5. Government Contracts | Article 299 and the Special Rules for the State as a Contracting Party

This is the 5th post in Unit I of Law of Contract – I — the earlier posts covered how private parties form a contract; this post covers what changes when one party is the Government.

The Problem This Topic Solves

The Government buys goods, builds roads and hires contractors on a huge scale, and it spends public money while doing so. If any officer could bind the State by a casual letter or oral promise, public funds would be at risk. So the Constitution sets special formalities for government contracts. At the same time, a private person who has supplied goods or done work for the Government should not be left with nothing. The law balances these two concerns.

Power of the State to Contract

Article 298 says the executive power of the Union and of each State extends to carrying on trade or business, to acquiring, holding and disposing of property, and to making contracts for any purpose. The Government can therefore enter contracts like any private party. Once it does, the general rules of the Indian Contract Act, 1872 (offer, acceptance, consideration, free consent and so on) apply, together with the special rules below.

Article 299: Formalities of a Government Contract

Article 299(1) lays down three requirements for a government contract (a contract made in exercise of the executive power of the Union or a State):

1. The contract must be expressed to be made by the President (Union) or the Governor (State).
2. It must be executed on behalf of the President or Governor.
3. It must be executed by a person authorised by the President or Governor, in the manner directed or authorised.

Article 299(2) adds that neither the President nor the Governor, nor the person executing the contract on their behalf, is personally liable on it.

Effect of Non-Compliance

In Mulamchand v. State of Madhya Pradesh (1968), the Supreme Court held that Article 299(1) is not a mere matter of form. It protects the Government against unauthorised contracts, and it is mandatory. A contract that does not follow it is void and cannot be enforced against the Government. The Court also held that the Government cannot be held bound on the ground of estoppel (being prevented from denying what it earlier led the other side to believe) or ratification (later approval of an unauthorised act).

This does not leave the supplier empty-handed. Where goods or services have been accepted by the Government, the supplier can claim compensation under Section 70 of the Indian Contract Act, which deals with non-gratuitous acts. The Supreme Court allowed such a claim in State of West Bengal v. B.K. Mondal and Sons, where the contractor had built godowns for the State without a contract complying with Section 175(3) of the Government of India Act, 1935, the predecessor of Article 299. The remedy is compensation for the benefit received (quantum meruit), not enforcement of the contract's terms.

Public Law Limits on Government Contracts

A government contract is also a public act. So some rules go beyond ordinary contract law:

• Article 14 applies. In Ramana Dayaram Shetty v. International Airport Authority (1979), the Supreme Court held that the Government and its agencies cannot act arbitrarily in choosing contractors and must follow fair and non-discriminatory standards.
• Judicial review is limited. In Tata Cellular v. Union of India (1994), the Court held that courts review only the decision-making process for arbitrariness, bias or unreasonableness. They do not substitute their own view on the merits of a tender.
• Promissory estoppel can bind the State. In Motilal Padampat Sugar Mills v. State of Uttar Pradesh (1978), the Court held that the Government can be held to its promise where a person has relied on it and changed position, unless public interest requires otherwise.

Remedies Against the Government

• A contractor can sue the Government for breach and claim damages, as with any other party.
• A suit against the Government needs a prior notice of two months under Section 80 of the Code of Civil Procedure, 1908, except where urgent relief is sought.
• Specific performance and injunctions are available, but the 2018 amendment to the Specific Relief Act limits injunctions that would delay infrastructure projects (see the note on infrastructure projects).
• Government contracts commonly contain arbitration clauses and liquidated-damages clauses for delay.

• Article 298 gives the State power to contract; Article 299(1) sets the formalities: expressed to be made by the President or Governor and executed by an authorised person in the authorised manner.
• Article 299(2): no personal liability of the President, Governor or the executing officer.
• Mulamchand (1968): Article 299(1) is mandatory; non-compliance makes the contract void; no estoppel or ratification.
• Section 70 still allows compensation for benefit accepted (State of West Bengal v. B.K. Mondal and Sons).
• Article 14 and limited judicial review apply to government contracting (Ramana Dayaram Shetty; Tata Cellular).

• Article 299 uses the word "contracts" and also covers "assurances of property" made in the exercise of executive power.
• Section 70 gives compensation, not the contract price or profit.
• Exam trap: do not say the Government can never be bound by an informal promise; promissory estoppel (Motilal Padampat) is a separate doctrine that can bind it in appropriate cases.

A Practical Example

A District Collector orally asks a supplier to deliver 500 blankets for a flood relief camp. The supplier delivers, but no written contract in the form required by Article 299 exists. The supplier cannot sue on the contract, because it is void for non-compliance. But because the Government accepted and used the blankets, the supplier can claim reasonable compensation under Section 70.

Quick Revision Points

• Article 298: power to carry on trade and make contracts; Article 299(1): three formalities; Article 299(2): no personal liability.
• Mulamchand (1968): mandatory; void if not complied with; no estoppel or ratification.
• Section 70 claim survives non-compliance (State of West Bengal v. B.K. Mondal and Sons).
• Article 14: Ramana Dayaram Shetty (1979); judicial review: Tata Cellular (1994); promissory estoppel: Motilal Padampat (1978).
• Suit against Government: Section 80 CPC notice (two months).