Business Laws in India

By Team Legal Helpline India, December 26, 2014

IMPORTANT: We provide legal advice and legal services in the fields of Business Laws in India, call our board No. 9-11-2335 5388 or mail us through contact us page of our website for any urgent requirements.

BRIEF DISCUSSION ON BUSINESS LAWS IN INDIA:

Business laws in India are governed by a set of laws contained in various enactments related to the business laws in India. To understand the business laws in India we can differentiate them in two broad categories of business laws in India governing the business with government and the business laws governing the private business. These two broad categories are different and distinct and are governed by a distinct set of business laws in India.

Suits by and against the government
Article 300 of the Constitution of India deals with suability of the Government which also includes the cases against the government in the business arena, to know more about the business laws in India we can go through the same accordingly.

300. Suits and proceedings
1) The Government of India may sue or be sued by the name of the Union of India. The Government of State may sue or be used by the name of the State and may, subject to any provisions which may be made by Act of parliament or of the Legislature of such State enacted by virtue of powers conferred by this Constitution, sue or be sued in relation to their respective affairs in the like cases as the Dominion of India and the corresponding Provinces or the corresponding Indian States might have sued or been sued if this Constitution had not been enacted. Business laws in India concerning the said issue is mainly contained in the Constitution of India which defines the term state and also describes its rights and liabilities.

2) If at the commencement of this Constitution –
a) any legal proceedings are pending to which the Dominion of India is a party, the Union of India shall be deemed to be substituted for the Dominion in those proceedings; and

b) any legal proceedings are pending to which a Province or an Indian State is a party, the corresponding State shall be deemed to be substituted for the Province or the Indian State in those proceedings”.

It provides for the following matters:
a) Form or title of the suit; and
b) Extent of the liability of the Government.
c) Form or title of the suit.

As regards a suit against Government of India, Article 300 lays down that it must be filed in the name of Union of India. Again in the case of a State, it must be filed in the name of the State and not against the Government of the State.


(a) Extent of liability of Government.
The business laws in India defining the extent of liability of the Government (i.e. in what matters a suit against Government of India or the Government of a State may be filed), the scheme of Article 300 is that it shall be as may be defined by law to be made by competent Legislature. Thus the extent of liability of the Government of India may be defined by law of Parliament and that of the Government of a State by the law of the State Legislature. The article also provides that so long as the Legislatures do not make any law in their respective spheres, the law in this regard as was obtaining before the commencement of the Constitution, shall continue. Before the Constitution the liability of the Dominion of India (i.e. Central Government) and of the Provinces, was dealt with in Section 176 of the Government of India Act, 1935. This section again referred back to the relevant provisions of the Government of India Act, 1915. Clause (1) of Section 32 of the Act of 1915 (which is relevant for our purposes) provided:

Every person shall have the same remedies against the Secretary of the State in Council as he might have had against the East India Company, if the Government of India Act, 1858, and this Act had not been passed.

Section 65 of the Government of India Act, 1858, which is relevant for our purposes provided:


The Secretary of State in Council shall and may sue and be sued as well in India as in England by the name of the Secretary of State in Council as a body corporate; and all persons and bodies politic shall and may have and take the same suits, remedies, and proceedings legal and equitable, against the Secretary of State in Council of India as they could have done against the said company; and the property and effects hereby vested in Her Majesty for the purposes of the Government of India, or acquired for the said purposes of the Government of India, or acquired for the said purposes, shall be subject and liable to the same judgments and executions as they would while vested in the said company have been liable to in respect of debts and liabilities lawfully contracted and incurred by the said Company.

The chain of enactments referred to above leads us to the position that the extent of liability of the Governments of India and of the States today, is the same as that of the East India Company before 1858. In each case involving liability of the Government today, we shall have to examine, if the case had arisen before 1858, whether a suit could be filed against the East India Company. If the answer is in the affirmative, a suit against the Government would be maintainable and if it is in the negative, no suit can be filed against the Government today. Civil liability is normally incurred by commission of a tort or by breach of contract. We shall therefore examine the liability of the Government in tort and contract separately. The business laws in India through time have evolved and developed only through the various such instances which we can refer herein.

