Government contracts and state liability: the administrative-law angle
Administrative Law · Unit IV · Topic 14 of 18 · 6 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. What is a government contract?
A government contract is a contract made by the Union or a State in the exercise of its executive power under Article 298, which extends to carrying on trade or business, acquiring, holding and disposing of property, and making contracts for any purpose. It includes contracts for supply of goods, works contracts, leases of public property, licences to sell liquor or extract minerals, and appointments on contract. Article 299(1) requires that it be expressed to be made by the President or the Governor, and executed on his behalf by a person authorised to do so. Article 299(2) frees the President, the Governor and the executing officer from personal liability.
2. The heads of liability in brief
- Contract complying with Article 299: binding on both sides, enforced by suit like any other contract.
- Contract not complying: void and incapable of ratification (Mulamchand, 1968), but the Government must pay for benefits received under section 70 of the Indian Contract Act, 1872 (B.K. Mondal, 1961).
- Promises outside a contract: the Government may be bound by promissory estoppel (Indo-Afghan Agencies, 1967; Motilal Padampat, 1978), covered in the next note.
- Tort: liability under Article 300 for the wrongs of servants, limited only for primary and inalienable sovereign functions after Nagendra Rao (1994).
- Constitutional tort: compensation in writ proceedings for violation of fundamental rights, in which sovereign immunity is no defence (Rudul Sah, 1983; Nilabati Behera, 1993).
3. The administrative-law addition: Article 14 in the contractual field
A private person can choose with whom he deals and on what terms. The State cannot. Because it acts for the public and holds public resources, it must act fairly, reasonably and without discrimination even when it contracts. That is the contribution of administrative law here, and it is the part of the answer most students leave out.
- Erusian Equipment and Chemicals Ltd. v. State of West Bengal, 1974 INSC 235, (1975) 1 SCC 70. The State blacklisted a firm, which meant no government department would deal with it. Ray C.J. held that the State is not bound to contract with anyone, but it cannot arbitrarily choose to exclude a person, and blacklisting, which has serious civil consequences, requires notice and a hearing.
- Ramana Dayaram Shetty v. International Airport Authority of India, 1979 INSC 104, (1979) 3 SCC 489. The Authority invited tenders for a restaurant at Bombay airport from persons who were registered second-class hoteliers with five years' experience, and then accepted a tender from people who did not meet that condition. Bhagwati J. held that the Authority was bound by the standard it had itself laid down; departing from it to the prejudice of others who might have tendered was arbitrary and violated Article 14. The Government, when it deals with the public, whether by way of giving jobs, entering into contracts or granting licences, cannot act arbitrarily.
- Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir, 1980 INSC 125, (1980) 4 SCC 1. Every action of the State in granting largesse must be informed by reason and must be in the public interest. A contract to tap resin awarded without auction was upheld because the terms were reasonable and the purpose, setting up a factory in the State, was in the public interest.
- Mahabir Auto Stores v. Indian Oil Corporation, 1990 INSC 77, (1990) 3 SCC 752. IOC stopped supplying lubricants to a dealer of long standing without reasons. The Court held that a State instrumentality must act fairly even in contractual matters and is bound to give reasons for its decision.
- Shrilekha Vidyarthi v. State of U.P., 1990 INSC 294, (1991) 1 SCC 212. The State terminated the appointments of all district government counsel by a single order. The Court held that the public character of the State remains when it enters the field of contract, that Article 14 applies to its actions there, and that the mass termination was arbitrary.
4. The limit: judicial restraint in tenders
The courts do not run tender processes. In Tata Cellular v. Union of India, 1994 INSC 283, (1994) 6 SCC 651, concerning licences for cellular telephone services in the four metros, the Court set out the principles:
- the court reviews the decision-making process, not the decision itself;
- the State must have freedom of contract, and the court does not sit as an appellate body on the merits of a commercial choice;
- interference is justified for illegality, irrationality (the Wednesbury standard) and procedural impropriety, or bias and mala fides;
- a decision taken in good faith on relevant considerations will not be upset because the court would have chosen differently.
Once a contract is concluded, disputes about its performance are ordinarily private law matters to be resolved by suit or arbitration, not by writ. The writ court intervenes where the State uses its contractual power arbitrarily or for a collateral purpose, or where the action is in the exercise of a statutory power.
5. Constitutional tort: the administrative-law reading
The cases are in the Constitutional Law II note. The point for administrative law is about remedies: compensation for violation of fundamental rights is a public law remedy for the failure of the administration to observe constitutional limits. It is awarded by the writ court, liability is strict, and sovereign immunity is irrelevant. It is in addition to, not a substitute for, damages in a civil suit, and amounts paid may be adjusted against damages later awarded. It is appropriate where the facts are clear and the violation is gross, such as death in custody or illegal detention.
How this is examined
January 2026: “Explain State liability in contracts.” June 2025: “What is a government contract? Discuss the various liabilities of Government in government contracts with the help of decided cases.” Answer: definition and Article 298; Article 299 requirements with Karam Chand Thapar and Mulamchand; section 70; promissory estoppel; then section 3 above, which lifts the answer above a constitutional law answer. A problem on blacklisting without hearing is answered from Erusian Equipment; on a tender awarded to an ineligible bidder, from Ramana Dayaram Shetty.
Now try the real questions: Administrative Law past question papers.