This article has been written by Arup Kumar Bhattachayya pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction 

Contract law in India is as significant in the day-to-day corporate affairs of the public sector as that of private corporate entities. In order to understand the need for enforcement of contract law in any sector, first there is the need to understand the importance of contract negotiations in day-to-day business affairs, irrespective of sector.

Though there is no dedicated legislation governing the form and model of the contract to be followed by the public sector,  a few state governments and public undertakings, like national highway authorities, have laid out legislation, rules, and model codes to impart legal bindings on the contract.

However, since the introduction of the Indian Contract Act 1872, the scenario of enforcement of contract laws in the Indian business sector, both public and private, has been pitiable. The stumbling block in implementing the policy of “Ease of Doing Business” can be attributed to the remarkably slow-paced judicial system.

It used to take years to get remedies against violations of terms of contract in court.

In the present scenario, there are two ways that the aggrieved parties can find remedies.

The first option is through mediation or arbitration and the second option is filing a suit.

The first option is less time-consuming, whereas the cost involved in the process is hefty and sometimes may not lead to the desired solution.

The second option is both a time-consuming and cost-increasing option and the timing of getting a remedy is uncertain. The slow and lengthy judicial system has been an impediment to the policy of “Ease of Doing Business.” The parties are reluctant to abide by the contractual obligations, knowing that the outcome of the remedy against infringement will take a long time due to the slow-paced judicial process.

Recently, the Indian Government has understood the importance of putting focus on this important area, as this factor is becoming a major impediment to garnering the performance of the public sector and pulling foreign direct investment.

For this purpose, the government has initiated ramifications in the civil justice system to weed out the lacunas through various amendments to concerned laws and regulations. 

These initiatives are expected to have a positive impact on the enforcement of contract laws in the public sector in India, fostering better public service and performance.

An overview of contract laws in India

The principles of English Common Law are the foundation of the Indian Contract Act, 1872. Mercantile and commercial transactions are mainly governed by the law of contracts.

The Laws of Contract, which came into existence in September 1872, mainly emphasise the aspects of an agreement entered into between two or more parties and its enforcement.

General features of Law of Contract

The contract /Act which was enforced on September 1, 1872, originally had 266 sections divided into 11 chapters. These chapters can be further categorised as follows:

1. General Principles of Law of Contract, which includes Chapters 1 to 6 and Sections 1 to 75.
2. Special kinds of contracts, which comprise the following contracts along with their corresponding chapters:

• Contract of Indemnity and Guarantee (Chapter 8)
• Contract of Bailment and Pledge (Chapter 9)
• Contract of Agency (Chapter 10)

Important Provisions of Law of Contract

Let’s start with the discussion on the subject of agreement, which is the foundation stone of the Laws of Contract. 

Agreement;- According to Section 2(e) of the Contract Act 1872, every promise and every set of promises form consideration for each other.

A contract is an agreement between two parties who have agreed to abide by certain bindings mutually agreed upon and is legally enforceable.

Hence, the essential elements which constitute the structure of an agreement are as follows:-

• Offer – According to Section 2(a) of the Contract Act, an offer refers to a promise where the elements of a certain act, promise or forbearance are involved in exchange for the initial promise.
• Acceptance – According to Section 2(b) of the Contract Act, when a person provides his consent to an offer made to him, in the form of goods or services, the offer is said to be accepted.
• Consideration – According to Section 2(d) of the Contract Act, a consideration means the benefit that each party to a contract receives. Usually, the consideration involves payment in exchange for goods or services but at other times, it may not involve money but can be anything of value.

Considerations should be valid, and a set of criteria has been defined for a consideration to be valid, which are as follows:

• The consideration must be made at the desire or request of the promisor. 
• Consideration needs to move from the promisee or any other person who has moved consideration on behalf of the promisee.
• Consideration must be an act, abstinence, forbearance or a returned promise.
• Consideration may be past, present or future.
• Consideration must be real, competent and have some value in the eyes of law.
• Consideration must involve the promise, which is already not bound by law.
• Consideration always does not equal the value of something received.

However, a consideration can be treated as unlawful if the agreement contains any of the following elements:

• Consideration of an agreement should not involve any act that is null and void in the eyes of law.
• A consideration that involves injury to a person or property of another, is a void consideration.
• Consideration has been regarded as immoral in the eyes of law.
• Consideration does not challenge any provision of law.
• Consideration is fraudulent.
• Consideration of an agreement if it involves contradiction to public interest or policy is a void consideration.
• Agreements that restrain the exercise of legal rights are null and void.

Promise:- According to Section 2(b) of the Contract Act, when an offer is accepted, it turns out to be a promise.

Void Agreement- According to Section 2(g), an agreement is considered as void agreement if it is not enforceable by law.

Voidable Contract- According to Section 2(i), a voidable contract is one that is enforceable by the option of the parties to the contract, not by law or others.

Void Contract:- According to Section 2(j) of the Contract Act, a contract is said to be a void contract if it is eligible to be enforced by law.

Enforceability of contracts in the public sector

Contracts in the Public Sector:- The Indian Contract Act 1872, though, does not prescribe any form for entering into a contract; however, the position is different with respect to the public sector. As per Article 299(1) of the Indian Constitution, the public sector in India needs to fulfil certain formalities. But the relevance of the Indian Contract Act 1872 had obviously not been superseded in order to comply with the requirements of Article 299(1) of the Constitution of India. The contracts in the public sector need to follow the essential requirements of the Indian Contracts Act 1872, such as offer, acceptance and consideration, that need to be followed for any contract by an individual under the ordinary law of contracts.

