This article is written by Abanti Bose, studying at Amity University Kolkata, India. The article talks about the constitutional validity of government contracts, the essentials of government contracts, the critical role played by the judiciary and various types of government contracts.
It has been published by Rachit Garg.
Table of Contents
Introduction
A contract is known as an agreement between two or more parties that is enforceable by law. In order for a contract to be legally binding, there must be an offer and acceptance, it must be expressed or implied, there must be a valid consideration, etc. However, in the case of government contracts, one party to the contract is either the Central or state government.
Government contracts are the kinds of contracts that are executed by the government for a variety of purposes such as construction, management, manpower supply, maintenance and repairs, IT-based projects, etc. When the central government or the state government gets involved in a contract it is known as a government contract. The party who executes the contract on the behalf of the government is referred to as a contractor.
Constitutional provisions of government contracts
The Constitution of India recognizes the contractual liability of the Central and state governments. Article 298 of the Constitution clearly lays down the power of the Central and state governments to carry out any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose. It is the executive power of the Union and the states. Similarly, the following Article, that is Article 299 prescribes the mode and manner of such contracts.
Article 299 of the Constitution of India reads; “All contracts made in the 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 the Governor by such persons and in such manner as he may direct or authorise.”
Thus according to Article 299 the requirements of valid government contracts which need to be fulfilled are:
- All the contracts must be expressed to be made by the President in the case of the Central Government and the Governor in the case of state governments.
- All the government contracts must be executed on behalf of the President of India or the Governor of the states, depending on the situation.
- All the contracts must be executed by the President or the Governor depending on the situation.
The use of the word “executed” in the Article means that the government contract must be in writing. An oral agreement between the government and the other party would not be valid for the purposes of Article 299.
Difference between government contracts and ordinary contracts
In India, the law regarding the formation and enforceability of contracts are governed by the Indian Contracts Act, 1872 but government contracts are governed by the provisions laid down in Article 299 of the Constitution. Article 299 lays down certain provisions concerning government contracts that must be followed.
| Government Contracts | Ordinary Contracts |
| According to Article 299, a government contract must be expressed. That is the words, ‘expressed to be made’ clearly mention that a government contract must always be in writing. | Whereas ordinary contracts which are formed under the Indian Contract Act, 1872 which states that a valid contract can be expressed or implied. |
| A government contract must always be executed by an authorised person in order to hold the government in contractual liability. A contract between the government and the other party would be invalid if it is not executed by the authorised person duly appointed by the President or the Governor, as the case may be. | An ordinary contract does not require to be executed by an authorised person. |
| A government contract must follow all the provisions stated under Article 299 of the Constitution. | An ordinary contract is bound by the provisions mentioned in the Indian Contract Act, 1872. |
How are government contracts formed
Government contracts are formed in the following manner:
- Every government contract must be expressed to be made by the President or the Governor.
- Every government contract must be executed on behalf of the President or the Governor.
- Every contract must be executed by a person authorised by the President or the Governor.
Principles of government contracts
The principles of government contracts are:
Transparency
The principle of transparency guarantees that the state authorities enter into contracts with the other party through a medium which is objective and fair. The authorities must also hold public hearings where proponents can express their doubts and submit questions, clarifications and/or complaints. Furthermore, third party documents and applications are also made public to ensure that the processes are carried out in a fair and equitable manner by the government authorities.
Economy
In this principle, the selection procedure for government contracts must be arranged in such a manner that only the procedures that are strictly essential and have connected terms and urgent deadlines, the least amount of resources will be used should be focused on by the government. Furthermore, before the selection of the party to a government contract, the appropriate authority must ensure that it has the appropriate financial allocations and preliminary research in place to determine the contract’s aim.
Responsibility
This principle states that the parties to a contract, that is the contractors, state entities, government officials, etc. will be held accountable if any dispute arises out of the government contract. Therefore, they will be held liable for civil, criminal, and disciplinary actions when their acts and/or omissions caused damages or infringed any provision of the contract.
Contractual balance
The principle of contractual balance states that the government contracts must maintain equality between the parties with respect to their obligations, rights and consideration stated during the execution of the contract. Thus, if the balance between the parties is not maintained then necessary steps must be taken to restore the balance between the parties.
Essentials of government contracts and critical role played by the judiciary
The essential elements of government contracts are governed by the provisions of Article 299 of the Constitution of India. It plays a vital role in prescribing the manner in which government contracts are to be executed. The significant requirements of government contracts are mentioned below.
Article 299 is a mandatory requirement when it comes to government contracts
The courts in various judgements have held that Article 299 is based on public policy and the protection of the general public. The courts have stated that the conditions laid down in Article 299 of the Constitution must be met in a government contract. If either party fails to meet any requirement stated under Article 299, then such a contract becomes null and void. Therefore, such a contract cannot be enforced by any of the contracting parties. And the government cannot be sued or held liable for damages for the breach of such a contract. Further, the government cannot enforce such a contract against the contracting party.
In the case of K.P. Chowdhary v. State of Madhya Pradesh (1966), the appellant gave the highest bids for two forest contracts at an auction. One of the terms of the auction was, that if the bidder failed to comply with the terms then his earnest money would be forfeited, and any deficiency occurring was to be recoverable from him as arrears of land revenue. Meanwhile, a dispute arose between the bidder and the forest department and since the dispute was not settled to the satisfaction of the bidder he refused to comply with the terms of the contract. The admitted position was that a contract complying with Article 299(1) has never been signed. The Supreme Court held that under Article 299 the words ‘mandatory terms’ mean there should be no implied contract between the parties. As laid down in Article 299 a government contract must be written and thus failure to follow the provisions indicates that the contract between the bidder and the state government was void.
