Module 5- Contracts and Services

Government contracts
To carry out various business activities, the contract has become an essential part
because under contracts the rights and obligations of all the parties involved in a
transaction are provided and in case of a breach of contract, the remedy can be availed
from the Courts.
The Government of India both at the Centre as well as at the State level also make
several contracts because Government also runs public companies and carries out
various function. While an ordinary contract is governed by the Indian Contract Act,
1872 but in case of a Government Contract some additional provisions have been
provided under the Indian Constitution, thus the formation of Government contract is
done in a different manner as compared to an ordinary contract.
A contract is an agreement which is made between at least 2 people in which both of
them agree to perform an act or abstain from doing the act in return for some
consideration. Section 2(h) of the Indian Contract Act has defined a contract as an
agreement which is enforceable by law. Thus when an agreement is not against the
provisions of law it is a contract.
As the name suggests a Government contract is a contract in which one of the parties
is the Government. The State, as well as the Central Government, maybe the party in
a Government contract. All the Government contracts are made in the name of
President of India
In India, the Contracts can be entered by express as well as an implied agreement but
in cases of Government contracts, the provisions of the Constitution specifically
enumerated in Article 299 has to be followed and the formalities which are required
have to be fulfilled for the formation of such contracts.
Formation of Government Contract
Under Article 298 of the Indian Constitution, the power of the Union and the State
government to carry on any trade or business has been provided. For the formation of
a Government contract the requirements under Article 299 have to be fulfilled and if
they have fulfilled a contract can be enforced against the Government.
As per Article 299, all the contracts which are made under the Executive power of the
Union or the State should be made in the name of the President or the Governor
respectively. If a contract is not made under the President’s or Governor’s name, such
a contract will not be considered as a Government contract. Further, all the terms of
the contract should be enforced on their behalf a person who has been authorized to
act on their behalf.
Under Clause 2 of Article 299, the President or the Governor cannot be held personally
liable for the non-performance of the contract. Thus they are immune to any personal
liability for the breach of contract because the contract is made in their name only but
they themselves do not perform the contract.
While an ordinary contract can be made by express words and by the implied conduct
of the parties, a Government contract should be made expressly.
Case Law: Seth Bhikraj Jaipuria v. Union of India- the Supreme Court had observed
that from the words ‘expressed to be made’ and ‘executed’ in Article 299 it is clear
that the Government contract should be made by a formal written contract. The court
also held these formalities under Article 299 are of mandatory nature and they cannot
be skipped by the contracting parties. If there is any contravention of these provisions,
then the contract will be nullified it will not be enforceable against the Government.
These provisions have been made to safeguard the Government against fake contracts
which may be made on their behalf to defraud the people and this is the reason why
implied contracts do not have any scope in cases of Government contracts.
Case Law: K.P. Chowdhary v. State of Madhya Pradesh- the Supreme Court held that
in view of Article 299, a Government contract cannot be created impliedly and there
should be a formal express agreement. In case a person enters into a contract with
Government impliedly, neither he nor the Government will be able to enforce it in a
court.
While the Supreme Court has held in many cases that there should be a formal express
contract, many have argued that it is not practical to always have a formal agreement
and many times the Government officers enter into petty contracts as well and
therefore it is not ideal to create a formal agreement every time even for such contracts.
So, the requirements have been liberated and if the contract is made in writing and the
substantial requirements under Article 299 Clause 1 are fulfilled then a contract will
be valid even if all the requirements under this provision has not been fulfilled.
Contractual Liability in Government Contracts
Under Article 299 Clause 2, the President and the Governor and the person who is
authorized to act on their behalf are provided immunity from any personal liability
which may be incurred due to non-performance of the contract. This immunity is
provided to them only but it does not mean that the Government is also not liable for
the contract because it would be unfair for the other party.
So the liability of the Government will be the same as is the case in a normal contract
under the Indian Contract Act, 1872. Thus, a person can sue the Government for the
breach of contract and may be awarded damages by the court.
The courts have also held that in case the Government has derived any benefit from a
person by an agreement which does not fulfil the requirements under Article 299, the
Government will be held liable for compensating the other party under Section 70 of
the Contract Act and such a contract will be deemed to be a quasi-contract to the extent
the Government gets the benefit. This has been provided to protect an innocent party
from suffering loss.
Under Section 70 of the Indian Contract Act, 3 conditions have been provided:
1. A person should do something lawful for another or he should deliver
something to another person
2. He must do such an act without the intention of doing it gratuitously
3. The person for whom such an act has been done or something has been
delivered, should enjoy the benefit from such act or delivery.
This view has been adopted because the modern Government performs many functions
and in carrying out these functions many petty contracts are also entered into as a result
of which strict compliance with Article 299 is not observed in many cases. If what has
been done by the other person is for the benefit of the Government and except for
compliance with article 299 and all the other aspects of the contract are proper then,
Section 70 should be applied.
Similarly, if a person has derived any benefit from the Government under such
contracts, the Government also has the right to sue that person under Section 70. In the
case the Government has made a void contract then it has the right to recover the
benefits given by it from the other party under section 65 of the Indian Contract Act.
