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CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS

CHAPTER 2
CONTRACTS WITH GOVERNMENT
2.1. Statutory requirements
Article 299 reads:
“299 Contracts –(1) All contracts made in exercise of the executive power of
the Union or of a state shall be expressed to be made by the President or by the
Governor 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 President or by the Governor by such persons and in such
manner as he may direct or authorize.
(2) Neither the President nor the Governor shall be personally liable in respect
of any contract or assurance made or executed for the purposes of this
constitution, or for the purposes of any enactment relating to the Government
of India heretofore in force, nor shall any person making or executing any
such contractor assurance on behalf of any of them be personally liable in
respect thereof”

2.2 Object of Article 299(1)


The reason for enacting Article 299 of the Constitution of India is that in order
to bind a Government there should be a specific procedure enabling the agents
of the Government to make contracts. The public funds cannot be placed in
jeopardy by contracts made by unspecific public servants without express
sanction of the law. It is a provision essentially made in the interest of the
Government so that Government may not be committed by any and every
public servant.

2.3 Requisite conditions of a valid contract


In order to comply with the requirements of Article 299 of the Constitution,
three conditions must be satisfied:
(i) The contract must be executed by a person duly authorized by the
Governor on behalf of the Governor; and
(ii) It must be expressed to be made in the name of the Governor; and

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CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS

(iii) It must be in writing. The writing however, need not be expressed in a


formal document. A valid contract may result from correspondenceif
the requisite conditions are fulfilled

2.4 No implied contract if Article 299 violated


Article 299 of the Constitution applies to all contracts made in the exercise of
executive power of the Union or a State.
If the contract between the Government and another person is not in
compliance with Article 299 (1), it would be no contract at all and could not
be enforced either by the Government or by the other person as a contract.
In view of the express provisions of Article 299 (1) all implied contracts with
the Government and other persons are ruled out.

2.5 Ratification when contract not as per Article 299


A contract not complying with Article 299 is enforceable against the
Government if ratified by it and ratification can be made in express terms by a
formal order of the Government or by the conduct of the Government.

2.6 Contract when deemed to comply with article 299


Where a contractor in response to notice inviting tenders by the Government
submitted a tender and the Government telegraphically accepted the same
through a proper Government authority under the Ministry abbreviated
telegraphic address, it was held that acceptance by telegram is valid.
Contracts by the Government may be embodied in formal documents and even
if no formal document is necessary, the correspondence embodying the
contract must ex facie show that the contract was entered in to by the
Government or on behalf of the Government.
2.7 Litigation between government departments and PSU’s not
maintainable
It was not contemplated by the framers of the Constitution or CPC that two
departments of a State or one or more states or the Union of India will fight
litigation in a court of law. Indeed such a course would but be detrimental to

EXTRACTS FROM BUILDING & ENGINEERING CONTRACTS ( LAW & PRACTICE) BY DR. P C MARKANDA
CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS

the public interest as it also entails avoidable wastage of public money and
time
For cases involving government departments inter se or with public sector
undertakings, recourse in the first instance, should be taken to a high powered
committee.
2.8 Only duty authorized official can enter into contract
It is well settled that Government can only be bound by contracts that are
entered into in a particular way and which are signed by the proper Authority.
Article 299 makes a specific reference not merely to the authorization but also
directions by the Governor in the alternative. The result, therefore, is that the
person executing the contract on behalf of the Governor should be found to
have either an authority or direction to do so.

2.9Legalistic attitude not permissible to defeat legitimate claim


The Government should honour its legal obligations arising out of contracts and
not drive citizens concerned to file a suit for recovery of the amount. In a
democratic society governed by the rule of law, it is the duty of the state to what is
fair and just to the citizen and the State should not seek to defeat the legitimate
claim of the citizen by adopting a legalistic attitude but should do what fairness
and justice demand.
2.10 Arbitration clause whether binding
Once the main contract is void then the arbitration clause contained therein
become meaningless because the arbitration clause is provided for reference of
present or future disputes to arbitration under a valid agreement and if the
agreement itself is invalid the arbitration clause falls with it.
Whenever there is an arbitration clause in the contract, the party aggrieved must
have recourse to the provisions of the Arbitration Act and that being a complete
Code in itself, the party cannot approach the High Court in a petition under Article
226 bypassing the arbitration clause and the provisions of the Arbitration Act.
Where in an agreement between the parties, arbitration clause was deliberately
and consciously stuck off by the parties, Court cannot appoint an arbitrator in such
a case for resolution of disputes which had arisen between the contracting parties.

