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GOVERNMENT CONTRACT AND ITS ESSENTIALS

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This article is written by Dhaani Gautam of 2nd Year of B. Com. LLB of Institute of Law, Nirma University, an intern under Legal Vidhiya

ABSTRACT

Government contracts are a vital instrument for the effective delivery of public services, ensuring the fulfillment of government responsibilities by outsourcing tasks to private entities. his article explores the legal framework surrounding government contracts, focusing on the requirements for validity, such as written agreements, proper authorization, and compliance with the Indian Contract Act, 1872. Additionally, it examines the formalities under Article 299, the procurement process, and the role of transparency measures like the General Financial Rules (GFR) and the Government e-Marketplace (GeM). Furthermore, the article addresses the legal remedies available when the government fails to honour its contractual obligations, including arbitration, writ petitions, and civil court claims. Through these discussions, the article highlights the importance of government contracts and it’s essentials.

KEYWORDS

Government Contracts, Article 299, Indian Contract Act, Article 298

INTRODUCTION

A contract is a formal agreement between parties that establishes enforceable obligations. For the agreement to be legally valid, it must meet certain essential requirements including mutual agreement shown through an offer and acceptance, legal consideration, the legal capacity of the parties involved, and a lawful objective. When a breach occurs, possible remedies include general damages, consequential damages, reliance damages, or specific performance.[1] A contract is defined under Section 2(h) of the Indian Contract Act, 1872, as an agreement that is enforceable by law. It specifies that a contract arises when there is a proposal (offer) made by one party, accepted by another, and backed by lawf3ul consideration, with the intention to create legal obligations.[2]

In case of government contracts, the agreement must involve a government entity forming a party, entering into a contract with private individuals or entities for the purpose of fulfilment of needs through ‘outsourcing’ certain services like construction, human resource supply, etc. The contract can be entered into by the Central or State government or its agencies.

The primary reason for government contracts is to enable the government to fulfill its public duties and responsibilities by partnering with private entities. Since governments often lack the capacity or expertise to directly provide all goods, services, or infrastructure, these contracts help outsource tasks to specialized organizations, ensuring efficiency and effective resource utilization. Government contracts are also crucial for promoting economic growth and fostering private sector participation in public welfare. They establish transparency and accountability in the allocation of public resources, regulating the relationship between the state and private entities. By setting clear obligations and rights, these contracts help protect the public interest and ensure compliance with laws and regulations. Furthermore, they prevent arbitrary decision-making by establishing norms that guide government dealings, ensuring fairness and structure in all governmental engagements.

HISTORY

Even in the pre-independence era, the government engaged in contracts to fulfill administrative and developmental needs. During British rule, the colonial administration entered into contracts with private parties to execute various public projects. A significant milestone came with the Crown Proceedings Act of 1947[3], which helped shape the modern approach embodied in Article 299[4] of the Constitution of India. This Act stipulated that the Crown (the government) could not be sued for contracts it had entered, thereby laying the foundation for a doctrine that would later evolve into government immunity in contractual matters.

After gaining independence in 1947, India recognized the need for a transparent and accountable system for managing public funds. The Constitution of India laid the foundation for financial accountability, particularly in government contracts. Article 299 mandates that all contracts entered into by the government must be executed in the name of the President (for the Union) or the Governor (for states) and signed by an authorized officer, ensuring a formalized and legally binding process.

Over the decades, the government has introduced several measures to enhance transparency, efficiency, and competition in public procurement. The General Financial Rules (GFRs)[5] provide a structured framework for procurement across ministries and public sector entities, ensuring uniformity and fiscal discipline. The 2017 revision of the GFRs introduced key provisions, including the establishment of the Government e-Marketplace (GeM)[6]-a digital platform aimed at streamlining procurement, reducing manual intervention, and promoting competitive bidding.

More recently, reforms have further modernized public procurement, including increased financial thresholds under the GFRs and the introduction of a revised Procurement Manual in 2024. These updates prioritize ease of doing business, greater transparency, and procedural clarity, aligning with contemporary governance standards.

CONSTITUTIONAL FRAMEWORK OF GOVERNMENT CONTRACTS IN INDIA

Government contracts are essential for the smooth functioning of public administration. They help in managing resources, delivering public services, and ensuring transparency in financial dealings. To regulate these contracts, the Constitution of India provides a clear legal framework that balances government authority with accountability. Several constitutional provisions define how the government can enter into contracts, what rules must be followed, and how disputes can be resolved.

