government_contracts_cvc_guidelines[module]

Module 9: Government Contracts
CVC Guidelines

INTRODUCTION

In England, the Government was never considered as an ‘honest man.’ It is fundamental to the
rule of law that the Crown, like other public authorities, should bear its fair share of legal
liability and be answerable for wrongs done to its subjects. The immense expansion of
governmental activity from the latter part of the nineteenth century onwards made it intolerable
for the Government, in the name of the Crown, to enjoy exemption from the ordinary law.
English law has always clung to the theory that the King is subject to law and, accordingly, can
commit breach thereof. As far as 700 years ago, Bracton had observed: “The King is not under
man, but under God and under the law, because it is the law that makes the King.” Though
theoretically there was no difficulty in holding the King liable for any illegal act, there were
practical problems. Rights depend upon remedies and there was no human agency to enforce
law against the King. All the courts in the country were his courts and he could not be sued in
his own courts without his consent. He could be plaintiff but never be made defendant. No writ
could be issued nor could any order be enforced against him. As ‘the King can do no wrong’.

Whenever the administration was badly conducted, it was not the King who was at fault but
his Ministers, who must have given him faulty advice. But after the Crown Proceedings Act,
1947, the Crown can now be placed in the position of an ordinary litigant. In India, history has
traced different path. The maxim ‘the King can do no wrong’ has never been accepted in India.
The Union and the States are legal persons and they can be held liable for breach of contract
and in tort. They can file suits and suits can be filed against them.

CONTRACTUAL LIABILITY

Constitutional Provisions:-
Contractual liability of the Union of India and States is recognized by the Constitution itself.
Article 298 expressly provides that the executive power of the Union and of each State shall
extend to the carrying on of any trade or business and the acquisition, holding and disposal of
property and the making of contracts for any purpose.
Article 299[1] prescribes the mode or manner of execution of such contracts. It reads:
“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 authorize.”

Requirements of the Contract:-
Reading the aforesaid provision, it becomes clear that Article 299 lays down the following
conditions and requirements which must be fulfilled in contracts made by or with the Union or
a State:

1. Every contract must be expressed to be made by the President or the Governor [as the
case may be];

2. Every contract must be executed on behalf of the President or the Governor [as the case
may be].

3. Every contract must be executed by a person authorized by the President or the
Governor [as the case may be];

The use of the word “executed” in proportions [2] and [3] above, indicates that the contract
between the government and any person must be in writing. A mere oral agreement is not valid
for the purpose of Article 299[1].

• Article 299[1] is mandatory:-
The courts have generally taken the view that Article 299[1] in the Constitution is based on
public policy and for the protection of the general public. In number of cases, the Supreme
Court has adopted a strict view of Article 299[1] and has held that the terms of Article 299[1]
are mandatory and not directory, that these formalities cannot be waived or dispensed with.
Therefore, a contract not meeting the conditions stipulated in Article 299[1] becomes nullified
and void. Such a contract cannot be enforced at the instance of any of the contracting parties.
Neither can the government be sued and held liable for damages for breach of such a contract,
nor can the government enforce such a contract against the other contracting party.

In the case of K.P. Chowdhary v. State of Madhya Pradesh, at the auction for forest contracts,
the appellant signed the sale notice agreeing to abide by the terms of the notice. One of the
terms was that if the bidder failed to complete the formalities after the acceptance of the bid,
his earnest money would be forfeited, the contract re-auctioned at his risk and any deficiency
occurring was to be recoverable from him as arrears of land revenue. In the meantime, a dispute
arose between the bidder and the forest department regarding the marking of the trees
auctioned. As the dispute was not settled to the satisfaction of the bidder, he refused to complete
the contract.

In this case, the admitted position was that a contract complying with Article 299[1] has never
been signed. The High Court dismissed the petition as it took the view that an implied contract
has arisen as a result of the appellant’s accepting the conditions of auction and that such an
implied contract was not hit by Article 299[1] which applied only to written contracts. On
appeal, the Supreme Court reversed the High Court. The Apex Court thus ruled that there was
no contract between the bidder and state government. The Court reasoned that Article 299[1]
being in “mandatory terms”, no implied contract could be spelled out between the government
and appellant.