Written contract
A contract made under Article 299 of the Constitution must be a written contract. The words ‘expressed to be made’ and ‘executed’ clearly state that the contract must be in writing and not an oral agreement. This is a requirement of law that must be fulfilled.
Execution by an authorised person
The next requirement under Article 299 of the Constitution is that a government contract can be entered into on behalf of the Government by a person authorised for that purpose by the President or the Governor, as the case may be. If the contract was entered by any person not authorised by the President or the Governor then such contract would not be valid.
In Union of India v. N.K. (P) Ltd. (1972), the Director of Railway Stores was authorised to enter into a contract on behalf of the President. However, the contract was entered into by the Secretary of the Railway Board. The Supreme Court held that the contract was entered into by an officer who was not authorised by the President for the said purpose hence, it is not a valid and binding contract.
Expression in the name of the President or the Governor
The last essential condition is that a government must be expressed in the name of the President or the Governor as the case may be. Even though the contract is entered into by an officer authorised for such purpose, the contract would not be valid or enforceable against the government if it is not expressed to be made on behalf of the President or the Governor.
In the case of State of Punjab v. Om Prakash (1961), a contract was entered into by the executive engineer of PWD, who was authorised to enter into a contract by the Governor, and therefore he accepted the tender for the construction of a bridge by PWD. However, in this case, the letter of acceptance was signed by the executive engineer but it was not expressed in the name of the Governor. Therefore, the Apex Court held that the contract is not valid since it fails to comply with the provisions of Article 299 of the Constitution.
Contractual liability in government contracts
The contractual liability in cases of government contracts of the Union of India and the state governments is recognised in the Constitution itself. Article 298 of the Constitution expressly mentions that the executive power of the Central government and of each state government shall extend to the carrying on of any trade or business and the acquisition, holding and disposal of property and the making of contracts for any purpose. Article 298 reads; “The executive power of the Union and of each State shall extend to the carrying on of any trade or business and to the acquisition, holding and disposal of property and the making of contracts for any purpose”, thereby, stating the Central and the state governments will be held liable in case of any dispute or issue arising out of the government contracts.
Significant categories of government contracting
The different types of government contracts are listed below.
Fixed-price contracts
In these kinds of contracts, the payment amount is not dependent on the resources used or the time expended. It is a contract where the predetermined value of the goods or services is already mentioned in the contract. In the contract, several provisions like contract change, economic pricing, or defective pricing are sometimes included.
The purpose of these contracts are to create agreements for the contractual parties that set a firm price for the goods or services provided. They provide certainty to both parties.
Cost reimbursement contract
Contrary to the fixed-price contracts, cost-reimbursement contracts are the type of contract where the contractor gets the reimbursement for the cost incurred while carrying out the work as per the contract and receives an additional fixed fee from the company/owner. Therefore, in this type of contract, the contractor can secure the labourer and the materials required for the project without having to fit all of it into a tight pre-fixed budget. This contract guarantees that the contractor will not only be paid solely for the costs but also any additional payments made by him.
Cost-plus a percentage of cost is a type of cost-reimbursement contract, where the buyer pays the seller the cost incurred plus a percentage of the cost.
Incentive contracts
These kinds of contracts were presented to motivate the contractors in executing their work, by awarding them with monetary incentives. Here one party promises the other party additional remuneration only if the other party executes the task with outstanding performance. Incentive contracts enable the contractor to put their best efforts to maximise the results and it also prevents inefficiency on part of the contractor. Types of incentive contracts are fixed-price incentive contracts, cost plus award fee contracts, delivery incentives, performance incentives, multiple incentive contracts, and cost-plus incentive contracts.
Indefinitely delivery contract
In this type of contract, the duration to perform the task stated in the contract is known but the exact time of delivery is unknown. This contract ensures the supply of an indefinite quantity of services mentioned in the contract within a fixed period of time. The government enters into this type of contract when the quantity of services is unknown and hence it is difficult to complete the contract within a stipulated period. Types of indefinite-delivery contracts are definite quantity contracts, indefinite-quantity contracts and requirements contracts.
Time and materials contract
It is the last type of government contract. It is carried out when there is the absence of a thorough knowledge of the duration or the cost to be incurred. In this kind of contract, government surveillance is required to monitor the work process and to observe that the parties adhere to the terms laid down in the contract. This type of contract is only used when there is no scope to employ any other contracts. Like fixed-price contracts, time and materials contract also includes a sealing price that the contractor exceeds only at his own risk.
Advantages of government contracts
Certain advantages of government contracts are mentioned below.
- In a government contract, the revenue concerning the project stated in the contract comes from a fixed and trusted source, i.e., the government thus enabling more efficiency in the work.
- The inclusion of government agencies in one’s portfolio will increase their credibility in the market.
- Indulgence of a government agency in one’s application will increase their company’s reliability which will further help in taking loans from the lenders.
Conclusion
In order to be a valid government contract, all the requirements laid down in Article 299, must be met; such as a written contract, executed by an authorised person, expressed in the name of the President or the Governor as the case may be. Therefore, a government contract becomes valid and enforceable when all the provisions of Article 299 are complied with.
Moreover, because of the advantages and the active role played by the judiciary in protecting the interest of the parties in accordance with the provisions stated under Article 299 of the Indian Constitution we can see the growing importance of government contracts.
References
- https://www.indiafilings.com/learn/different-types-government-contracts/#:~:text=Government%20 contracts%20are%20contracts%20 undertaken,makes%20it%20a%20government%20contract.
- https://blog.ipleaders.in/government-contracts-constitutional-provisions/
- https://www.lawctopus.com/academike/requirement-of-government-contract/
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