur5 A-1DSCD$$$%D"47" : A,/ "47% SC ""$
It is indeed unthin3able that in a democracy governed by the rule of law the executive overnment or any of its ocers should possess arbitrary power over the interests of the individual. ;very action of the executive overnment must be informed with reason and should be free from arbitrariness. %hat is the very essence of the rule of law and its bare minimal re&uirement. 'nd to the application of this principle it ma3es no dierence whether the exercise of the power involves aection of some right or denial of some privilege. /5 In the case of H. :onda 8eddy v. Stateof'.4 / it was held that li3e all its actions, the action even in the contractual $eld is bound to be fair. It is settled law that the rights and obligations arising out of the contractafter entering into the same is regulated by terms and conditions of the contract itself. It is settled principle of law that the Court would stri3e down an administrative action which violates any foregoing conditions. /( In a democratic society governed by the rule of law, it is the duty of the State to do what is fair and "ust to the citiFen and the State should not see3 to defeat the legitimate claim of the citiFen by adopting a legalistic attitude but should do what fairness and "ustice demand. // )(* 4ublic InterestB 4ublic interest is the paramount consideration. %here may be situations where there are compelling reasons necessitating the departure from the rule, but there the reasons for the departure must be rational and should not be suggestive of discrimination. ;very action of the public authority or of the person acting in public interest or any act that gives rise to public element, should be guided by public interest. /1 If actions bear insignia of public law element or public character they are amenable to "udicial review and the validity of such action would be tested on the anvil of 'rticle 1. istinction between public law and private law remedy is now narrowed down. /6 'ppearance of public "ustice is as important as doing "ustice. >othing should be done which gives an appearance of bias, "obbery or /5
/amana 0a9aram Shett9 6) ,nternational Airport Authorit9 of ,ndia5 A-1DSCD$$<D"4'4 : *"4'4+# SCC <4 : A,/ "4'4
SC "7%
/ A-1DAPD$$"D"44' : A,/ "44' AP "%") /(
DSection P9rites5 Phosphates Chemicals Ltd) 6) (ihar 3lectricit9 (oard5 A,/ "447 Pat "
// *DSection+ Hindustan Sugar ills 6) State of /ajasthan5 A-1DSCD$<<%D"4'4 : A,/ "4" SC "7" /1 Supra -ote < at p) <%" /6
L,C 6) Consumer 3ducation and /esearch Centre5 A-1DSCD$''%D"44& : *"44&+ & SCC <%
nepotism./9 4erson holding public oce must exercise his power in public interest and for public good. / )/* Contractual LiabilityB 'rticle (00)(* immunises the 4resident, or the overnor, or the person executing any contract on his behalf, from any personal liability in respect of any contract executed for the purposes of the Constitution, or for the purposes of any enactment relating to overnment of India in force. %his immunity is purely personal and does not immunise the government, as such, from a contractual liability arising under a contract which ful$lls the re&uirements under 'rticle (00)*. /+ %he governmental liability is practically the same as that of a private person, sub"ect, of course, to any contract to the contrary. /0 %he Courts have adopted this view on practicable considerations. Aodern government is a vast organiFation. @cers have to enter into a variety of petty contracts, many a time orally or through correspondence without strictly complying with the provisions under 'rticle (00. In such a case, if what has been done is for the bene$t of the government for its use and en"oyment, and is otherwise legitimate and proper, Section 5 15 of the Indian Contract 'ct, +( should step in and support a claim for compensation made by the contracting parties notwithstanding the fact that the contract in &uestion has not been made as per the re&uirements of 'rticle (00. If Section 5 was to be held inapplicable, it would lead to extremely unreasonable circumstances and may even hamper the wor3ing of government. Li3e ordinary citiFens even the government should be sub"ect to the provisions of Section 5. 1 Similarly, if under a contract with a government, a person has obtained any bene$t, he can be sued for the dues under Section 5 of the 'ct though the contract did not
/9 Shri Sachidanand Pande9 6) State of W)()5 A-1DSCD$"#7D"4' : A,/ "4' SC ""$4 /State 6) P)C) ishra5 "44& Supp *<+ SCC "#4 /+
State of (ihar 6) Sonabati5 A-1D(HD$"'
/0
State of (ihar 6) Abdul ajid5 A-1DSCD$"%$D"4&< : A,/ "4&< SC %<&: "4&< SC/ '7
15 '$) Obligation of person enjo9ing benefit of non?gratuitous act)? Where a person lawfull9 does
an9thing for another person5