Thus, since K.P. Chowdhary’s, Case the view has come to be accepted that Article 299[1] is
mandatory and that a contract not complying with formalities of Article 299[1] is no contract
at all and so is unenforceable in a court of law. But then, at times, the Supreme Court has taken
a somewhat relaxed view of compliance with Article 299[1]. Insistence on a strict compliance
with these conditions may inequitable to private parties, and at the same time, make
government operations extremely difficult and inconvenient in practice.

• Written Contract:-
A contract to be valid under Article 299[1], must be in writing. The words ‘expressed to be
made’ and ‘executed’ in this article clearly go to show that the must be a formal written contract
executed by a duly authorized person. Consequently, if there is an oral contract, the same is not
binding on the Government. This is not a mere formality but a substantial requirement of law
and must be fulfilled. It, however, does not mean that there must be a formal agreement

properly signed by a duly authorized officer of the Government and the second party. The
words ‘expressed’ and ‘executed’ have not been literally and technically construed.

In Chatturbhuj Vithaldas v. MoreshwarParashram, speaking for the Supreme Court, Bose, J.
observed:
“It would, in our opinion, be disastrous to hold that the hundreds of Government officers who
have daily to enter into a variety of contracts, often of a petty nature, and sometimes in an
emergency, cannot contract orally or through correspondence and that every petty contract
must be effected by a ponderous legal document couched in a particular form……”
In Union of India v. A.L. Rallia Ram, tenders were invited by the Chief Director of Purchases,
Government of India. R’s tender was accepted. The letter of acceptance was signed by the
Director. The question before the Supreme Court was whether the provisions of Section 175[3]
of the Government of India Act, 1935 [which were in parimateria with Article 299[l] of the
Constitution of India] were complied with. The Court held that the Act did not expressly
provide for execution of a formal contract. In absence of any specific direction by the
Governor-General, prescribing the manner or mode of entering into contracts, a valid contract
may result from the correspondence between the parties.

The same view was reiterated by the Supreme Court in another case wherein the court
observed:
“It is now settled by this court that though the words ‘expressed’ and ‘executed’ in Article
299[l] might suggest that it should be by a deed or by a formal written contract, a binding
contract by tender and acceptance can also come into existence if the acceptance is by a person
duly authorised on this behalf by the President of India.”

From the above observations, it can safely be said that the Constitution does not require any
formal document to be executed on behalf of the Government and only then it would constitute
a binding agreement. Any form of ‘offer and acceptance’ complying with Article 299 of the
Constitution would be a valid and binding contract.

• Execution by authorized person:-
The next requirement is that such a contract can be entered into on behalf of the Government
by a person authorized for that purpose by the President or the Governor as the case may be. If
it is signed by an officer who is not authorized by the President or Governor, the said contract
is not binding on the Government and cannot be enforced against it.

In Union of India v. N.K. [P] Ltd., the Director was authorized to enter into a contract on behalf
of the President. The contract was entered into by the Secretary, Railway Board. The Supreme
Court held that the contract was entered into by an officer not authorized for the said purpose
and it was not a valid and binding contract.

In Bhikraj Jaipuria v. Union of India, certain contracts were entered into between the
Government and the plaintiff-firm. No specific authority had been conferred on the Divisional
Superintendent, East India Railway to enter into such contracts. In pursuance of the contracts,
the firm tendered a large quantity of food grains and the same was accepted by the Railway
Administration. But after some time, the Railway Administration refused to take delivery of
goods. It was contended that the contract was not in accordance with the provisions of Section
175[3] of the Government of India Act, 1935 and, therefore, it was not valid and not binding
on the Government.

The Supreme Court, after appreciating the evidence – oral as well as documentary – held that
the Divisional Superintendent acting under the authority granted to him could enter into the
contracts. The Court rightly held that it was not necessary that such authority could be given
‘only by rules expressly framed or by formal notifications issued in that behalf.’

