Article 298 provides that the executive power of the Union and of each State extends to the carrying on of any trade or business, to the acquisition, holding and disposal of property, and to the making of contracts for any purpose. The State's capacity to contract is therefore constitutionally conferred and does not depend on legislation. Article 299 then prescribes the form in which that capacity must be exercised, and Art.300 provides for suits.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| Art.298 | Power to trade and contract | The executive power extends to trade or business, to acquisition, holding and disposal of property, and to the making of contracts for any purpose |
| Art.299(1) | Form of contracts | Every contract made in the exercise of the executive power must be expressed to be made by the President or the Governor, and must be executed on behalf of him by such persons and in such manner as he may direct or authorise |
| Art.299(2) | No personal liability | Neither the President nor the Governor is personally liable in respect of such a contract, nor is the person making or executing it on his behalf |
| Art.300 | Suits | The Union or the State sues and is sued in its own name |
| Art.14 | Equality | Applies to the State's contractual dealings, so tenders and allotments must be non-arbitrary |
| Indian Contract Act, 1872 S.70 | Quasi-contract | Where a person lawfully does something for another, not intending to do so gratuitously, and the other enjoys the benefit, he must compensate |
The Three Requirements of Art.299(1)
| Requirement | Content |
|---|---|
| 1. Expressed to be made by | The contract must be expressed to be made by the President or the Governor, as the case may be |
| 2. Executed on behalf of | It must be executed on behalf of the President or the Governor |
| 3. By an authorised person | It must be executed by a person authorised or directed by the President or the Governor, and in the manner so directed |
The three are cumulative. All must be satisfied. If any is missing, the contract is void and cannot be enforced against the Government, and equally the Government cannot enforce it.
Facts: A Divisional Superintendent of a railway placed orders for the supply of foodgrain. The orders did not comply with the constitutional form then in force, its predecessor in Section 175(3) of the Government of India Act, 1935, in that they were not expressed to be made by the Governor-General and were not executed by a person duly authorised. Goods were supplied and part payment made.
Issue: Whether a contract not complying with the prescribed form binds the Government, and whether such non-compliance may be waived or the contract ratified.
Held: The provision is mandatory and not merely directory. A contract that does not comply is void and unenforceable against the Government. The requirements exist for the protection of the public, to ensure that no unauthorised officer can bind the Government and burden public revenues, so they cannot be waived, and the contract cannot be ratified by conduct such as accepting the goods or making part payment.
Relevance: The leading authority on the mandatory character of Art.299(1). Cite it for the proposition that neither estoppel nor ratification can supply the missing formality.
Facts: A contractor performed work and supplied goods under an arrangement with a State that did not satisfy the constitutional form. The State enjoyed the benefit but resisted payment on the ground that there was no valid contract.
Issue: Whether a party who has performed under a contract void for non-compliance with Art.299 is without remedy.
Held: He is not. Although the contract itself is void and no action lies on the contract, and although there can be no estoppel or ratification, the party may recover on the footing of quasi-contract under Section 70 of the Indian Contract Act, 1872. Where a person lawfully does something for another or delivers something to him, not intending to act gratuitously, and the other enjoys the benefit of it, the latter must compensate him. The claim is not for damages for breach but for the value of the benefit conferred.
Relevance: The essential companion to Bhikraj Jaipuria. Together they give the complete answer: no claim on the contract, but restitution for benefit received.
Why the two cases must be read together: Standing alone, the mandatory rule would allow the State to take the benefit of supplies and refuse payment because its own officer had failed to observe a formality designed for its protection. Section 70 prevents that unjust result while preserving the discipline of Art.299. The distinction to state precisely is between enforcing the bargain, which is impossible, and recovering the value of what the State has actually received and enjoyed, which is not.
No implied contracts. Because Art.299(1) requires an expressed and executed instrument in the prescribed form, there can be no implied contract with the Government. A course of dealing, however long, does not create one.
Government Contracts and Art.14
The State's freedom to choose whom it contracts with is not the same as a private person's. Because it acts as a trustee of public resources, its contractual dealings are subject to Art.14 and must be neither arbitrary nor discriminatory.
Facts: A tender notice for a catering licence at an airport stipulated that tenderers must be registered second class hotel keepers with at least five years experience. The contract was awarded to a party who did not satisfy that condition, no other tenderer having done so, while the petitioner's tender was not considered.
Issue: Whether the State and its instrumentalities are bound by Art.14 in awarding contracts, and whether they may depart from their own stated eligibility standards.