Article 294[7] lays the foundation for government contracts by transferring ownership of assets, rights, and liabilities from the British Crown to the Indian government after independence. This ensured a smooth transition and prevented confusion over property and agreements made before 1947. More importantly, it clearly separates government-owned resources from private assets, ensuring that public property is managed responsibly.

Article 298[8] gives both the Union and State governments the power to conduct business and enter into contracts. This provision allows them to buy, sell, and manage property and sign agreements necessary for governance. It plays a crucial role in public procurement, as it legally enables the government to collaborate with private entities while following proper procedures.

One of the most important provisions is Article 299[9], which sets the legal requirements for government contracts. It states that all government agreements must be made in the name of the President (for the Union) or the Governor (for the States). Additionally, these contracts must be in writing and signed by an authorized official. These rules prevent unauthorized agreements, ensure transparency, and protect officials from personal liability as long as they follow the correct procedures. By making contracts more formal and structured, Article 299 helps maintain trust and accountability in government dealings.

Despite these safeguards, disputes may still arise regarding government contracts. Article 300 addresses this issue by allowing individuals and businesses to sue the government if it fails to fulfill its contractual obligations. While Articles 298 and 299 focus on how contracts should be made, Article 300[10] ensures that the government remains accountable if it does not meet its commitments. This provision upholds the rule of law and ensures that government dealings remain fair and transparent.

These constitutional provisions work together to create a structured and accountable system for government contracts in India. They provide a legal foundation for public procurement, ensuring that government agreements are transparent, enforceable, and in the best interest of the public. By following these principles, the government can manage public resources efficiently while maintaining public trust.

VALID GOVERNMENT CONTRACT AND ITS FORMALITIES

In the case of State of Bihar v. Majeed (1954)[11] the Supreme Court of India held that a government contract must comply with Article 299 in addition to the standard requirements of the Indian Contract Act. The court emphasized that the liability of the government is the same as that of any private party—provided all formalities prescribed by Article 299 are complied with. Government contracts must satisfy both the general elements of a contract under the Indian Contract Act, 1872 and additional formalities specific to government contracts .

A. General Contractual Requirements

For any agreement to be enforceable, as per contractual law jurisprudence and the Indian

  1. Offer and Acceptance: There must be a clear and unambiguous offer[12] from one party, followed by an unconditional acceptance[13] from the other. This forms the basic consensus ad idem or “meeting of the minds.”
  2. Intention to Create Legal Relations: Both sides must have a genuine intention for the agreement to have legal consequences. This ensures that both parties are serious about their promises and enforceable in a court of law.
  3. Consideration: Something of value must be exchanged between the parties[14] .This could be money, services, or any benefit that makes the promise worth something in the eyes of law.
  4. Capacity to Contract: The parties involved must be legally capable of entering into a contract[15] .This means they shouldn’t be minors, should be of sound mind, and not disqualified by any other law.
  5. Free Consent: Consent must be given freely and without any coercion, undue influence, fraud, misrepresentation, or mistake. This ensures that the agreement is made without any pressure or deception.[16]
  6. Lawful Object: The purpose of the contract must be legal and not against public policy. If the objective is illegal, the contract is void.
  7. Certainty and Possibility of Performance: The terms of the contract need to be clear, and the obligations must be realistically performable

These basics ensure that any agreement, whether with a private or public party, is valid and enforceable in court.

B. Additional Formalities Specific to Government Contracts

Government contracts differ from private agreements because they involve public funds, state interests, and various constitutional principles. As a result, they must comply with certain additional requirements beyond the Indian Contract Act:

1. Compliance with Article 299 of the Constitution

The requirements for government or state contracts are outlined in the cases of K.P. Chowdhry v. State of Madhya Pradesh[17] and State of Bihar v. M/s Karam Chand Thapar& Brothers Ltd [18]. In these rulings, the Supreme Court has specified the conditions under Article 299 that must be met for a government contract to be legally binding. These conditions are:

  1. The contract must explicitly state that it is made by the Governor or the Governor-General.
  2. The contract must be executed in writing.
  3. The execution of the contract must be carried out by persons authorized or directed by the Governor or Governor-General.

