GOVERNMENT CONTRACT

Introduction

Government contracts in India play a crucial role in the economy, as they enable the
procurement of goods, services, and infrastructure by various government agencies. The law
governing these contracts ensures transparency, accountability, and fairness in the public
procurement process. The Government contracts in India are subject to several legal
frameworks, including the Indian Contract Act,1872, specific Constitutional provisions and
various rules and guidelines issued by the Government. The objective of these laws is to
establish a fair competitive environment, prevent corruption, and ensure value for money in
government expenditure.

What is Government Contract

Government contracts are agreements between public sector entities (like federal, state or
local governments) and private businesses or organisations to provide goods or services. A
contract to which the Central Government or State Government is a party is called a
‘Government Contract’. These contracts can cover a wide range of industries, from construction
and defence to IT services and consulting.

Purpose:

Government contracts are executed by the Government for a variety of purposes such as
construction, management, manpower supply, maintenance and repairs, etc.

Legal Framework Governing Government Contracts

A contract to which the Central Government or State Government is a party is called a

‘Government Contract’.

Like other contracts, a Government Contract is also governed by the Indian Contract Act 1872,
however, in addition to the requirements of Indian Contract Act, 1872, a Government Contract
has to comply with the provisions of Article 298 and Article 299 of the Indian Constitution.

1) The Indian Contract Act,1872:

The Indian Contract Act is the foundational legislation that governs all contracts in India,
including government contracts. Section 2(h) of the Indian Contract Act,1872 defines a
contract as an agreement enforceable by law, and the general principles such as offer,
acceptance, consideration, and capacity to contract apply equally to government
contracts.
2) Constitution of Indian:
Article 298 of the Constitution states that under the exercise of its executive power, the
Union or a State Government can enter into contracts for the acquisition, holding and
disposal of property, or to carry on any trade or business or for any other purpose.
Article 299 of the Constitution provides the procedure of how the Government Contract
is made and who will be liable in case of breach of Government Contract.
Under Article 299(1), 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 exercise of that power shall be executed on behalf of President or the Governor
by such persons and in such manner as he may direct or authorise.
 The Article requires the following formalities to be done for a Government Contract:
(i) Government contract must be expressed to be made by the President or the
Governor of the State, as the case may be;
(ii) The contract must be executed by the authorized person and in the prescribed
manner on behalf of the President or the Government of the State.

Article 299(2) states that 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 which is in force, nor shall
any person making or executing any such contract of assurance on behalf of any of them be
personally liable in respect thereof.

If the above requirements are not complied with then:

(i) The Government will not be bound by the contract because Article 299 is mandatory
(ii) The officer executing the contract would be personally bound.
(iii) The Government, however, if it enjoys the benefit of performance from the other party
to the contract, would be bound to restore the benefit to the party from whom the
benefit had been received by the Government.

In the case of Bhikraj Jaipuria v. Union of India (1962), Bhikraj Jaipuria, a contractor, entered into
a contract with the Central Government for the supply of certain goods. The contract was signed
on behalf of the government by officials who did not have the required authorization as per
Article 299 of the Indian Constitution, which mandates that government contracts must be
executed in the name of the President or Governor, following specific formalities. Jaipuria
fulfilled his part of the contract and supplied the goods. However, when he sought payment, the
government refused on the grounds that the contract was not legally binding as it was not
executed in compliance with Article 299’s requirements. Supreme court held that a contract
with the government, to be enforceable, must strictly comply with the procedural requirements
of Article 299. Formal written document is necessary for a Government Contract.

The provisions of Article 299 is mandatory. The Government Contract must comply with the
Article 299. In the case of Mulamchand v. State of M.P.(1968), Mulamchand, the plaintiff,
entered into a contract with the state of Madhya Pradesh. However, this contract was not
formalized following the requirements under Article 299 of the Indian Constitution, which
mandates that government contracts must be in writing and executed by an authorized officer.
The court held that a Government Contract not entered into in compliance with Article 299 of
the Constitution is no enforceable. The court ruled that the government can not be held liable
for a contract that is not executed as per constitutional provisions.

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 as Article 299 of the Constitution requires that a government contract be entered into
by a person authorized by the President or Governor. If the contract is not entered into by an
authorised person, it is not valid.

In 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.

Parties to The Government Contract

In a Government Contract, the primary parties involved are the Government entity and the
Contractor.

i)Government (Principal/Employer): The Government entity which could be Central or State

Government ministries, departments, agency, municipal bodies, corporations or public sector
undertakings is the principal party that enters into a contract to procure goods, services, or
works. The Government acts as the employer or buyer in the contract. Depending on the nature
of the contract, the Government may represent various sectors, including defence,
infrastructure, education, healthcare, and others.

ii)Contractor (Supplier/Service Provider/Contracting Party):

The contractor is the private entity or individual who enters into the contract with the
Government to supply goods, provide services, or carry out works. Contractors can be
companies, Partnership Firms, Individuals/Sole Proprietors, consortium/ joint ventures
( multiple companies/organisations for large or complex projects).

Difference Between Ordinary contract and Government Contract

Ordinary Contract Government Contract

Ordinary contracts are formed under the Government contracts are formed under
Indian Contract Act,1872. Article 299 of the Indian Constitution along
with the provisions of Indian Contract Act,
1872.
A valid contract can be express or implied. A Government contract must be expressed in
writing. There can be no implied contract.
An ordinary contract need not be executed by A Government Contract must be executed by
an authorized person. an authorized person duly appointed by the
President or Governor.
Bound by the provisions mentioned in Indian Must follow Article 299 of the Constitution of
Contract Act,1872. India.

TYPES OF GOVERNMENT CONTRACT

Government contracts can be classified into several types based on their nature, pricing
structure, and scope. Each type of contract is tailored to specific procurement needs, ensuring
the best value for the government while managing risks.