Held: They are bound. Where the Government or an instrumentality of the State proposes to confer a benefit or enter into a contract, it must act fairly and without arbitrariness or discrimination, and it cannot act at its sweet will as a private party might. Having laid down a standard or norm for eligibility, it is bound to adhere to it and cannot depart from it in an individual case, for to do so would be to discriminate. The award was accordingly held bad. The Court also laid down the tests for determining when a body is an instrumentality or agency of the State.
Relevance: The foundational case on Art.14 in public contracting. Read it with Tata Cellular v Union of India (1994), which confines judicial review to the decision making process rather than the merits of the commercial decision, and with Erusian Equipment and Chemicals v State of West Bengal (1975) on the need for a hearing before blacklisting.
Promissory Estoppel against the State
Facts: In response to an inquiry, the State assured a company in writing that a new sugar unit would be exempt from sales tax for three years. Relying on that assurance the company borrowed heavily and set up the unit. The State then resiled, first reducing and then withdrawing the exemption.
Issue: Whether the doctrine of promissory estoppel operates against the Government, and what defences are open to it.
Held: The doctrine applies against the Government in the exercise of its executive functions in the same way as against a private party. Where a clear and unequivocal promise is made, intended to create a legal relation, and the promisee acts on it and alters his position, the promisor is bound, and no consideration is necessary, nor need the promisee show detriment in the strict sense. The Court identified the limits. The doctrine cannot be invoked to compel the Government to act contrary to law, nor against the exercise of legislative power, nor where the promise is outside the authority of the officer making it. Nor is it enough for the Government merely to assert overriding public interest: it must place before the court the material showing that the public interest requires it to resile, and the court will decide.
Relevance: The leading case. Note the structure of an answer: establish the clear promise and the alteration of position, then work through each defence.
Legitimate expectation is a related but distinct doctrine, protecting an expectation arising from a settled practice or an express undertaking. It is generally weaker than promissory estoppel, and ordinarily yields to a change of policy made in the public interest, though it may require that the affected person be heard before the change is applied to him.
Illustrations
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Order by an unauthorised officer: A Superintending Engineer places a supply order not expressed to be made by the Governor. The contract is void under Art.299(1), and no suit lies upon it.
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Government takes the benefit: Goods are nevertheless supplied and consumed by the department. Applying Mulamchand (1968), the supplier may recover their value under S.70 of the Indian Contract Act.
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No ratification: The department accepts the goods and makes part payment. Applying Bhikraj Jaipuria (1962), this does not ratify the void contract or cure the defect of form.
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No implied contract: A contractor has supplied goods to a department for ten years without any formal agreement. No contract can be implied, Art.299(1) requiring the prescribed form.
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No personal liability: A Secretary signs a contract on the Governor's behalf, and it is later breached. Under Art.299(2) neither the Governor nor the Secretary is personally liable.
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Departure from stated eligibility: A tender notice requires five years experience, and the contract is awarded to a party with two. Applying Ramana Dayaram Shetty (1979), the award is arbitrary and violates Art.14.
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Review of a commercial choice: Two tenderers both satisfy the conditions, and the Government prefers one on a commercial assessment. Applying Tata Cellular (1994), the court reviews the process and not the merits of the choice, and will not sit in appeal over the evaluation.
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Blacklisting without hearing: A contractor is blacklisted without notice. Applying Erusian Equipment (1975), the order is bad for breach of natural justice, blacklisting having serious civil consequences.
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Promise of exemption withdrawn: A State assures a manufacturer of a tax exemption, the manufacturer invests on that basis, and the State resiles. Applying Motilal Padampat Sugar Mills (1979), the State is bound unless it establishes by material that overriding public interest requires otherwise.
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Promise contrary to statute: An officer promises an exemption which the taxing statute does not permit. No estoppel arises, since the doctrine cannot compel the Government to act contrary to law.
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Estoppel against legislation: A State promises not to increase a duty and then the Legislature enacts an increase. Promissory estoppel does not operate against the exercise of legislative power.
Recall Check
- State the three requirements of Art.299(1) and the consequence of failing any of them.
- If a contract is void under Art.299, what remedy remains and under which provision?
- What are the four limits on promissory estoppel against the Government?
Key Cases
Bhikraj Jaipuria v Union of India (1962) Bhikraj Jaipuria v Union of India 1962
Issue: Whether the constitutional form for government contracts is mandatory and whether non-compliance can be waived or ratified.
Rule: The provision is mandatory and exists for the protection of the public, so the contract is void and cannot be ratified or waived.
Held: The supply orders did not bind the Government.
