Administrative Law
Government Contracts and Public Tenders: Article 299, Fairness under Article 14, Tender Review and Blacklisting
The State is the largest contracting party in India, and its contracts are governed by two bodies of law that pull in different directions. The first is the ordinary law of contract, modified by Article 299, which prescribes the form in which the Government must contract and makes non-compliance fatal. The second is public law, which insists that the State cannot choose its contractors arbitrarily, must run a fair process, must give reasons for excluding a bidder and must hear a contractor before blacklisting him. The tension between the two is genuine: the State needs the commercial freedom any contracting party has, and it also exercises public power when it distributes public resources. This topic sets out both bodies of law and how the courts have reconciled them.
1. Article 299 and the Form of a Government Contract
Article 299 Clause (1) provides that 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. Clause (2) provides 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 the Constitution or of any enactment relating to the Government of India, nor shall any person making or executing any such contract or assurance on their behalf be personally liable in respect of it. |
Three requirements follow from clause (1), and all three are mandatory. The contract must be expressed to be made by the President or the Governor. It must be executed on behalf of the President or the Governor. And it must be executed by a person authorised by the President or the Governor to do so. The provisions exist to protect the public: they ensure that the State is bound only by contracts made by those it has authorised, and that unauthorised officials cannot commit public funds.
📖 Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113 Facts: Contracts for the supply of foodgrains were entered into with the Railway administration through a Divisional Superintendent, and goods were supplied and accepted. The agreements did not comply with the formal requirements then applicable, corresponding to Article 299, in that they were not expressed to be made by or executed on behalf of the appropriate authority in the prescribed manner. The supplier sued for the price, and the Union denied the existence of a binding contract. Held: The Supreme Court held that the statutory and constitutional requirements as to the form of a government contract are mandatory and not merely directory, and that a contract not complying with them is not enforceable against the Government. The provisions are enacted in the public interest to safeguard the State against unauthorised contracts, and the Court held that they cannot be waived and that there is no room for an implied contract arising from conduct such as acceptance of goods, since to permit that would defeat the very object of the requirement. The Court nonetheless recognised that the supplier was not without remedy, since a claim may lie under section 70 of the Indian Contract Act, 1872 where the Government has enjoyed the benefit of goods delivered or work done, that being a claim in restitution rather than on the contract. Ratio: The requirements of Article 299 are mandatory; a contract not in the prescribed form does not bind the Government and cannot be validated by ratification or conduct. The supplier's remedy lies in restitution under section 70 of the Contract Act. |
2. Effect of Non-Compliance
Question | Position |
|---|---|
Is the contract enforceable against the Government? | No; the requirements are mandatory (Bhikraj Jaipuria) |
Can it be ratified afterwards? | No; ratification cannot cure a want of the prescribed form |
Can an implied contract arise from conduct? | No; that would defeat the purpose of Article 299 |
Is estoppel available against the Government? | Not to create a contract in defiance of the constitutional requirement |
Has the supplier any remedy? | Yes; restitution under section 70 of the Contract Act where the Government has enjoyed the benefit |
Is the officer personally liable? | No, by virtue of Article 299(2), where he acted for the purposes of the Government |
Can the Government enforce it against the other party? | The same defect affects the contract, though the position has been argued differently where the State has performed |
3. Article 14 and the Award of Contracts
📖 Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489 Facts: The International Airport Authority invited tenders for a contract to run a restaurant and snack bars at the airport, stipulating that tenderers should be registered second class hotel keepers having at least five years' experience. The tender accepted was that of a person who did not satisfy that condition. Another party challenged the award, and it was objected that the Authority was free to choose its contractor as any private party might. Held: The Supreme Court held the award invalid. It held that the Government and its instrumentalities cannot act arbitrarily at their sweet will in the matter of awarding contracts, granting largesse or distributing benefits; their action must be in conformity with standards or norms which are not arbitrary, irrational or irrelevant, and which are made known in advance. Where an authority lays down a condition of eligibility and then departs from it in favour of a particular party, it acts contrary to Article 14, since it has denied to others the opportunity of competing on the terms it in fact applied. The Court also laid down the indicia for determining when a body is an instrumentality of the State and therefore subject to Part III. Ratio: The State cannot award contracts arbitrarily; it must act on standards announced in advance and apply them consistently. Departure from a declared eligibility condition in favour of one party violates Article 14. |
The counterweight came in Tata Cellular v. Union of India, (1994) 6 SCC 651, which held that judicial review is concerned with the decision-making process rather than the merits, that the Government must have freedom of contract and fair play in the joints, and that the terms of an invitation to tender are not open to judicial scrutiny. The two decisions together define the field: Article 14 secures a fair and transparent process; it does not entitle a bidder to have his offer preferred or a court to evaluate offers.
4. Judicial Review of Tender Decisions
The enquiry has been reduced to two questions, stated in Michigan Rubber (India) Ltd. v. State of Karnataka, (2012) 8 SCC 216: whether the process or decision is mala fide or intended to favour someone, or so arbitrary and irrational that no responsible authority acting reasonably could have reached it; and whether the public interest is affected. If the answer to both is negative, there is no interference. To this Afcons Infrastructure Ltd. v. Nagpur Metro Rail Corporation Ltd., (2016) 16 SCC 818 adds that the author of the tender document is the best judge of its requirements, whose interpretation is accepted unless perverse or mala fide.