2. Written Form and Proper Authorization

In State of Bihar v. M/s. Karam Chand Thapar & Brothers Ltd[19]., the Supreme Court evaluated whether the Executive Engineer, Y.K. Lall, had the authority to sign an arbitration agreement on behalf of the Government of Bihar. The Court determined that Y.K. Lall was specifically authorized by the Governor, acting through the Secretary, to execute the agreement. This authorization was supported by the correspondence and instructions from the Secretary, who led the process of arranging arbitration on behalf of the Government. Therefore, the Court concluded that the arbitration agreement was valid and binding, as it was executed by a person duly authorized under Section 175(3)[20] of the Government of India Act, 1935.

3. Public Procurement Rules and Transparency

Most government contracts are awarded through an open tender process, ensuring fair competition and equal opportunity. The process includes:

Government contracts are subject to audits by agencies like the Comptroller and Auditor General of India (CAG) to prevent misuse of public funds. Any irregularity or corruption in government contracts can lead to investigations by the Central Bureau of Investigation (CBI), Enforcement Directorate (ED), or Lokpal.

6. Remedies and Legal Action Against the Government

Under Article 300, the government can be sued in contracts if it fails to honour its obligations. Disputes are often resolved through:

  1. Arbitration (as per the Arbitration and Conciliation Act, 1996).
  2. Writ petitions under Article 226[24] or Article 32[25] for violations of fundamental rights.
  3. Contractual claims in civil courts for breach of contract.

CONCLUSION

Government contracts are essential for running public services and projects, ensuring that public funds are used properly and efficiently. These contracts must follow both general contract laws and specific rules outlined in the Constitution of India, especially under Article 299. By making sure contracts are in writing, signed by authorized officials, and follow the correct procedures, the government ensures fairness and transparency. The use of competitive bidding, audits, and legal actions helps keep the process accountable and prevents misuse of funds. With reforms, digital platforms for procurement, the system continues to improve, making government dealings clearer and more efficient for everyone involved.

REFERENCES

  1. Abhimanu, Executive Power under Article 299 of the Constitution, Judicial System (May 25, 2020), https://abhipedia.abhimanu.com/Article/1077/NDI2OTM1/Executive-Power-under-Article-299-of-the-Constitution-Judicial-System.
  2. Understanding Government Contracts, iPleaders (Dec. 6, 2018), https://blog.ipleaders.in/understanding-government-contracts/.
  3. Legal Service India, Liability of Administration in Contract (Government Contract), https://legalserviceindia.com/legal/article-6162-liability-of-administration-in-contract-government-contract.html.

[1] Cornell Law School, Contract, Legal Information Institute, https://www.law.cornell.edu/wex/contract.

[2] Indian Contract Act, 1872, §§ 2(h) (India).

[3] Crown Proceedings Act of 1947 (India).

[4] Constitution of India, art. 299.

[5] Ministry of Finance, General Financial Rules 2017 (Government of India, 2017), https://doe.gov.in/files/circulars_document/GFR2017_0_11zon_1.pdf.

[6] Government e-Marketplace, https://gem.gov.in/.

[7] Constitution of India, art. 294.

[8] Constitution of India, art. 298.

[9] Constitution of India, art. 299.

[10] Constitution of India, art. 300.

[11] State of Bihar v. Abdul Majeed, (1954) S.C.R. 786 (India).

[12] Indian Contract Act, 1872, § 2(a).

[13] Indian Contract Act, 1872, § 2(b).

[14] Indian Contract Act, 1872, § 2(d).

[15] Indian Contract Act, 1872, § 11.

[16] Indian Contract Act, 1872, § 10.

[17] K. P. Chowdhary vs State Of Madhya Pradesh & Ors, 1966 SCR (3) 919 (India).

[18] The State Of Bihar vs M/S. Karam Chand Thapar & Brothers Ltd, 1962 SCR (1) 827 (India).

[19] ibid

[20] Government of India Act, 1935, § 175(3).

[21] General Financial Rules, 2017.

[22] Right to Information Act, 2005, No. 22 of 2005 (India).

[23] Public Procurement (Preference to Make in India) Order, 2017, Notification No. P-45021/2/2017-BE-II, Dated: 16 September 2017.

[24] Constitution of India, art. 226.

[25] Constitution of India, art. 32.

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