In State of Bihar v. Karam Chand Thapar, the plaintiff entered into a contract with the
Government of Bihar for construction of an aerodrome and other works. After some work, a
dispute arose with regard to payment of certain bills. It was ultimately agreed to refer the matter
for arbitration. The said agreement was expressed to have been made in the name of the
Governor and was signed by the Executive Engineer. After the award was made, the
Government contended in civil court that the Executive Engineer was not a person authorised
to enter into contract under the notification issued by the Government, and therefore, the
agreement was void. On a consideration of the correspondence produced in the case, the
Supreme Court held that the Executive Engineer had been ‘specially authorised’ by the
Governor to execute the agreement for reference to arbitration.

• Expression in the name of President [Governor]:-
The last requirement is that such a contract must be expressed in the name of the President or
the Governor, as the case may be. Thus, even though such a contract is made by an officer
authorized by the Government in this behalf, it is still not enforceable against the Government
if it is not expressed to be made on behalf of the President or the Governor.

In Bhikraj Jaipuria,the contracts entered into by the Divisional Superintendent were not
expressed to be made on behalf of the Governor-General. Hence, the Court held that they were
not enforceable even though they were entered into by an authorized person.

In Karamshi Jethabhai v. State of Bombay, the plaintiff was in. possession of a cane farm. An
agreement was entered into between the plaintiff and the Government for supply of canal water
to the land of the former. No formal contract was entered into in the name of the Governor but
two letters were written by the Superintending Engineer. The Supreme Court held that the
agreement was not in accordance with the provisions of Section 175[3] of the Government of
India Act, 1935 and, consequently, it was void.

Similarly, in D.G. Factory v. State of Rajasthan, a contract was entered into by a contractor
and the Government. The agreement was signed by the Inspector General of Police, in his
official status without stating that the agreement was executed ‘on behalf of the Governor’. In
a suit for damages filed by the contractor for breach of contract, the Supreme Court held that
the provisions of Article 299[l] were not complied with and the contract was not enforceable.

In State of Punjab v. Om Prakash, the Executive Engineer, PWD, who was authorised under
the PWD Manual to enter into a contract accepted the tender of the contractor for construction
of a bridge. The letter of acceptance was signed by the Executive Engineer but was not
expressed in the name of Governor. The Supreme Court held that there was no valid contract.

Reiterating the principles laid down in earlier decisions and holding the provisions of Article
299 mandatory and in public interest, the Court ruled that the said formalities could not be
waived or dispensed with.

Non-Compliance: Effect
The provisions of Article 299[1] are mandatory and not directory and they must be complied
with. They are not inserted merely for the sake of form, but to protect the Government against
unauthorized contracts. If, a contract is unauthorized or in excess of authority, the Government
must be protected from being saddled with liability to avoid public funds being wasted.
Therefore, if any of the aforesaid conditions is not complied with, the contract is not in
accordance with law and the same is not enforceable by or against the Government.
Formerly, the view taken by the Supreme Court was that in case of non-compliance with the
provisions of Article 299[1], a suit could not be filed against the Government as the contract
was not enforceable, but the Government could accept the liability by ratifying it.

But in Mulamchand v. State of M.P, the Supreme Court held that if the contract was not in
accordance with the constitutional provisions, in the eye of the law, there was no contract at all
and the question of ratification did not arise. Therefore, even the provisions of S. 230[3] of the
Indian Contract Act, 1872 would not apply to such a contract and it could not be enforced
against the government officer in his personal capacity.

Valid Contract: Effect
If the provisions of Article 299[1] are complied with, the contract is valid and it can be enforced
by or against the Government and the same is binding on the parties thereto. Once a legal and
valid contract is entered into between the parties, i.e. Government, each a private party, the
relations between the contracting parties are no longer governed by the provisions of the
Constitution but by the terms and conditions of the contract. Article 299[2] provides that neither
the President nor the Governor shall be personally liable in respect of any contract executed
for the purpose of the Constitution or for the purpose of any enactment relating to the
Government of India. It also grants immunity in favour of a person making or executing any
such contract on behalf of the President or the Governor from personal liability.

