Vetting basic principles governing govt. contracts

Mr. Z


Dear Sir,

Re:    Vetting of

We refer to your letter dated ___________________.

We summarise the basic principles governing govt. contracts:

Government contracts are tested for its validity on the touchstone of reasonableness and public interest and if its fails to satisfy either test, it would be unconstitutional and invalid. Contracts must be within the limits of the authority of the public body concerned (COMPANY 1 v. BANK 1. 1992 2 SCC 343).

Action of the govt. in granting the contract by way of negotiation was held not arbitrary / irrational.(COMPANY 2  v. STATE 1 AIR 1980 SC 1992).

To satisfy the requirements of non arbitrariness in a state action it is necessary to consider and give due weight to the reasonable and legitimate expectation of the persons likely to be affected by the decision (COMPANY 3 v. COMPANY 4 AIR 1993 SC 1601).

Legitimate expectation gives the applicant sufficient locus standi for judicial review. However there exist a substantive protection and does not amount to a grant of absolute right. Therefore the expectation can be denied if overriding public interest exist.

However if a denial of the legitimate expectation amounts to a denial of rights guaranteed or is arbitrary, gross abuse of power, discriminatory or violation of principles of natural justice then the same can be questioned on ground attracting Art 14 of the Indian Constituion (Art. 14 inhibit arbitrary action by the State (BANK 1 V. Hindustan Development Corporation AIR 1994 SC 988)


  • the agreement should be couched in terms which creates legitimate expectation on the Lenders that the govt. will perform this agreement.
  • The agreement should be clear about the fact that the consent to this assignment was within the limits of the public body authorised and competent to give and execute such consent.
  • The consent is binding on other relevant public bodies/ local authority even if they are not made parties to this agreement.
  • The whole assignment agreement was entered into after negotiation with the Lenders and after giving due consideration to the public interest i.e. powers generation and the necessity to finance such generation.

Please note that in international law state responsibility does not arise in case of breach of contractual terms with a foreign corporation. State responsibility will only arise if there is a breach of terms extraneous to the contract as for e.g. denial of justice to the other contracting party.

On perusal of the provisions of the draft agreement we are of the following opinion:

Sl Clause Comments
Preamble clause E Add in the beginning of the clause as follows: “ after negotiation with the concerned parties and considering the interest of the public in general in power generation and the  necessity of financing the project of power generation”
3.3(i) After the word assignment add as follows: “ of the company’s rights and interest to the agent as security for financing for the security for the Complex.
Add v in 3.3 Confirms to the agent that all the public bodies / local authority concerned shall co-operate with the agent in the event that the assignment agreement comes into force”
3.6 After the words “ The GOB agrees that” add as follows: “ if any assignment agreement is invalid or ceases to come into force prior to the date when the agreement is supposed to come into force or” then continue with “ if any……….”
3.9 Add as follows: the GOB shall ensure that Article IV of the Implementation Agreement containing provisions regarding consents from the Govt, GOB support to obtain consent and the remedies for such non-performance shall apply in case of transfer or re-issuance of any such consent.

If you have any further queries please do not hesitate to revert back to us.

Thanking You,

Yours faithfully,


For: “The Lawyers & Jurists”