or deli6ers an9thing to him5 not intending to do so gratuitousl95 and such other person enjo9s the benefit thereof5 the latter is bound to ma!e compensation to the former in respect of5 or to restore5 the thing so done or deli6ered)
1
State of West (engal 6) ()8) ondal5 A,/ "47% SC "&%E see also -ew arine Coal Co) 6) 1nion of ,ndia5
A-1DSCD$$&"D"47# : A,/ "47< SC "&%
con$rm to 'rticle (00. 1( If the overnment has made any void contracts it can recover the same under Section 96 of the 'ct. 1/ 'll that Section 5 provides is that if the goods delivered are accepted, or the wor3 done is voluntarily en"oyed, then the liability to en"oy compensation for the said wor3 or goods arises. ?hat Section5 prevents is un"ust enrichment and it as much to individuals as to corporations and governments. It needs to be emphasiFed that Section 5, Contract 'ct, does not deal with the rights and liabilities of parties accruing from that from relations which resemble those created by contracts.
IN PRINCIPLES OF CONTRACTAL LIA!ILIT" ?hile a private person can avoid contractual obligation at his peril, overnment can do so impunity on the plea of, executive necessity. ;xecutive necessity is the principle which state sthat although overnment can be bound through its ocers by a contract similar to anyon eelse is liable to pay damagesD overnment is not competent to fetter its future executive action, which must necessarily be determined by the needs of the community when the &uestion arises. %he essence of the doctrine therefore is that overnment cannot hamper thefreedom of the future actions of 4arliament in matters which concern the welfare of the State .%he sovereign rights of the overnment are paramount and it transcends the municipal laws. ;minent domain is an essential attribute of sovereignty. It remains unaected by law of contract. %hough the government is also governed by the law of contract, yet in some special circumstances, the government can rescind a contract without any adverse conse&uences if it is re&uired for its executive functions. %his phenomenon is termed as executive necessity. Ithas been held that the overnment cannot fetter its discretion in executive matters by contractual obligations. Sovereignty is manifested by exercise of eminent domain translated in executive necessity. ?hile the existence of executive necessity is $rmly established, its parameters are neither $rm not $xed. %he most famous case in this category is that of 'mphirite .%he owners of the 'mphirite, a Swedish ship had before sending her to ;nglandin Aarch 0+ obtained from the 7ritish legation at Stoc3holm an underta3ing that the shipwould earn her own release if she carried a cargo of at least 95 approved goods. %hisunderta3ing was in contrary to the normal practice of the 7ritish overnment but without it,it is apparent that the ship would not have sailed for ;ngland. 'fter one voyage on which theunderta3ing was honored, a second voyage was made from Sweden to ;ngland but only afteran express renewal of the former promise. @n this occasion, however, the 7ritish overnment refused clearance from 7ritish port unless arranged through the Swedishshipping committee. %he owners had, however disentitled themselves, from applying to that 1( State of Orissa 6) /ajballa65 A,/ "4'7 Ori '4 1/ Pannalal 6) 0eput9 Commissioner5 A-1DSCD$$#"D"4'# : A,/ "4'# SC ""'as Plant5 A-1DSCD$"$$D"4$ : A,/ "4$ SC "##$
committee the ship having formerly traded with ermany the ship was detained and eventually sold because no release could be obtained despite the underta3ing that had been given. %hus the applicants claimed enforcement of a contract against the Crown and the Courts came to the conclusion that no damages could be awarded. !owever it will be wrong to say that the "udiciary has always sided with the overnment in 8obertson v. Ainister of 4ensions enning, = observedB JCrown cannot escape by saying that estoppels do not bind the Crown for that doctrine has long been exploded. >or can the Crown escape by pressing in aid the doctrine of executive necessity that is the doctrine that the crown cannot fetter its executive action K.In India this issue came in the Indo 'fghan case where the Supreme Court held thatB Jwe areunable to accede to the contention that executive necessity releases the overnment from honoring its solemn promises relying on which the citiFens have acted to their detrimentK .%he plea of executive necessity has been negated in ruling given in AEs Sterling Comp Ltd. v. AEs A> 4ublication ,where the court said that defense of executive necessity cannot be used liberally. %hus ;xecutive necessity can constitute a defense to enforcement of contractual obligation. It can also be used as weapon of oense to rescind contracts. 