Quasi-Contractual Liability
The provisions of Article 299[1] of the Constitution [Section 175[3] of the Government of
India Act, 1935] are mandatory and if they are not complied with, the contract is not
enforceable in a court of law at the instance of any of the contracting parties. In these
circumstances, with a view to protecting innocent persons, courts have applied the provisions
of Section 70 of the Indian Contract Act, 1872 and held the Government liable to compensate
the other contracting party on the basis of quasi-contractual liability. What Section 70 provides
is that if the goods delivered are accepted or the work done is voluntarily enjoyed, then the
liability to pay compensation for the enjoyment of the said goods or the acceptance of the said
work arises. Thus, where a claim for compensation is made by one person against another under
Section 70, it is not on the basis of any subsisting contract between the parties, but on the basis
of the fact that something was done by one party for the other and the said work so done has
been voluntarily accepted by the other party. Thus, Section 70 of the Contract Act prevents
‘unjust enrichment.’ Before Section 70 of the Contract Act is invoked, the following conditions
must be fulfilled:

• A person must have lawfully done something for another person or deliver something
to him;

• He must not have intended to do such act gratuitously; and
• The other person must have accepted the act or enjoyed the benefit.
If these three conditions are fulfilled the section enjoins on the person receiving benefit to pay
compensation to the other party.

Before 1947, in common law, the crown could not be sued in a court on a contract. The Crown
Proceedings Act, 1947 abolished this procedure and permitted suits being brought against the
crown in ordinary courts to enforce contractual liability barring a few types of contracts.
However, in India, this view was never accepted and government was liable as an ordinary
litigant in court. Section 175[3] of the Government of India Act, 1935 prescribes the
requirements for the government liability in contractual obligations, which is reincorporated in
Article 199[1] of the Constitution of India.

To bind the government in contractual liability the three requisites must be there, which
includes i.e. written contract, execution by authorised person and expression in the name of
President. Earlier the Apex Court took the rigid view that these requirements are mandatory
and must be complied with. However, in recent times the Court has taken a lenient view in
respect of mandatory requirements of Article 299[1].

Different Types of Government Contracts
Government contracts are contracts undertaken by the Government for varied purposes
like construction, management, maintenance and repairs, manpower supply, IT related
projects etc. The involvement of Central Government or State Government or Government
body in a contract makes it a government contract. The party who executes the contract on the
behalf of the government is referred to as a contractor, for example Larsen and Turbo may act
as a contractor for Tamil Nadu Government for the construction of a flyover etc. Generally, in
a government contract, opened tenders are floated through sealed biddings and request for
proposals may be invited. To participate in a Government contract, the supplier would require
a GST registration and must fulfill the eligibility criteria set forth in the contract document.
Now, let us look at the different types of government contracts:

Fixed-Price Contracts
A fixed-price contract is a contract where the cost isn’t calculated based on the time and
resources used, which implies that such a contract is entered into, if the cost of the project is
already known. Certain provisions like contract change, economic pricing, or defective pricing
are sometimes included in the agreement. Either of the parties can gain or lose from it. To
illustrate, in case of an abrupt increase in prices, the seller gets to lose a chunk of his margin
while the buyer is benefited as he got the bargain from the deal, and vice versa.

Cost Reimbursement Contracts
In complete contrast to a fixed-price contract, cost reimbursement contract allows the
contractor to claim all of his expenses [subject to conditions], along with additional payments
to make for a profit. The Government might be in the receiving end of losses due to escalating
costs, or the liability to pay even on occasions when the task isn’t completed, though we may
opine that this would be a rare scenario. This kind of a contract is adopted where the costs are
difficult to be ascertained. In certain cases, the contractor would present an estimated cost. If
the cost exceeds the estimate, the government must approve the same, else the contractor would
be in a loss over the exceeded budget.

Incentive Contracts
Incentive contract was introduced to motivate the contractors in performing their work, by
rewarding them with monetary incentives. An incentive contract might be any of the ones
mentioned below:

• Fixed price incentive contracts
• Cost plus incentive contracts

• Cost plus award fee contracts
• Performance incentive
• Delivery incentive
• Multiple incentive contracts

Indefinite-Delivery Contracts
An indefinite delivery contract takes place when the duration of the contract is known, but the
exact time of delivery is unknown. It is a contract which ensures supply of indefinite quantity
of services in a fixed period of time. This is generally undertaken when the government is
unsure about the quantity of services required to complete the task. The average duration for
completion of a contract of this kind would be four years. There are three types of indefinite
delivery contracts:

• Definite quantity contract
• Requirements contract
• Indefinite quantity contract

Time and Materials Contract
A time and materials contract is only carried out in the absence of a thorough knowledge of the
duration or the cost to be incurred. This type of a contract requires government surveillance to
adjudge the efficiency of the work process. This contract is only undertaken if there is no scope
for implementing any of the other contracts. Similar to fixed-price contracts, time and materials
contract includes a sealing price which the contractor exceeds only at his own risk.