Although Section 70 allows the party to recover the benefits provided by it, it does not
affect the binding character of Article 299. Under Section 70 apart cannot sue for the
specific performance of the contract and he cannot ask for damages for the breach of
contract. Under Section 70, the cause of action is not the breach of contract but instead,
it is aimed to avoid the unjust enrichment to any party whether a person or even the
Government. So, the claim under section 70 is based on the assumption that the
contract is ineffective and thus it does not amount to a contract at all.
Government Contracts and the Role of Judiciary
The Government is not bound to enter into a contract with any person but when it does
enters into one, it has to do so in a fair manner without any prejudice and such a
contract is subject to judicial review power of the Judiciary.
The power of judicial review is exercised to keep the unfair practices which may be
exercised by the Government or the officers who act on their behalf, in check and
therefore it plays an important role in ensuring that the interest of the contracting party
is protected.
The ambit of judicial review and the power of the court to set aside any decision of the
Government on its merits are very important factors in Government contracts. This
control by the judiciary is concerned with the decision-making process itself and not
with the merits of the decision. By judicial review, the court cannot review the details
of the terms of the contract which has been entered into by the public authorities on
behalf of the Government. If the Government has entered into a contract without any
arbitrariness and all the procedures have been duly followed in the contract which is
essential to be followed without any prejudice, the court cannot exercise its power of
judicial review.
But if the procedure which has been taken by the authority is against the provisions of
Article 14 or there is non-compliance of the proper procedure and the interest of the
public, the court cannot ignore such actions and it has to exercise its power of judicial
review.
Thus the judiciary is only concerned with the manner in which a decision is taken and
not with the fairness of the decision. So, the grounds on which an administrative action
can be put to judicial review are as follows:
• Irrationality
• Procedural Impropriety
• Illegality
These grounds are not exhaustive and further grounds can be added for judicial review.
Case Law: Tata Cellular v. Union of India, the Supreme Court observed that The
Government should be given the freedom to enter into a contract but this freedom
should be subject to the test of reasonableness and should also be free from any
arbitrariness.
Thus judicial review is a powerful tool in checking arbitrary Government contracts but
this power cannot be used at any time because it would amount to infringing on the
rights of the Executive to enter into contracts. So, whenever the contract is arbitrary or
is against the proper procedure, the power of judicial review can be used.
A Government contract is the same as an ordinary contract but under this contract one
of the parties is the Central or the State Government and in addition to the requirements
of the Indian Contract Act 1872, the provisions of Article 299 of the Indian
Constitution also has to be followed otherwise the contract will not be a valid one.
The formation of Government contract is done by express agreement in the name of
the President or the Governor by a person who is authorized to act on their behalf and
all of them are not personally liable. But the Government is held liable and contracts
can be enforced against it.
Implied agreements cannot become a Government contract. Although strict
compliance with the provisions of Article 299 is required to be fulfilled. But in cases
where there is unjust enrichment, the court allows the party to recover such benefit
provided by them.
The judiciary also plays an important role in Government contracts by exercising their
power of judicial review to ensure that there is no arbitrariness or prejudice against a
party to the contract. Therefore, when the provisions of Article 299 are complied with,
a Government contract becomes valid and enforceable.
Recruitment and conditions of service
Article 309 Constitution of India: Recruitment and conditions of service of persons
serving the Union or a State
Acts of appropriate legislature may regulate the recruitment and conditions of service
of persons appointed to public service and posts in connection with the affairs of Union
or State.
Proviso: The President or Governor or such person directed by them are competent to
make rules regulating the recruitment and conditions of service to such service and
posts until provision in that behalf is made by or under an Act by legislature under this
article and such rules have effect subject to provisions of such Act.
Article 309 of the Constitution of India provides that acts of the appropriate Legislature
may regulate the recruitment and conditions of service of persons appointed to public
services and posts in connection with the affairs of the Union or any State. It also
provides that pending provision in this behalf being made by or under an Act, the
President or such persons as he may direct shall be competent to make, in the case of
services and posts in connection with the affairs of the Union, rules regulating the
recruitment and other service conditions of persons appointed to such services and
posts.
For an impartial and uniform procedure of recruitment to services, it is necessary that
there should be prescribed recruitment rules for every post/grade and all recruitment
made in accordance with these rules. In deciding on the methods of recruitment the
main consideration naturally is whether a direct recruit or a person with experience of
work in the next lower grade would be more suitable for appointment to the post/grade.
Not infrequently departmental experience in an office is not only essential but may
also be preferable to mere academic qualifications for maintaining efficiency. It is also
natural for, persons serving in the lower grades to look forward to promotion to highest
posts in which their experience can be used with advantage to the State. For these
reasons, promotion is one of the recognised important methods of recruitment to
various services and posts under the Central Government.
Case Law: Jayanthilal Vaghela and others- For persons engaged under contract
service rules are not applicable.
Case Law: Chand Mal Chayal v. State of Rajasthan- After accepting resignation the
employee cannot be re-employed condoning the period of absence.
Case Law: Mathura Prasad v. Union of India- Disciplinary action will not offend
Article 21 of the Constitution.