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CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS

2.10 Contracts made under executive power different from


statutory power
The mandate of Article 299 applies only to contracts made in exercise of the
executive power. It can have no application to contracts which are statutory in
contracts
2.11 Payment for work done under a void contract
Where an agreement does not comply with the requirements of Article 299 (1) of
the Constitution, the other party to the contract is entitled to relief under section
70 of the Contract Act if the three conditions mentioned in the section are
satisfied.
When a contract in which the state is a party is acted upon and benefits derived
under it, the Claimant is is entitled to recover his dues under section 70 or 65 of
the Contract Act, as the case may be, though the contract did not conform to the
requirements of Section 175 of Government of India Act or Article 299 (1) of the
Constitution.
Where the claim for compensation is made, the juristic basis of the obligation is
not founded upon any contract or tort but upon a third category of law, namely
quasi-contract or restitution, provided, of course, the plaintiff adduces evidence in
support of his claim.
2.12 Oral Contracts not binding
The word “executed” in Article 299 (1) of the Constitution indicates that the
contract must be in writing. An oral contract to which the State is a party is not
recognized under the Constitution.
2.13 Parties may agree to form of Contract
While the Contract Act merely provides for certain elementary conditions under
which the contract becomes binding on the parties, it does not provide any
particular form or condition of a Contract. It is therefore clear, that the parties to
the contract may agree to a particular form or condition or mode in which the
contract is to be executed.
A valid concluded contract comes into existence even on communication of
acceptance of tender by authority empowered to enter into contract. A formal
agreement between the parties is not necessary in the absence of prescribing of
manner of entering into contract.

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An agreement which is not in the form prescribed by section 175 (3) is


unenforceable in law with the necessary consequence that under the provisions of
section 2 (g) of Contract Act is also void.
2.14 State must act fairly
The public property owned by the State or by any instrumentality of the State
should be generally sold by public auction or by inviting tenders. Observance of
the rule not only fetches the highest price for the property but also ensures fairness
in the activities of the State and the public authorities. Nothing should be
suggestive of discrimination. Nothing should be done by them which gives an
impression of bias, favouritism or nepotism. Ordinarily these factors should be
absent if the matter is brought to public auction or sale by tenders. There may be
situations necessitating departure from the rule, but then, such instances must be
justified by compulsions and not by compromise.
In the field of public law, the action of the State is open to challenge only when
the action is arbitrary, irrational, unreasonable and opposed to public interest or
when the action is discriminatory in nature.
2.15 Reasonable and fairness of clauses of contract
In the sphere of contractual relations of the State, its instrumentality, public
authorities or those whose acts bear the insignia of public element, action to
public duty or obligation are enjoined in a manner that is fair, just and equitable,
after taking objectively all the relevant actions into consideration and in a manner
that is reasonable, relevant and germane to effectuate the purpose for public good
and in general public interest and it must not take any irrelevant or irrational
factors into consideration or appear arbitrary in its decision. Every activity of the
public authority or those under public duty or obligation must be informed by
reason and guided by public interest.
The action of the State or its instrumentality can be checked under Article 14.
Their action must be subject to rule of law. If the governmental action even in the
matter of entering or not entering into contract, fails to satisfy the test of
reasonableness, the same would be unreasonable. Rule of reason and rule against
arbitrariness and discrimination, rules of fair play, natural justice are part of the
rule of law applicable in situation or action by State/ Instrumentality in dealing
with citizens.

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Even though the rights of the citizen are in the nature of contractual rights, the
manner, the method and the motive of a decision of entering or not entering into a
contract, are subject to judicial review on the touchstone of relevance and
reasonableness, fair play and natural justice, equity and non-discrimination.
2.16 Rates once accepted cannot be changed
A natural and logical meaning of a term in a contract of the price being firm and
fixed and not subject to escalation, obviously means that the price will be firm and
fixed during the period of performance of the contract i.e., no additional amount
towards the price will be payable for any reason whether for foreign exchange
variation or otherwise during the payment of amounts towards tranches of prices
over the elongated performance of the contract.
The terms and conditions of a contract are regulated and guided by the terms and
conditions of the tender notice and agreement between the parties, if any. At the
time of allotment of the contract with the Respondent, the lower rates quoted by
him was the consideration. All the tenderers while quoting rates in their respective
tenders must have calculated their respective profits by taking into consideration
the rates prevalent in the district and other relevant considerations. Subsequently,
rates cannot be allowed to be enhanced. If, after the allotment of contract, the
enhancement of rates is allowed it would not only harm the sanctity of the tender
system but also it will cause loss to public exchequer.
Once a contract is entered into then it cannot be altered to the prejudice of the
either of the parties unilaterally.
The agreement once reduced in writing, binds both the parties and the parties are
bound by contractual obligations contained therein and no party has right to
relieve itself of its contractual obligations much less unilaterally.

EXTRACTS FROM BUILDING & ENGINEERING CONTRACTS ( LAW & PRACTICE) BY DR. P C MARKANDA