1. Fixed-price contracts:
In this type, the contractor agrees to provide goods or services at a set price, regardless
of the actual costs incurred during performance. Fixed-price contracts are best suited
when the scope of work is well-defined and the government can clearly outline its
requirements.
2. Cost-Reimbursement contract, the government:
 In a cost-imbursement contract, the government agrees to cover the contractor’s
allowable expenses to perform the contract, along with an additional fee for profit.
These contracts are typically used when the scope of work is uncertain, and it is difficult
to estimate costs accurately at the start of the contract.

3. Time and Material (T &M) Contracts:

This type of contract pays the contractor based on the time spent and the materials
used to perform the work. The government pays for labour at pre-set hourly rates and
reimburses material costs.
4. Indefinite Delivery Contracts:
These contracts allow for flexible ordering of good or services over a specific period,
usually for situations where the for situations where the government knows what it
needs but can not predict the exact quantity or timing.
5. Incentive Contracts:
In incentive contracts, the contractor’s compensation is tied to performance outcomes,
such as cost savings, timely delivery, or meeting quality standards. Incentives can be in
the form of bonuses or shared savings.
6. Public- Private Partnership (PPP) Contracts:
These are long-term contracts in which the government partners with private-sector
companies to deliver infrastructure projects (e.g. highways, airports) or public services
(e.g., healthcare, education). In a PPP, the private party may provide both financing and
government maintains overall control and ensures public access.
7. Framework Contracts:
Framework contracts set terms (such as prices and delivery times) for goods or services
to be provided by the contractor over a period, but without a firm commitment to the
quantity or timing of orders. They are often used for routine procurement needs.
8. Build-Operate-Transfer Contracts:
A form of public-private partnership, BOT contracts are common in infrastructure
projects where a private entity is contracted to design, build, and operate a facility (e.g.,
a road, power plant) for a specified period, after which the facility is transferred back to
the government.

Contractual Liability in Government Contract

Under Article 299(2), the President or the Governor and the person who is authorized to
act on behalf of the President or Governor are provided immunity from any personal
liability which may be incurred due to non-performance of the contract. This immunity is
provided to the President, Governor and the authorized person only, but it does not
mean that the Government is also not liable for the contract. Therefore, the liability of
the Government will be the same as in the case of a normal contract under the Indian
Contract Act, 1872. Thus, a person can sue Government and Government also can sue a
person in case of breach of contract in the court of law. Under Article 300, Government
of India may sue or be sued by the name of Union of India and the Government of the
State may sue or be sued by name of the State subject to law.

Settlement of Disputes
 In government contracts, disputes can arise due to issues like delays, cost overruns,
poor performance, or non-compliance with contract terms. The Indian legal framework
provides various mechanisms for resolving these disputes, ensuring fair outcomes for
both the government and contractors.
Dispute resolution in government contracts is crucial to ensuring that projects are not
unduly delayed and that both parties have a fair opportunity to resolve conflicts. The
most common dispute resolution mechanisms in are:
1. Arbitration: Arbitration and Conciliation Act, 1996 provides for certain dispute
settlement mechanisms alternative to the court litigation. Arbitration is the preferred
method for settling disputes in Government contracts in India, as it is quicker and
less formal than court litigation.
Contracts often include an arbitration clause, which specifies that disputes will be
resolved through arbitration instead of court proceedings. The arbitrator ( or an
arbitrator panel) is typically a neutral third party agreed upon by both the
government and the contractor. It is faster, more confidential than other dispute
settlement mechanisms. The arbitral award is binding upon the parties to the
dispute.
2. Mediation and Conciliation: These are voluntary, non-binding processes where a
neutral third party(mediator or conciliator) helps the disputing parties reach a
mutually agreeable solution. Mediation is commonly used before arbitration or
litigation, especially for resolving minor disputes.
3. Negotiation: Most contracts encourage negotiation as the first step in resolving
disputes. The parties may engage in discussions to settle the conflict without
involving third parties. This is typically used for minor disputes. It is fast, private and
maintains good relations between the parties.
4. Litigation (Court process): If the arbitration or other alternative dispute resolution
(ADR) mechanisms fail, disputes can be resolved through litigation in civil courts.
However, Government contracts often prefer arbitration to avoid prolonged court
battles.
• Writ Petitions: In some case, contractors may file writ petitions in the High
Court under Article 226 of the Constitution, particularly if there is a violation
of constitutional provisions (e.g., unfair treatment or bias in contract
awarding).
• Public Interest Litigation (PIL): Citizen or groups may file PILs if a government
contract impacts public interest, although this is rare.
5. Dispute Review Board (DRDs): Dispute Review Boards are often used in large
infrastructure projects. They consist of a panel of experts appointed at the start of
the project to review disputes and issue non-binding recommendations as the
project progresses.

Remedies for Breach of Government Contracts

When a party (either the government or the contractor) fails to fulfil their obligations under the
contract, the following remedies are available to the aggrieved party:

1. Damages
2. Specific Performance
 3. Rescission of contract
4. Restitution
5. Injunction
(please explain all the remedies in brief)

Conclusion

Government contracts in India play a crucial role in the economy, as they enable the
procurement of goods, services, and infrastructure by various government agencies. The law
relating to government contracts in India aims to ensure fairness, transparency, and efficiency
in the procurement process. While there is a robust legal framework in place, challenges such
as corruption, delays, and disputes remain. Recent developments like e-procurement and the
introduction of the GeM (Government e-Marketplace) platform have significantly enhanced
transparency and accountability. However, further reforms would provide much-needed
uniformity and strengthen the existing framework. A consistent and transparent government
contracting system is vital for the efficient delivery of public services and infrastructure in India.

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