Public Procurement
Public Procurement is a part of government operations for the smooth functioning of a country,
but it doesn’t create a situation of corruption less procurements because we know that
businessmen today can go to any extent to make profits in his/her business. Procurement is one
such area which is vulnerable to fraud and corruption. No one knows here who can initiate the
fraud it can be a contracting public officer or a goods supplier. According to the World Bank,
it has estimated that roughly $1.5 trillion in public contract awards are influenced by
corruption.

To be a developed nation, the country has to overcome the problem of corruption. Corruption
reduces the quality of the goods and services rendered, so the CVC in this matter works and
regulates so that the businessmen can’t just gain unnecessary profits. The commission has
always ensured regarding the fair play of all procurements. The CVC’s main feature is taking
into account the practices and procedures, being followed by various organisations are effective
for the economy or not.

What is CVC?
The Central Vigilance Commission [CVC] is the agency that is endorsed with the
responsibility to oversee the promotion of good governance. The CVC has examined public
procurements and works accordingly to improve the practices. According to a study of the
Central Vigilance Commission, the Indian Railways adopts well-defined procedures governing
the open tender and limited tender systems.
What is public procurement?
Public procurement of goods, services and constructions on behalf of public by government
agencies is known as public procurement. The government procurements comprise about 25 to
30 % of its gross domestic production [GDP]. To achieve economic strengthening the
government has adopted the method of procurement.

Why CVC has made guidelines regarding public procurement?
School, colleges, houses, hospital, roads, dams, and bridges these are the kind of public projects
which are known for corruption.

Good procurement system works with transparency and clear regulations of the commissions
that work above them. To meet the definition of a good procurement the government has
introduced an apex body to bound the bidders by certain guidelines which can prevent
corruption and give better quality of goods and services.
In this matter the Central Vigilance Commission has issued guidelines to increase transparency
and objectivity in public procurement.

Review of regulatory framework for public procurement in India
The constitution of India does not have any properly stated article on public procurement in
India. However, Article no. 299 states that all contracts made in the exercise of executive
power of the union or state shall be supposed to be made by the President or by the
Governor. There is no national legislation regarding public procurement in India. Certain
states like Karnataka and Tamil Nadu have framed legislation regarding public procurement.

Key Issues in Regulatory and Legal framework
Multiple guidelines
There is no single body defining regulations regarding the policies and rules of public
procurement in India. There are many loopholes and gaps regarding procurement as there are
various guidelines and models issued by the CVC regarding public procurement. In addition,
all these guidelines are not available at a single source.

Absence of Standard procedures, contracts, and tender documents
Because of the absence of a specific act for public procurement it is alleged that the government
is able to tweak the guidelines intentionally to their benefit.

Present monitoring system – A weakness
CAG audits the tendering process. However, these audits are carried out after the damage is
done. External audits fail in their effectiveness as the findings often do not attract the requisite
attention of the Parliamentary Accounts Committee. The external audits usually fail in their
effectiveness as the findings often do not attract the attention of parliamentary accounts
committee.

Need for a public procurement law
Till today there has not been a single law or act regarding public procurement. The CVC issues
notifications regarding the procurement process but that is about it.

Barriers to entry in public procurement in India
There is a tendency among procurers to not choose big firms to ensure quality of supply and
reduce cost of bids. In addition to this, a very dull process for participation also creates severe
barriers to procurement. Moreover, new firms are usually dependent on the approving authority
but to obtain approval is difficult. Approval takes a lot time and as new firms have to go through
a lengthy administrative procedure. The procedure is that’s why a complex one.