Stage | Position on review |
|---|---|
Framing eligibility and technical conditions | For the authority; exclusion of some bidders is not by itself a vice |
Interpretation of a tender condition | For the author of the document, unless perverse or mala fide |
Evaluation of bids | Not reappreciated; commercial and technical judgment belongs to the authority |
Selective relaxation of a condition | Closely examined; the classic indicator of favouritism |
Change of criteria after bids are opened | Bad; defeats the equality the process secures |
Award to an ineligible bidder | Bad (R.D. Shetty) |
Cancellation of the process | Permissible on relevant grounds in the public interest |
Blacklisting arising from the contract | Full natural justice required |
5. Blacklisting
Blacklisting is the most serious consequence a contractor can face, since it excludes him from public contracting generally and carries a stigma. The governing principles come from Erusian Equipment and Chemicals Ltd. v. State of West Bengal, (1975) 1 SCC 70, which held that blacklisting has civil consequences and casts a slur, that the State cannot exclude a person from dealing with it arbitrarily, and that a person is therefore entitled to be heard before being blacklisted.
- A show cause notice is required, and it must state in terms that blacklisting is proposed; a notice that merely alleges a breach and threatens unspecified action is insufficient, the position in Gorkha Security Services v. Government of NCT of Delhi, (2014) 9 SCC 105.
- The material relied on must be disclosed, and an opportunity given to meet it.
- A reasoned order is required, dealing with the representation made.
- The period must be proportionate to the default and cannot be indefinite, per Kulja Industries Ltd. v. Chief General Manager, BSNL, (2014) 14 SCC 731.
- Blacklisting a related entity requires that entity to be heard; a person cannot be excluded by association without notice.
6. Estoppel, Expectation and Auctions
Promissory estoppel operates against the Government in the contractual field, so that where a clear promise has been made and acted upon the State must place material before the court showing why the public interest requires it to resile, the position in Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., (1979) 2 SCC 409. But estoppel cannot be used to create a contract in defiance of Article 299, nor to compel the State to act contrary to a statute.
Legitimate expectation gives a bidder or an existing contractor a right to fair and non-arbitrary consideration, not to the contract itself, and it yields to a genuine change of policy in the public interest, per Food Corporation of India v. Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71 and Punjab Communications Ltd. v. Union of India, (1999) 4 SCC 727.
Public auctions attract the same requirements of fairness. The State is entitled to decline the highest bid, but must do so for reasons connected with the public interest; the decision to auction rather than to allot, the reserve price and the conditions of participation must all be non-arbitrary; and where the method of allocation is incapable of achieving the stated object, it may be struck down, as the spectrum allocation in Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1 was.
⚠ Article 299 and Article 14 answer different questions These two provisions are frequently run together and they do quite different work. Article 299 asks whether a contract exists and binds the Government, and is concerned with form: who signed, on whose behalf, and with what authority. A defect here is fatal to the contract however fair the process was. Article 14 asks whether the State acted fairly in deciding with whom to contract, and is concerned with process: what criteria were announced, whether they were applied consistently, and whether anyone was favoured. A defect here vitiates the award however impeccable the documentation. A contractor may therefore lose on the first while being entirely right on the second, which is what makes compliance with the form of Article 299 a matter of practical importance rather than of technicality. |
7. The Position in Summary
- Article 299 requires a government contract to be expressed to be made by the President or Governor, executed on their behalf, and by an authorised person; the requirements are mandatory and cannot be waived or ratified (Bhikraj Jaipuria).
- Non-compliance means the contract does not bind the Government and no implied contract arises, but a claim in restitution lies under section 70 of the Contract Act where the benefit was enjoyed.
- The State cannot award contracts arbitrarily; it must act on standards announced in advance and apply them consistently (R.D. Shetty), subject to the freedom of contract and fair play in the joints recognised in Tata Cellular.
- Tender review is confined to mala fides or favouritism, irrationality of a kind no responsible authority could display, and prejudice to the public interest, with the author of the tender the best judge of its terms.
- Blacklisting requires a show cause notice expressly proposing it, disclosure of the material, a reasoned order and a proportionate period; promissory estoppel and legitimate expectation operate in this field but cannot override Article 299 or a statute.
8. Related Topics and Provisions
- Judicial Review of Government Contracts and Tenders (Topic 98) and Tata Cellular (Topic 103).
- Doctrine of Level Playing Field (Topic 139): equality of opportunity in the tender process.
- Natural Justice in Government Contracts (Topic 85) and in Blacklisting (Topic 83).
- Promissory Estoppel against the Government (Topic 55) and Legitimate Expectation (Topic 54).
- Public Interest and Administrative Discretion (Topic 57): allocation of public resources.
- Constitution of India: Articles 12, 14, 19(1)(g), 226, 298 and 299; Indian Contract Act, 1872, section 70.