Governmental Liability in Tort
The liability of the Government for torts committed by its servants in the course of their employment depends upon the tortuous liability of East India Company before 1858. It is, therefore, necessary to embark upon an enquiry as to the liability of East India Company for torts committed by its servants in the course of their employment. This matter was for the first time examined in 1862 by SIR BARNES PEACOCK, Chief Justice of the Calcutta Supreme Court in the leading case of Peninsular and Oriental Steam Navigation Co. v. Secretary of State of India in Council popularly known as the P.& O. case.

In this case the learned Chief Justice pointed out that the East India Company had a dual character or capacity – one was its sovereign character in which it was governing India as a delegate of the British Crown and the other was its commercial character in as much as the company had started its career in India initially as a trading company. According to the Chief Justice Sir BARNES PEACOCK the company enjoyed immunity in respect of its sovereign functions only and that no such immunity was available to it in respect of other functions which were of non-sovereign character such as commercial functions etc.

Thus the liability of East India Company depended upon the distinction between sovereign and non-sovereign functions. As to the distinction between sovereign and non-sovereign functions, the learned Chief Justice pointed out that where a particular function performed by the East India Company was of such a nature which could be undertaken by a private individual, it was a non-sovereign function and the company enjoyed no immunity from suits in respect of such functions. But where the function of the company was of such a nature which could not be undertaken by a private individual without the aid of Governmental power or authority, such a function was of a sovereign nature and the company enjoyed immunity in respect of such functions.

Applying the principle to the facts of P. & O. case the Government was held liable. The facts of the case were:


The servant of the plaintiff (P. & O. Company) was traveling in a carriage from Garden Beach to Calcutta and while passing by the Kidderpore Dockyards, which was Government property, be found some workmen of the Dockyards coming from opposite direction carrying a heavy piece of iron. As they were moving in the middle of the road, the servant of the plaintiff raised an alarm from a considerable distance but it fell on deaf ears of the servants, who continued to move in the middle of the road without taking note of the alarm and noticed the carriage coming from opposite direction only when it had come too close to them. Thinking the collision to be inevitable, the servants ran away in a panic – those in from ran to one side of the road and those at the back to the other side of the road. As a consequence thereof, the piece of iron fell down upon the road producing a loud sound. The horse of the carriage got frightened and dashed against the piece of iron, got injured and started limping. The plaintiff company which owned the carriage and the horse filed a suit against the Secretary of State for India in Council claiming damages for the tort of negligence committed by the servants of the Government Dockyards.

The suit was filed in the small cause court and the trial Judge found that the servants of the Government were negligent and that according to the ordinary law of master and servant, the master would have been vicariously liable for the tort of negligence. The Judge, however, was doubtful, if the same law would apply, where master instead of being a private individual had been Government. A reference was, therefore, made by the Judge to the Calcutta Supreme Court on this important question of law.

The Supreme Court of Calcutta through a very learned judgment delivered by Chief Justice Sir BARNES PEACOCK held that in as much as the function of the Government in the instant case clearly of non-sovereign character, the Government enjoyed no immunity and that it was liable for the tort in the same way as a private individual. The said case can be termed as the turning point in the history of business laws in India which was subsequently developed through various other authoritative pronouncements.

This distinction between sovereign and non-sovereign functions for fixing liability of the Government was not followed by the Madras High Court in 1882 in Secretary of State v. Hari Bhanji where Chief Justice CHARLES TURNER declared that Government was liable in all cases, excepting what is technically called ‘Act of State’. The business laws in India were thus defined with the liability of the state on such issues.

Thus the law on Governmental liability in tort remained in a State of uncertainty for a fairly long period and continued to be so even after coming into force of the present Constitution. As a matter of fact business laws in India could take a definite shape after several such judgments pronounced from time to time by the different High Courts. Some High Courts followed the Calcutta approach, while others followed Madras. This uncertainty ended with the Supreme Court decision in 1962 in State of Rajasthan v. Vidyawati, in which Chief Justice B.P. Sinha approved the view taken by Sir BARNES PEACOCK in P. & O. case. The facts of the case were as follows :

A Government jeep car maintained for the official use of the Collector of the district was being driven to the residence of the Collector after repairs from a private workshop. Through negligent and rash driving, a pedestrian was knocked down and fatally injured. The widow, Vidyawati, filed a suit against the Government of Rajasthan claiming damages in tort. The Government relying upon the decision of Calcutta Supreme Court in P. & O. case took the plea that since the tort was committed in the course of sovereign functions, the Government enjoyed immunity and that the suit was not maintainable.