Guidelines on Tenders
Proper consultancy

• The first and foremost feature of a consultant is that he/she should draw attention
towards the guidelines of CVC, GFR issued by Ministry of Finance, relevant and
extant instructions of government of India.

• The issue of role and professional liability of consultants in government contracts
has been under consideration in the commission for quite some time.

• There should be an advisory to the consultants to keep in view the transparency and
to provide equal opportunity to all the bidders and tenders.

• Consultants shall avoid any kind of conflicts while discharging their contractual
obligations and bring beforehand any possible instance of conflict of interest to the
knowledge of the employer.

Before reaching a conclusion, an employer must be fully consulted so that accordingly he
would be accepting the advice and rendering the services.

Notice inviting offers
• Tender applications regarding notice invitation could be rejected without assigning
any reason.
• This clause is apparently incorporated in tender enquiries to safeguard the interest
of the organisation in exceptional circumstance and to avoid any legal dispute, in
such cases.

Shortcomings in the bidding process
• Before the time of bidding, everyone should be aware of the evaluation criteria
which the organisation is adopting. This should be made explicit at the time of
inviting the offers so that the basic concept of transparency and equality is satisfied.
• The acceptance and rejection of the proposal must be on justified grounds according
to laid down prescriptions, leaving no rooms for complaints.

Requirements for e-procurement systems
• The commission has been advocating use of the technology for activities prone to
corruption in 2006. One of the remarkable initiatives in this regard has been adopting
e-procurement for goods, services, and works by all ministry/organisations
commissions/departments.
• The e-procurement system was basically introduced to reduce corruption and make
organisations more effective and faster.

Consideration of Indian agents
• The commission throughout the years has been stressing on the need to observe
transparency and determination of fair prices while dealing with tender services.
• There has been a number of references received in the commission citing certain
situations and difficulties being faced in dealing with traders.
• After the references were received, the commission decided that in all cases of
procurement, the following guidelines should be followed:
o In a tender, either the Indian agent on behalf of the principal/OEM or
principal/OEM itself can bid but both cannot bid simultaneously for the same
item or product in the same tender.
o If an agent submits a bid on behalf of one principal/OEM, he cannot submit bid
on behalf of another principal/OEM, in the same tender or same project.
• The tender conditions must be carefully prepared keeping in view the above
guidelines.

Projects funded by the world bank and other international agencies
• It is clarified that the commission’s guidelines would not be applicable to projects
funded by the World bank, IMF, etc. as part 2 of the commission’s circular.

Mobilisation advance
• Mobilisation advance should not be paid in advance of more than 2 months.
• This is to ensure that the contractor does not misuse the advance when the work is
delayed.

Post-tender negotiations
• As per a CVC circular, post tender negotiation could be a source of corruption.
According to the commission, there cannot be any post tender negotiations except
under certain circumstances.

E-tendering systems
• It is clarified that while ensuring fair play, transparency, and open tendering
procedure for e-tendering solutions, the organisations must take due care to see that
effective security provisions are made in the system to prevent any misuse.

The Integrity Pact
• The pact is basically between the bidders and the buyers committing the
persons/officials of both side to not to commit any sort of illegal practice or corrupt
practice at any stage of the contract.
• The Commission has recommended adoption of Integrity Pact and has provided
basic guidelines for its implementation in respect of major procurements in
government organizations.

Time-bound processing of procurement
• The Commission has observed that at times the processing of tenders is inordinately
delayed which may result in time and cost overruns and also invite criticism from
the trade sector. It is, therefore, essential that tenders are finalized and contracts are
awarded in a time bound manner within original validity of the tender, without
seeking further extension of validity.

Pre-qualification criteria
• The Commission has received complaints regarding discriminatory pre-
qualification criteria incorporated in tender documents by various
departments/organisations. This needs to improve in order to have a more efficient
process.

Tender Sample Clause
• The Commission has received complaints that offers are rejected on the basis
of tender samples not conforming to the requirements of feel, finish and
workmanship as per the ‘master sample’ though the bidders confirm in their bids
that supply shall be made as per the tender specifications, stipulated in the bid
documents. This too needs to be addressed for a better and more efficient system.