7ut in both cases it is obligatory for the overnment to satisfy the court with facts "ustifying the existence of the plea. iven the circumstances =udges have sought to limit the application of the doctrine but as the limits want in precision the doctrine is Mexible to an extent how ever the basic core remains constant. %he extent of governmental liability is in direct succession of the liability of the ;ast India Company in similar situations. %he 'rticle /55 of the Constitution of India points out that the extent of liability of the 2nion of India and the States will be similar to that of the ominion of India and the 4rovinces under the overnment of India 'ct, 0/6. %he 'ct of 0/6 refers to the 'ct of 06 which in turn refers bac3 to the overnment of India 'ct, +6+. %hus, it must be referred bac3 to the times of ;ast India Company in order to determine the extent of liability of government today.7efore 01, the Crown in ;ngland en"oyed immunity from being sued in its own court. %his immunity of the Crown was further forti$ed by the doctrine of feudalistic origin signifying that the N:ing can do no wrongO. !owever, even during the heyday of Crown immunity, a person could see3 redress against the Crown through a N4etition of 8ightO. %here was neverany doubt that the ;ast India Company, which was essentially a commercial concern, was notentitled to any immunity which the Crown may en"oy from the liability arising out of contracts. In 7an3 of 7engal v. 2nited Company ,Sir Charles rey and =ustice avigation Co. Case,had asserted that Jwhere a contract is entered in the exercise of powers usually called sovereign powers, no action will lieK.2nfortunately a doubt was cast on the extent of
liability of the ;ast India Company in contract in >obinChunderey v. Secretary of State for India. In this case, a gan"a licence was auctioned. >obin Chunder, the highest bidder, sued for speci$c performance of the contract. It was held that the suit for speci$c performance could not succeed because theauction of gan"a licence was a method of collection tax which was a sovereign function. It is gratifying to note that this proposition of immunity of the government from liability arising out of contract entered into in exercise of its sovereign power was not followed by the courts in India. %here is no denying the fact that government, because of its special responsibilities and position, cannot be e&uated with any other individual and, therefore, the overnment of India 'cts, +6+, 00 and 0/6 made special provisions prescribing the manner in which government contracts are to be made.
Conclusion %he State cannot , therefore , act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational an nonG discriminatory. %he action of the ;xecutive overnment should be informed with reason and should be free from arbitrariness. %he test of liability of the State should not be the origin of the functions but the nature of the activity carried on by the State. espite the clear mandate for legislation provided under 'rticle /55, nothing has done in this regard. ;ven the overnment )Liability in %ort 7ill*, 09 which was introduced in the 4arliament had not been passed due to the resistance of various State overnments. 11 %he overnment was of the view that th; burden on the State would be more than it could possibly handle. In absence of a clear and concise statute that clearly de$ned the contractual liability of the State, the pronouncements made by the =udiciary assume all the more importance. =udicial &uest in administrative matters has to $nd the right balance between the administrative discretion to decide matters contractual or political in nature, or issues of social policy and the need to remedy any unfairness. ' State, when it enters into a contract, must do so fairly without discrimination and without unfair procedureD and its action is sub"ect to "udicial review under 'rticle 1 of the Constitution of India. %he "udicial power of review is exercised to rein any unbridled executive functioning. %he restraint has two contemporary signi$cances. @ne is the ambit of "udicial interventionD the other covers the scope of the Court#s ability to &uash an administrative decision on its merits. %hese restraints bear the hallmar3 of "udicial control over administrative action. =udicial review is concerned with not reviewing the merits of the decision in support of which the application for "udicial review is made, but the decision ma3ing process itself and therefore "udicial review can be a sucient tool to decide the ambit of contractual liability of the State.
11 ) eena >opala!rishnan5 >o6ernment Contracts5 http:DDwww)legalser6iceindia)comDarticleDl<%?>o6ernment?Contracts)htm
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