CONTRACT LAW NOTES

MODULE 4
CHAPTER 1: PUBLIC AND GOVERNMENT CONTRACT I. CONSTITUTIONAL FRAMEWORK i. Art 299 specifies the triple condition which the contract made by the government should fulfil: a) Must be expressed to be made by the president/governor as the case may be b) Executed by such a person in such a manner as the President/Governor may authorize c) Executed on behalf of the President/governor as the case may be ii. Fundamental purpose and function of Art299 appear to be that the Government should not be saddled with the consequences arising from unauthorized contracts for this would place public funds in jeopardy. iii. Art 298 - The executive power of the union and each of the state shall extend, subject to any law made by the appropriate legislature, to the grant, sale, disposition or mortgage of any property held for the purpose of the union or of such state and to the purpose and acquisition of property for these purposes and to the making of contracts. iv. Formal requirements embodied in Art 299:a) Contract must be in writing b) The contract expressed to be made by the President/Governor ie, in the name of President/Governor not of Central Government or State Government. c) Contracts must be entered into in such a manner as the President/Governor may direct. v. Karamshi v. State of Bombay- Contract between minister of Public works department and the appellant firm was repudiated by the government of Bombay on the solitary defense that the contract was not expressed in the name of the governorwho constitutionally represents the state. Relief sought by appellant firm was specific performance of contract or alternatively damages for breach of contract. Supreme court dismissed appeal on the basis of failure to comply with mandatory requirements of Art 299. vi. Judicial approach to Art 299 has sought to reconcile two conflicting requirements:a) Safeguard interest of government from unauthorised contracts b) Protect bonafide contracting parties who enter into the contracts with the governments without complying with all or some of the formailities mentioned in Art 299. II. CONSTITUTIONAL LIMITS AND LIMITATIONS i. Earlier judicial tendency was to grant large amount of discretion to govt to choose party with whom they enter into contractual relations on the premise that government enjoyed the same freedom as private parties. This purely private law approach of the Supreme Court made them shrug their shoulders when asked to interfere with governmental discretion in matters of awarding contracts. ii. Milk Supply Case: C.K. AcHuten v. State of Kerela - petitioner had contracts in milk supply at govt hospital over considerable period of time. Sumbitted tenders which were scrutinized and accepted. After sometime petitioner was informed that policy of the government in supply of milk to government medicinal institutions was to be given to the cooperative milk supply union. Govt involked Clause 20 of the agreement to terminate contract giving 1 month notice. Petitioner was advised to file a civil suit not proceed under Art 226. iii. A carspectus of catena of cases clearly demonstrate the judicial policy that openness, impartiality and fairness are required to be observed not only while entering into contract but also in the terms and stipulations of the performance of contract but as well as its breach. III. PERSONAL LIABILITY IN GOVERNMENT CONTRACT i. Article 299 exempts the President and Governor of State from personal liability in respect for govt contracts made by the union of India or appropriate state. (Personal immunity) ii. State of UP v. Murali Lal - attempt made to apply personal liability on the strength of Section 235 of ICA. Supreme Court rejected contention holding Sec 235 would apply only if valid contract existed; void contract incapable of ratification because whatever is applicable to Sec 230 will be applied to Sec 235; concluding that contracting officer wil not be liable personally in respect of a contract entered into on behalf of the govt whether or not requirements of Art 299 are complied with or not. IV. NATURE OF CONTRACTUAL RELATION

