Liability of Government | Administrative Law - CLAT PG PDF Download

Introduction

In England, the Government was never seen as an 'honest man.' It's essential for the rule of law that the Crown, like other public authorities, should be legally responsible and accountable for wrongs done to its subjects. The significant increase in government activity from the late 19th century onwards made it unacceptable for the Government, representing the Crown, to be exempt from ordinary law. English law has always maintained that the King is subject to law and can breach it. 

• As far back as 700 years ago, Bracton noted that "The King is not under man, but under God and under the law, because it is the law that makes the King." Although theoretically, the King could be held liable for illegal acts, practical issues arose. Rights depend on remedies, and there was no way to enforce law against the King. 
• All courts were his courts, and he could not be sued without his consent. He could be a plaintiff but never a defendant. No writ could be issued, nor could any order be enforced against him. Since 'the King can do no wrong,' when the administration was poorly managed, it was not the King at fault but his Ministers, who must have given him bad advice. However, after the Crown Proceedings Act of 1947, the Crown can now be treated like an ordinary litigant.

In India, the situation is different. The maxim 'the King can do no wrong' has never been accepted. The Union and the States are legal entities and can be held liable for breach of contract and tort. They can file lawsuits, and lawsuits can be filed against them.

Contractual Liability

• Contractual liability of the Union of India and States is recognized by the Constitution itself. Article 298 explicitly states that the executive power of the Union and each State extends to carrying on any trade or business, acquiring, holding, and disposing of property, and making contracts for any purpose.
• Article 299(1) prescribes the mode of execution of such contracts, stating that all contracts made in the exercise of executive power by the Union or a State shall be expressed to be made by the President or the Governor of the State, and executed on their behalf by authorized persons.

Requirements

• Every contract must be expressed to be made by the President or the Governor (as applicable).
• Every contract must be executed by a person authorized by the President or the Governor.
• Every contract must be expressed in the name of the President or the Governor.

Written Contract

• A valid contract under Article 299(1) must be in writing.
• Oral contracts are not binding on the Government.
• Formal written contracts executed by authorized persons are required.
• The terms 'expressed to be made' and 'executed' indicate the need for a formal written contract.

Execution by Authorized Person

• Contracts on behalf of the Government must be signed by authorized persons designated by the President or the Governor.
• Contracts signed by unauthorized officers are not binding on the Government.
• In the case of Union of India v. N.K. (P) Ltd., the Supreme Court ruled that contracts signed by unauthorized officers are invalid.

Expression in the Name of President (Governor)

• Contracts must be expressed in the name of the President or the Governor.
• If a contract is not expressed on behalf of the President or the Governor, it is unenforceable against the Government.
• In Bhikraj Jaipuria, contracts not expressed on behalf of the Governor-General were deemed unenforceable.

Non-compliance: Effect

• The provisions of Article 299(1) are mandatory and must be complied with. They are not merely formalities but protect the Government from unauthorized contracts.
• Non-compliance renders the contract unenforceable by or against the Government.
• Previously, the Supreme Court held that non-compliance meant the contract was not enforceable, but the Government could ratify it.
• In Mulamchand v. State of M.P., the Supreme Court ruled that if a contract did not comply with constitutional provisions, it was null and void, and ratification was not possible.
• Section 230(3) of the Indian Contract Act, 1872 did not apply to such contracts, and government officers could not be held personally liable.

Valid Contract: Effect

• If Article 299(1) is complied with, the contract is valid and enforceable by or against the Government.
• The contract binds the parties involved.
• Once a legal and valid contract is established, the relationship between the parties is governed by the contract terms, not by constitutional provisions.
• Article 299(2) states that the President and Governor are not personally liable for contracts executed under the Constitution or related enactments.
• It also provides immunity to individuals making or executing such contracts on behalf of the President or Governor from personal liability.

