Government’s immunity when entering contracts

Context: 

In a recent case, the Supreme Court has held that the government, when entering into a contract under the President’s name, cannot claim immunity from the legal provisions of that contract under Article 299 of the Constitution.

• The case dealt with an application filed by Glock Asia-Pacific Limited, a pistol manufacturing company, against the Centre regarding the appointment of an arbitrator in a tender-related dispute.

Ruling of the Supreme Court: 

• The court in the above case observed that the arbitration clause allowed a “serving employee of the Union of India, a party to the contract, to nominate a serving employee of the Union of India as the Sole Arbitrator.” 
• The Court held this to be in conflict with Section 12(5) of the Arbitration and Conciliation Act, 1996.
• The court also appointed former SC judge Justice Indu Malhotra “as the Sole Arbitrator to adjudicate upon the disputes” in the case.

Article 299 of the Constitution:

• Articles 298 and 299 came after the Constitution came into effect and the government entered into contracts even in the pre-independence era. 
• Article 298 grants the Centre and the state governments the power to carry on trade or business, acquire, hold, and dispose of property, and make contracts for any purpose
• Article 299 delineates the manner in which these contracts will be concluded. 
• Article 299
  • 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.
  • All such contracts and assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by persons in a manner as directed and authorised by them.
  • There must be a deed or contract in writing and that it should be executed by a person duly authorised by the President of the Governor on their behalf.

Supreme Court’s ruling in Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors

• The objective behind Article 299(1) is that there must be a definite procedure according to which contracts must be made by agents acting on the government’s behalf; otherwise, public funds may be depleted by unauthorised or illegitimate contracts. 
• It implies that contracts not adhering to the manner given in Article 299(1) cannot be enforced by any contracting party.
• Article 299 (2) says that essentially, neither the President nor the Governor can be personally held liable for such contracts.

Essential requirements for government contracts under Article 299 as given in K.P. Chowdhry v. State of Madhya Pradesh. And Others, 1966

• The contract must be expressed to be made by the Governor or the Governor-General.
• It must be executed in writing.
• The execution should be by such persons and in such a manner as the Governor or the Governor-General might direct or authorise.

News Source: Indian Express