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When Government enters into the contract with governments of other coutries such contracts are made in the exercise of sovereign power of State. Such contracts need not be necessarily made only for the pursuance of commercial activities but aso for the purpose of promotion of general welfare and protection of international peace. These contracts are know as treaties or pacts which may be bi/multi-lateral. ii. There are also contracts made by government in the exercise of statutory powers. iii. Categories:a) Where govt acts as a supplier, manufacturer, producer of commondities and serives (water, electricity, telephone, post, railway) b) Govt contracts may include contracts made by them for the disposal of surplus goods and unserviceable stores (sale of natural produce from forests, right to catch fish- sold through auction) c) Case where government itself is consumer of goods and services and therefore the biggest buyer:1. Procurement contracts - ranging from stationary to supersonic jet 2. Construction contracts - new construction, addition or alteration to property/bridges/roads that PWD (Public Works Dept) does not have capacity to undertake. 3. Repairing contracts - repairing, reconditioning, maintaining building/plants/machinery 4. Development & research contracts - studies in field of social science/science. 5. Licensing contracts - running liquor shops/fair price shops 6. Service contracts DIVERSE TYPES OF CONTRACTS i. Single Transaction or Fixed Price Contract - qty, price & time of delivery fixed. Price variation permitted if there is an escalation clause. Inherent incentive to contractor to perform contract as early as possible; promoting efficiency. ii. Rate contract - used in case of long duration yet specified period of time. Offer to supply goods at fixed rate standing offer order is placed in response to it leading to fresh contract and binding obligation. iii. Running contract - contractor is required to provide approximate qty of goods at fixed time intervals. Price fixed. iv. Cost plus percentage of cost - contractor gets actual cost plus percentage of profit or fixed amount. Actual cost is amount spent on raw materials , taxes, labour. No incentive to perform in time. Different items lizble to be priced differentsly and subject to change if longer duration of contract. v. Cost plus fixed fee contract - innovative version of the above. Actual cost incurred by contractor is reimbursed along with fixed amount as fee. Profit of contractor in this case is irrespective cost, sum is mutual pre-decided. SELECTION OF CONTRACTOR i. Competitive tendering - Most common method because through medium of competition price is most economical. Sometimes in view of constant competition prices are cut down and parties may try to avoid contractual obligations on flimsy grounds. Consequently quality suffers. Two types of competitive tendering:a) Open competitive tendering - all invitations to tenders are advertised and everyone who considers themselves competent to contract can sumbit an offer. Invitation to tender are issued to limited tenders who are on the approved list. Others cannot submit tender. b) Non competitive tendering - alternative method is by process of negotiation - if particular brand of commodity or a product of particular manufacture is required this type of method is resorted to so as to ensure that the price is fair and not too excessive. ii. Negotiative or non competitive tendering PUBLIC LAW REMEDY IN GOVERNMENT CONTRACTS i. Contractors are inclined to invoke writ jurisdiction to enforce contractual obligation against the government. The writ of Mandamus can be issued by superior courts only if the following conditions are complied with:a) Petitioner must have legal writ to performance of legal duty b) Legal duty must be of public nature c) The right must be subsisting on the date of the writ petition d) Petitioner must have demanded the performance of the duty and the authority must have refused.

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Venkata Subbayya v. Government of A.P. - State Text Book Committee selected Hindu Text Book of the petitioner for the use of students. Director of Public Intruction communicated that petitioners books have been prescribed for 1954-65 subject to the fulfillement of two conditions:- (1)deposit of specified sum of money in govt treasury (2) execution of the agreement by the petitioner in teh favour of the govt. Second communication sent ordered to keep first communication in abeyance. Third communication cancelled order. Subject matter for judicial scrutiny was argued on behalf of petitioner that they had sufficient interest emanating to file writ as they have accrued specific right by the first communication. Court concluded contract had not come into being & interest in something is inferior to a right, infact it is merely a chance. iii. Breach of contract can take place in the below ways:a) Where a contract is entered into in the exercise of statutory powers under certain enactments and/or the rules made there under and there is a reasonable allegation with regard to breach of aforesaid statutory conditions on the part of the government. b) Where there is a genuine grievance that there has been a breach of promise or an assurance made by the government in pursuabce of which the other party has acted to his detriment but the agreement is short of Article 299 c) Where the contract entered into by the government and the affected party is non statutory in character and purely contractual; the rights and obligations are fully governed by the terms and conditions of the contract and the breachof the contract by the state is the subject matter of the challenge. STATUTORY DISCRETION AND GOVERNMENT CONTRACTS i. The executive power of the government to make a contract is not uncontrolled and unlimited. The contract can be varied or even abrogated by the legislature acting within its plenary power. Its a fundamental principle of the law that a public authority which is empowered by a statue with a discretionary power meant to be exercised for the promotion of the public welfare by entering into a contract in general terms cannot fetter itself in the exercise of such discretion. Principle of non-fettering of statutory discretion by a contract. The rationale stems from the fact that the power of the legislation to make the law is plenary and cannot be fettered. ii. B.K. Das v. State of Assam - appellant firm was appointed distributor of certain controlled commodities including salt, subject to certain terms and conditions. One pre condition was keeping in stock a specified quantity. The government in exercise of statutory power decontrolled the salt. Consequently price of salt came down and company sustained huge losses. Court held power to decontrol vested in the statue could be exercised at any time by the government notwithstanding anything said in contract to the contrary. FINANCIAL CONTROL i. Constitution of India provide for the government accounts of the states and the centre to be kept in three parts viz,:a) Consolidated Fund b) Public Accounts Fund c) Contingency Fund ii. The Comptroller and Auditor General is responsible for examining all financial transactions in the country & his audit ensures:a) That all expenditures are incurred according to the provisions of the Constitution, laws and financial rules and regulations b) That proper sanctions and authorities exist c) That the expenditure is within the prescribed limit d) That supported documents and vouchers are kept e) That the expenditure has been properly accounted for

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CHAPTER 2: ENGINEERING CONTRACT (*generic - read through chapter once) I. TYPES (LIPSTCC):i. Lump Sum Contract ii. Item Rate Contract (measured contract) iii. Petty Labour Contracts iv. Schedule Contracts (percentage rate contract) v. Sub Contracts:a) Back to back sub contract b) Other sub contract vi. Turn-key contracts vii. Cost plus contract viii. Cost plus fixed fee contract II. STAGES OF ENGINEERING CONTRACTS