Mulamchand v State of Madhya Pradesh (1968) Mulamchand v State of Madhya Pradesh 1968
Issue: Whether a party who has performed under a void government contract is without remedy.
Rule: No action lies on the contract, but restitution lies under S.70 of the Indian Contract Act for the value of the benefit enjoyed.
Held: The contractor could recover on a quasi-contractual basis, though not on the contract.
Ramana Dayaram Shetty v International Airport Authority of India (1979) Ramana Dayaram Shetty v International Airport Authority 1979
Issue: Whether the State is bound by Art.14 in awarding contracts and whether it may depart from its own eligibility standards.
Rule: The State must act fairly and without arbitrariness, and having laid down a norm it is bound to adhere to it.
Held: The award to a party not satisfying the stated condition was invalid.
Motilal Padampat Sugar Mills Co Ltd v State of Uttar Pradesh (1979) Motilal Padampat Sugar Mills v State of UP 1979
Issue: Whether promissory estoppel binds the Government.
Rule: It does, without any need for consideration, subject to the limits that it cannot compel illegality, does not bind legislative power, and that overriding public interest must be established by material.
Held: The State was bound by its assurance of exemption, having failed to justify resiling.
Distinctions
| Basis | Claim on the contract | Claim under S.70 |
|---|---|---|
| Foundation | A valid contract complying with Art.299(1) | Benefit lawfully conferred and enjoyed, without intention to act gratuitously |
| Available where the form is defective | No | Yes |
| Measure of recovery | Contractual damages, including loss of profit | Value of the benefit actually received |
| Effect of ratification | Cannot cure the defect | Not needed |
| Authority | Bhikraj Jaipuria (1962) | Mulamchand (1968) |
| Basis | Promissory estoppel | Legitimate expectation |
|---|---|---|
| Source | A clear and unequivocal promise acted upon | A settled practice or an express undertaking |
| Consideration | Not necessary | Not applicable |
| Strength | Binds unless overriding public interest is proved | Ordinarily yields to a change of policy in the public interest |
| Typical relief | Enforcement of the promise | A hearing, or reasons, before the expectation is defeated |
| Against legislation | Not available | Not available |
| Basis | Private contracting party | The State as contracting party |
|---|---|---|
| Freedom of choice | May contract with whom it pleases | Bound by Art.14 to act fairly and without arbitrariness |
| Form | Any form the law of contract permits | The mandatory form in Art.299(1) |
| Departing from stated criteria | Permissible | Impermissible (Ramana Dayaram Shetty, 1979) |
| Blacklisting a counterparty | No duty to hear | Duty to hear (Erusian Equipment, 1975) |
| Resiling from an assurance | Governed by ordinary contract law | Governed additionally by promissory estoppel |
Flashcards
Which article empowers the State to make contracts?
Art.298, as part of the executive power, which extends to trade, property and the making of contracts for any purpose.
State the three requirements of Art.299(1).
The contract must be expressed to be made by the President or Governor, executed on behalf of him, and executed by a person authorised by him in the manner directed.
What is the effect of non-compliance with Art.299(1)?
The contract is void and unenforceable, and cannot be validated by ratification or waiver.
Why is Art.299(1) treated as mandatory?
Because it exists for the protection of the public, so that no unauthorised officer may bind the Government and burden public revenues.
What remedy survives where the contract is void for want of form?
A quasi-contractual claim under S.70 of the Indian Contract Act, 1872 for the value of the benefit enjoyed.
Can there be an implied contract with the Government?
No, because Art.299(1) requires an expressed and executed instrument in the prescribed form.
What does Art.299(2) provide?
That neither the President nor the Governor, nor the person executing the contract on his behalf, is personally liable in respect of it.
Is the State bound by Art.14 when awarding contracts?
Yes. Ramana Dayaram Shetty (1979) held it must act fairly and without arbitrariness.
Can the State depart from eligibility criteria it has itself laid down?
No. Having laid down a norm, it is bound to adhere to it.
How far may a court review a tender decision?
Only the decision making process, not the merits of the commercial choice (Tata Cellular, 1994).
Must a contractor be heard before being blacklisted?
Yes. Erusian Equipment (1975) so held, blacklisting having serious civil consequences.
Does promissory estoppel apply against the Government?
Yes, in the exercise of executive functions, and without any requirement of consideration.
What are the limits on promissory estoppel against the Government?
It cannot compel action contrary to law, does not operate against legislative power, does not bind where the officer lacked authority, and yields to overriding public interest which the Government must establish by material.