Though there is hardly any difference in terms of the interpretation of a contract between private parties as well as that of the public sector, so far as enforceability and interpretation are concerned, some special privileges are accorded to the public sector in the form of special treatment under the statute of limitation.

Provisions of Article 299(1)

All contracts made in the exercise of executive power of the union or 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 the property made in the exercise of that power shall be executed on behalf of the President or the Governor by such person and in such manner as he may direct or authorise.

The above provision clearly emphasises that the contract must be in written form. The purpose of enacting Article 299(1) is to provide a safeguard for the public sector against entering into any unauthorised contracts. Usually, a contract in the public sector is made by tender and acceptance. The acceptance must be made by a duly authorised person and should be a valid contract.

Any contract entered into by the public sector without following the provision of Article 299(1), is not ratifiable by law. In K.P.Chowdhary v. State of Madhya Pradesh [ AIR 1967 SC 203], the Supreme Court held that “in view of the provision of Article 299(1), there is no scope for any implied contract. Thus, no contract with the public sector is enforceable by law by any side, if it is made without complying with the provisions of Article 299(1).

A strict adherence to the provisions of Article 299(1) of the Constitution often causes hardship in the smooth execution of the contract, especially when dealing with private parties. This may be the reason why the judiciary sometimes allowed mitigations in compliance with the stringent rigours of the formalities contained in Article 299(1).

As per the provisions of Article 299(1), a contract in the public sector should be in writing, but it is not necessary that the contract always be in a formal legal document. It could be through correspondence or through offer and acceptance, which are the essential components of a valid contract as per provision in the Indian Contracts Act 1872, if it is in compliance with Article 299(1).

An officer of the public sector can be entrusted with the authority to enter into a contract governed by a rule, formal notifications or special orders. This officer has the authority to execute the contract on behalf of the public sector, duly authorised by the President/ Governor, as the case may be.  

Challenges to contract law enforcement in the public sector

There are a number of challenges to contract law enforcement in the public sector in India. These challenges include:

• The sheer size and complexity of the public sector: The public sector in India is vast and complex, with a wide range of different agencies and entities. This can make it difficult to ensure that all contracts are properly enforced.
• A lack of transparency: The public sector in India is often not transparent, and this can make it difficult to hold government agencies accountable for their actions. This lack of transparency can also make it difficult to identify and prosecute cases of contract fraud and corruption.
• Inadequate resources: The public sector in India is often underfunded, and this can lead to a lack of resources for contract law enforcement. This lack of resources can make it difficult to investigate and prosecute cases of contract fraud and corruption, and it can also make it difficult to ensure that government agencies comply with their contractual obligations.
• Political interference: Political interference can also be a challenge to contract law enforcement in the public sector. This interference can take a number of forms, such as pressure on government agencies to award contracts to certain companies or individuals or interference with the investigation and prosecution of cases of contract fraud and corruption.

Recommendations for improving contract law enforcement in the public sector

There are a number of things that can be done to improve contract law enforcement in the public sector in India. These recommendations include:

• Increasing transparency: The public sector in India should be made more transparent, so that government agencies are more accountable for their actions. This can be done by publishing more information about contracts online, and by making it easier for the public to access information about government procurement.
• Providing more resources: The public sector in India should be provided with more resources for contract law enforcement. This can be done by increasing funding for government agencies, and by providing them with the necessary staff and training.
• Reducing political interference: Political interference in contract law enforcement should be reduced. This can be done by strengthening the independence of government agencies, and by making it more difficult for politicians to interfere with the investigation and prosecution of cases of contract fraud and corruption.
• Establishing a specialised contract enforcement agency: A specialised contract enforcement agency could be established to investigate and prosecute cases of contract fraud and corruption in the public sector. This agency could be independent of the government, and it could be given the resources and expertise to effectively investigate and prosecute these cases.

Judicial interference in contractual matters

Judicial interference in contractual matters endorses fairness in contractual obligations and formalities. A public sector undertaking or organisation, while dealing in, cannot arbitrarily use its power of discretion while dealing in through entering into a contract. Rather, it should conform to certain standards or norms that are not arbitrary, irrational, or irrelevant. The application of judicial review lies in adjudging the exercise of contractual powers by public sector organisations in order to prevent arbitrariness or favouritism.

Conclusion

Low-cost and impartial contract enforcement procedures enhance predictability by restraining opportunities among contracting parties. This predictability ensures a reduction in uncertainty, thereby decreasing the cost of exchange and enhancing transactions.

Fair, transparent and low-cost enforcement of contracts can open the door to competition and allow exchange among strangers by reducing the inherent risk of transactions.

In developing countries like India, information asymmetries, opportunism, and transaction costs limit the effectiveness of state-run public sectors. The public sector in India often does not provide for predictable contract enforcement.

However, in recent days, due to ever increasing focus on “Ease of Doing Business” by the Indian Government, India has come up to the rank of 63 from 143 globally, as per the ranking provided by the World Bank. The Indian government nowadays is focusing more on improving the performance of the Indian Legislature and Judiciary in enforcing contracts. In order to inculcate an encouraging business environment, an effective contract system is a must to reduce uncertainties vis-a-vis to promote business. An effective contract enforcing system not only ensures legal and economic protection of all parties involved but also increases the “Ease of Doing Business”.

References

• https://resourcehub.bakemckenzie.com
• https://thewire.in
• https://taxman.com
• https://en.m.wikipedia.org
• https://zeus.firm.in
• https://pdf.usaid.gov