Quasi-contractual Liability

• Article 299(1) provisions are mandatory, and non-compliance renders the contract unenforceable in court.
• Court applies Section 70 of the Indian Contract Act, 1872, holding Government liable to compensate other party based on quasi-contractual liability.
• Section 70 addresses compensation for accepted goods or enjoyed work.
• Claims under Section 70 are not based on contract but on voluntary actions accepted by other party.
• Section 70 prevents 'unjust enrichment.'
• Conditions for invoking Section 70:
• Lawful act done for another or delivery of something.
• No intention of gratuitous act.
• Acceptance of act or enjoyment of benefit by other party.
• If conditions met, receiving party must pay compensation to other party.

In Quasi-contractual Liability:

• Article 299(1) provisions are mandatory; non-compliance makes contract unenforceable in court.
• Court applies Section 70 of Indian Contract Act to hold Government liable to compensate other party.
• Section 70 addresses liability for accepted goods or enjoyed work.
• Claims under Section 70 are based on voluntary actions accepted by other party, not on contract.
• Section 70 prevents 'unjust enrichment.'
• Conditions for invoking Section 70:
• Lawful act done for another or delivery of something.
• No intention of gratuitous act.
• Acceptance of act or enjoyment of benefit by other party.
• If conditions met, receiving party must pay compensation to other party.

Doctrine of Unjust Enrichment

• The Doctrine of 'unjust enrichment' is an equitable principle that prevents a person from benefiting at the expense of another. Although 'unjust enrichment' is not explicitly defined in the Constitution or any statute, it refers to the retention of a benefit by a person in a manner that is unjust or inequitable.
• Unjust enrichment occurs when someone keeps money or benefits that, in fairness and good conscience, rightfully belong to someone else. The doctrine is rooted in the idea that no one should gain a benefit without incurring a loss. It is not based on contract or tort but on quasi-contract or restitution.

Key Case: Orient Paper Mills Ltd. v. State of Orissa

• In this case, the Supreme Court denied a refund to a dealer because he had already passed on the burden to the purchaser. The court noted that the Legislature could restrict the right to claim a refund of illegal tax paid by individuals, ensuring that such claims were made only by those who paid the tax, not by dealers.

Grant of State Largess

• The modern State has evolved from being a 'Police State' to a 'Welfare State,' engaging in various commercial activities.
• While a private individual has the right to decide whether to enter into a contract with the State, the State also has the right to choose whether or not to enter into an agreement with any person.
• However, this right of the State is not absolute or unlimited, especially when it comes to granting State largess.

Contract of Service

• A contract of service between the State and a private individual is not governed by Article 299 of the Constitution.
• Initially, when a person is appointed to Government service, there is a contract between the parties, with an offer and acceptance of employment. However, once appointed, the individual acquires a status, and the relationship is no longer governed by a contract but by relevant legislation or rules under Article 309 of the Constitution.
• In the case of Roshan Lal Tandon v. Union of India, the Supreme Court clarified that the relationship between the Government and its servant is not like an ordinary contract of service. The duties of the Government servant are determined by law, and society has an interest in the enforcement of these duties.

Unconscionable Contracts

• A contract between an individual and the Government cannot be enforced by a court of law if it contains a clause that is arbitrary, unreasonable, unconscionable, or against public policy.
• For instance, a condition in a service contract allowing the termination of a permanent employee's service by paying three months' salary is unenforceable.
• Similarly, a provision in a contract of service permitting the employer to terminate the services of an Air Hostess upon her first pregnancy is considered arbitrary, unreasonable, and contrary to civilized societal norms.
• Moreover, mass termination of all Government Counsel without any justification violates Article 14 of the Constitution, even if such action is in line with a contractual term.
• Even in contractual matters, the Government is expected to act reasonably.

Statutory Contracts

• Article 299 of the Constitution applies to contracts made by the Government in the exercise of executive powers, not in the exercise of statutory powers.
• There is a distinction between contracts entered into by the Government and a private party in the exercise of 'executive powers' and in the exercise of 'statutory powers.'
• The rights and liabilities of the parties in a contract entered into between the Government and an individual in the exercise of executive powers are governed by Article 299.
• However, in contracts governed by statutory provisions, the rights and liabilities of the parties are determined by the relevant statute, and Article 299 does not apply.