Tender notice Conditionalities in tender (3 types):a) Standard form conditionalities b) General conditionalities c) Special conditionalities:1. Material issue clause 2. Force majeure clause 3. Escalation clause 4. Bank guarantee clause 5. Recovery clause 6. Arbitration clause iii. General and special specifications iv. Schedule for the purpose of billing v. Payment schedule vi. Tender drawings vii. Memorandum of agreement III. TENDER PROCEDURE i. Preparation of tender documents ii. Receiving tenders iii. Processing and comparing the tenders iv. Selection and communication of acceptance IV. MANAGEMENT OF ENGINEERING CONTRACTS i. The following stages require careful consideration;a) Arranging bank guarantee and drawal of advances b) Receiving mobilisation and other grant advance c) Site makeover and initial development of the site d) Planning of the work in different phases e) Monitoring turn over in different phases f) Work assessment and quality monitoring g) Change in the constitution of the firm or company of the contractors h) Engaging sub contractors V. SPECIAL CONTRACTUAL FEATURES i. Time is of essence ii. Bankers status report is not guarantee iii. Fair practise in acceptance iv. Rules of interpretations a) Meaning of a document or of a particular part of it is to be sought for the document itself b) Intetniont of the parties shall be understoof from the document itself unless otherwise clear c) Words must be given literal meaning d) Literal meaning depends on the circumstances of the parties e) The contract has to construed as a whole f) Technical terms will have technical meaning CHAPTER 3: QUASI CONTRACT I. THEORETICAL FOUNDATION i. Quasi contract or contract in fiction is an equitable concept arising out of the application of principle of equity in the realm of interpersonal relations. ii. This suggests there are some situations when the law can construct a contract from the similarity of the positions of the parties with that of contractual relations. iii. Anson - Circumstances must occur under any system of law in which it becomes necessary to hold one person to be accountable to another without any agreement on the part of the former, on the ground that otherwise he would be retaining money or some other benefit which has come into his hands which the law regards the other person as better entitled or on the grounds that without such accountability the other would unjustly suffer a loss. The law of quasi contract exists to provide remedies in circumstances of this kind iv. Distincitve marks of Quasi contract:i. Such a right is always a right to money mostly a liquidated sum though may not always be so. ii. It does not arise out of contract between parties but is imposed by law iii. This right is unlike tort, right against only a specific person. v. Traditional view rests upon a hypothetical contract which is implied by law, considered as a branch of law of contract & has certain limitations. Modern view suggests liability in

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quasi contract not connected with contract at all & obligations are imposed by the law in teh situations when one person unjustly enriches himself at the cost of another. vi. Moses v. Macferlan - Moses received from Jacob 4 promissory notes of GBP 30 each. He endorsed the same to Macferlan who sued Moses as liable on the endorsement. Court refused to recognise agreement and Moses had to pay. Later, moses brought an action against Macferlan & court allowed the prayer holding this kind of equitable action to recover back money, which ought not in justice to be kept si very beneficial and much encouraged. vii. The next principle is Restitution, any unjust enrichment at the cost of another is required to be restituted includes both a persola action similar to but not identical with the action for money had and received and also the proprietory remedy of tracing. INDIAN INSTANCES i. Supply of necessaries - According to Sec 68 of ICA if a person is incapable of entering into a contract or any one whom he has legally bound to support is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. This is known as equitable compensation in the case of the agreement being viod on the grounds of incapacity of the other person. Essential ingredients:i. Incapacity of the beneficiary to enter into a formal contract for the supply ii. The supply must form necessary to the conditions of the life of the beneficiary iii. The supplier to be reimbursed from the estate of the beneficiary ii. Payment by an interested person - According to section 69 of ICA a person who is interest in the payment of money which another is bound by law to pay and who therefore pays it is entitled to be reimbursed by the other. Conditions:i. The plaintiff is not under legal compulsion to pay but he has only interest in the payment. [Port Trust Madras v. Bombay Co.] ii. Defendant is lawfully bound to make payment [Govindram v. State of Gondal] iii. Plaintiff must have paid the amount. [ Secretary of State for India v. Fernandes] iii. Liability to pay for non gratuitous acts - According to Section 70 of the Act where a person lawfully does anything for another or delivers anything to him not intending to do so gratituously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former or to restore the thing so done or delivered. Also, a person who has kept goods of another and is not legally entitled to do so cannot demand compensation.Conditions:i. Person should lawfully do something for another person or delivers something to him ii. He must not intend to act gratituously iii. The basic philosophy is compensating an innocent supplier for his act of subsistence. iv. Finder of goods - According to Srction 71 of ICA a person who finds goods belonging to another and takes them into hsi custody is subject to the same responsibility as a bailee. He is therefore responsible for restoration of property to the owner. A finder has better title on those goods against everyone excepting the true owner. v. Mistake or coercion- According to Section 71 of ICA a person whom money had been paid or anything delivered by mistake or under coercion must repay or return it. Money paid under coercion is subject to the option of the person on whom the coercion has been perpetrated. Money receicved under any condition of duress including under the pressure of circumstances makes Section 72 applicable.