Exam Scenario
Problem: A Divisional Officer of a State Public Works Department issues a written work order to Neelam for road repairs. The order is on departmental letterhead, signed by the officer in his own name, and is not expressed to be made by the Governor. Neelam completes the work, which the Department inspects, certifies and puts to public use, but payment is refused on the ground that there was no valid contract. In a separate matter, the same Department invites tenders stipulating a minimum turnover of five crore rupees, and awards the contract to a firm with a turnover of one crore, rejecting Neelam's compliant bid without reasons. Two years earlier, the State had assured Neelam in writing that registered contractors would receive a fifteen per cent price preference for five years; it has now withdrawn that preference, asserting simply that the public interest requires it. Advise Neelam on all three matters.
Step 1: Test the work order against Art.299(1)
| Requirement of Art.299(1) | On these facts |
|---|---|
| Expressed to be made by the Governor | Fails. The order is on departmental letterhead and is not so expressed |
| Executed on behalf of the Governor | Fails. It is not executed on his behalf |
| Executed by a person authorised, in that capacity | Fails. The officer signed in his own name, not as an authorised signatory |
All three limbs fail. Applying Bhikraj Jaipuria v Union of India (1962), Art.299(1) is mandatory and exists for the protection of the public, so the contract is void and no suit lies upon it.
The Department's inspection, certification and use of the road do not amount to ratification. No implied contract can arise either, whatever the parties' course of dealing.
Step 2: Recover the value of the work under S.70
Neelam is not without remedy. Applying Mulamchand v State of Madhya Pradesh (1968), she may recover under S.70 of the Indian Contract Act, 1872: she lawfully did the work, did not intend to act gratuitously, and the State has enjoyed the benefit of it by putting the road to public use.
Be precise about the measure. She recovers the value of the benefit conferred, not contractual damages, so any claim for lost profit or for the contract rate as such will fail.
Step 3: Attack the tender award under Art.14
Apply Ramana Dayaram Shetty v International Airport Authority of India (1979). The State laid down a turnover norm of five crore rupees and is bound to adhere to it. Awarding the contract to a firm with a turnover of one crore, while rejecting a compliant bid, is arbitrary and violates Art.14. The absence of reasons compounds it.
Anticipate the State's reliance on Tata Cellular v Union of India (1994) and distinguish it.
| Case | What it governs | Effect here |
|---|---|---|
| Ramana Dayaram Shetty (1979) | Adherence to a self imposed eligibility norm, a flaw in the process | Applies. The norm was departed from |
| Tata Cellular (1994) | Judicial restraint over the merits of a commercial choice between eligible bidders | Does not apply. It does not protect a departure from the eligibility condition itself |
The award is liable to be set aside.
Step 4: Establish promissory estoppel, then work through the defences
Apply Motilal Padampat Sugar Mills Co Ltd v State of Uttar Pradesh (1979). The elements are made out: a clear and unequivocal written assurance, intended to create a legal relation, on which Neelam has acted by registering and bidding. No consideration is required.
Then take the defences in this order:
- Contrary to statute. Not suggested on these facts.
- Withdrawn by legislation. The preference was not withdrawn by legislation.
- Officer lacked authority. Not suggested; the assurance came from the State in writing.
- Overriding public interest. The only defence left, and here the case is clear.
On the fourth, a bare assertion is insufficient. The State must place the material before the court, which will then decide for itself whether the public interest requires it to resile. The withdrawal is prima facie bad.
Ratification cannot cure Art.299(1). Inspection, certification and public use of the road do not validate a void contract, and no implied contract arises from the course of dealing.
The measure of relief under S.70 is not the contract rate. She recovers the value of the benefit conferred, so lost profit and the contract rate as such fail. This is the point on which most answers go wrong.
Tata Cellular does not cover this award. It restrains review of the merits of a choice between eligible bidders. It does not protect the State when it departs from its own eligibility condition, which is a process flaw.
Public interest is not made out by assertion. Under Motilal Padampat the State bears the burden and must place material before the court, which decides the question for itself.
Conclusion. Neelam cannot sue on the work order, but can recover the value of the work under S.70. The tender award is liable to be quashed for breach of Art.14. The withdrawal of the price preference is open to challenge on promissory estoppel unless the State discharges its burden of justification.
See Also
- Liability of the State in Torts : the companion head of State liability under Art.300.
- Freedom of Interstate Trade, Commerce and Intercourse : the other principal constitutional restraint on State economic action.
- Services under the State and Public Service Commissions : the officers through whom the State contracts and the limits of their authority.