Case Law: Veerendra Singh Hooda and other v. State of Haryana- Rules prevail over
executive instructions.
Case Law: UOI v. RK Chopra- In relation to revised pay scales, dismissed employee
cannot exercise option.
Doctrine of pleasure
Doctrine originated in England. In England, the Crown is regarded as the Executive
head and the civil services are part of the Executive. The doctrine of Pleasure means
that the Crown has the power to terminate the services of a civil servant at any time
they want without giving any notice of termination to the servant. Thus the civil
servants work at the pleasure of the Crown which can remove them at any time. When
the civil servants are removed from their service, they do not have the right to sue the
Crown for wrongful termination and they also cannot ask for damages undergone due
to wrongful termination. This doctrine is based on the concept of public policy and
whenever the Crown feels that a civil servant should be removed from his office
because keeping him will be against public policy, the Crown can remove such servant.
The doctrine of pleasure is also followed in India. Since the President of India is the
Executive Head of the Union and he enjoys the same position as the Crown enjoys in
England, the President has been vested with the power to remove a civil servant at any
time under this doctrine.
While this doctrine has been adopted in India it has not been blindly copied in the same
manner as it is followed in England and there are some modifications which exist in
India’s adoption of this doctrine from that of England. In India, Article 310 of the
Indian Constitution embodies the provision for this doctrine.
According to Article 310, except for the provisions provided by the Constitution, a
civil servant of the Union works at the pleasure of the President and a civil servant
under a State works at the pleasure of the Governor of that State. This implies that the
operation of the Doctrine of Pleasure can be limited by constitutional provisions.
Under the constitution, the following are excluded from the operation of this doctrine:
• Judges of the Supreme Court;
• Judges of the High Courts;
• Chief Election Commissioner; and
• Comptroller and Auditor General of India.
Thus, this doctrine is not absolute and is subject to Constitutional provisions. The civil
servants can also be excluded from the operation of this doctrine because they have
been provided with some protection under Article 311 and thus this doctrine’s
application can be limited to civil servants as well.
While these protections are provided to the people working for the Government, all
the Government servants cannot avail of these protections. Thus, only certain people
have the right to be protected under the provisions of Article 311.
The following people have the right to be protected under the provisions of Article
311:
• The members of:
• Civil service of the Union;
• All India Service; and
• Civil service of any State.
People who hold a civil post under the Union or any State.
By the words civil services, it has been made clear that the members of the Armed
Forces are not part of the servants who are covered under the provisions in the
Constitution, related to Civil Servants.
Case Law: Purshottam Lal Dhingra v. Union of India- it was held that the protection
provided under Article 311 to the civil servants includes permanently employed civil
servants as well as temporarily employed civil servants.
While protection has been provided under Article 311 of the Constitution to ensure
that their interests are protected, these protections are also subject to some exceptions.
When these exceptions arise in a case, the protection cannot be claimed by the
concerned civil servant. The following are the exceptions:
If the civil servant has been found guilty of a criminal offence, in such cases the
protection under Article 311 cannot be availed for him and in such cases, he can be
removed for misconduct without getting a chance of being heard.
Case Law: Union of India v. Tulsiram Patel- explained the scope of this exception.
The Court observed that for determining the impracticability of holding the enquiry
the point of view of a reasonable man has to be used. If a reasonable man who is in
this situation thinks that holding such an enquiry is not practicable, then not holding
such enquiry will not amount to a violation of Article 311.
The last exception to the protection under Article 311 is the reasons of security of the
State. This right is given to the President and the Governor as the case may be and
whenever the President or the Governor is satisfied that it is not in the interest of the
security of State to hold an enquiry, such an enquiry can be stopped from taking place.
Here, actual threat to the security is not the focus of this exception but only the
satisfaction of the President or Governor about the risk of threat to security is enough
to invoke this exception. This exception appears to be a loophole against the protection
to civil servants because satisfaction is a subjective concept and therefore what a
person may consider being a threat might not be regarded to be the same by another
person.
Judiciary plays a very important role in India by performing its function as the
interpreter of laws. While the doctrine of pleasure has been adopted from the English
Law, Judiciary has through various cases, provided its judgments regarding the
applicability of this doctrine in India.
Case Law: State of Bihar v. Abdul Majid- the rule regarding the maintainability of a
claim by the civil servant regarding arrears for salary was decided by the Supreme
Court. In England, the rule was that a servant could not sue the Crown for arrears of
salary. The same was argued in this case. A sub-inspector had been removed from his
service on the ground of cowardice and was later re-hired. He filed a suit for recovering
the arrears of his salary but the Government contended that he cannot do so under the
rule followed in the doctrine of pleasure. The Supreme Court held that this rule would
not apply in India and thus the sub-inspector had the right to claim the arrears of his
salary.
Case Law: Union of India v. Balbir Singh- it was held that the Court has the power to
examine the satisfaction of the President or the Governor as the case may be. If the
Court finds that the satisfaction is based on such grounds which have no relation to the
security of the State then, the Court can hold such a satisfaction to be based on
irrelevant and extraneous grounds and the dismissal of a civil servant can be held
invalid.