The Supreme Court, while approving the business laws in India as laid down by Sir Barnes Peacock in P. & O. case held that in order to claim immunity it would not be enough for the Government to establish that the tort was committed in the course of sovereign functions. Government can claim immunity only when it is established that at the time when the tort was committed, the Government was engaged in the actual performance of a sovereign function. In the instant case, the Government was not engaged in the actual performance of any sovereign function when the tort was committed. Hence the claim to immunity was not allowed and the Government was held liable.

It will be seen that the Supreme Court decision in Vidyawati’s case, while recognizing immunity of Government in respect of sovereign functions, makes an attempt to limit or narrow down the scope of immunity in respect of such functions, by making it obligatory upon the Government to establish that at the time when the tort was committed, the Government was engaged in the actual performance of a sovereign function. To illustrate, if the accident in the instant case had occurred at a time, when the Collector was touring and inspecting flood-affected areas, the Government would not have been liable.

In Kasturi Lal Ralliaram Jain v. State of U.P., the Supreme Court once again affirmed the law laid down in Vidyawati’s case. The facts of the case were :


Kasturi Lal, a bullion merchant of Punjab came to Meerut around midnight, along with some gold and silver in his bag which he intended to sell in the market next day. He was caught and arrested by a police constable, who believing the articles to be stolen property, seized it from him. Kasturi Lal was subsequently put in police lockup and the property was deposited in police malkhana till the disposal of the case. Kasturi Lal was later released as no case of theft was made out against him, but the gold seized from him was not returned to him.

As a matter of fact, the head constable in charge of the police malkhana, Mohd. Amir, had absconded to Pakistan along with the gold seized from Kasturi Lal. Despite repeated demands neither gold nor its value was given back to Kasturi Lal and finally he was informed that the gold belonging to him stood lost and that Government was neither liable to return the gold nor its value. The manner in which gold seized from Kasturi Lal was kept and dealt with at the police station, showed gross negligence on the part of police officers and the loss suffered by Kasturi Lal was the consequence of such negligence. The State, however denied its liability as the loss suffered by Kasturi Lal arose in the course of sovereign functions of the State.

The Supreme Court relying upon P. & O. case held that the Government was not liable since the tort in the instant case was committed in the course of sovereign functions. Chief Justice P.B. Gajendragadkar, while deciding the case sympathized with Kasturi Lal and expressed his great dissatisfaction with the unhappy state of the law. But the learned Chief Justice showed his utter helplessness in the matter as the remedy according to him lay with the Legislature and not with course. He made a strong appeal for reform of the law.

Although no law has so far been made defining liability of the Government in tort, in the business laws in India and there appears to be a change in the judicial climate. In Shyam Sunder v. State of Rajasthan, a P.W.D. truck was proceeding on famine relief work. Through the negligence of the driver, the engine of the truck caught fire and the occupants were asked by the driver to jump out of it. One of the occupants while jumping, struck a road-side stone and died instantaneously. The Supreme Court held that there was negligence on the part of truck driver.

The Court further declared that famine relief work which is traditionally understood to be a sovereign function is in fact not a sovereign function. The Court explained that famine relief is a work which can be and is being undertaken by private individuals. There is nothing peculiar about so that it might be predicated that State alone can legitimately undertake the work. The function in the instant case was held not of a sovereign character and consequently the State of Rajasthan was held liable.

In sharp contrast to the 19th Century Police-State which performed merely negative functions, the modern welfare State is assuming more and more positive functions, taking care of the individual literally from the womb to the tomb. Consequently, the distinction between sovereign and non-sovereign functions for determining Governmental liability in tort has become meaningless and with a view to bringing certainty and rationality in the law, the sooner it is done away with the better it is.

The distinction between sovereign and other functions of the State often leads to confusing results. The Madhya Pradesh High Court did not hold the State liable for the acts of its servants in misappropriating the timber which they had earlier seized in the exercise of their statutory authority. But the Allahabad High Court held the State of U.P. liable when its treasury officials misappropriated the money paid by a producer of goods by way of excise duty. The treasury was treated as a banking function and not a sovereign function. Both High Courts were purporting to follow the ruling in Kasturi Lal case.

That State has not been held liable for the damage done to an agitating processionist loudspeaker in a police action against them, nor for the action of a Magistrate in issuing warrants of arrest against all the five accused persons whereas two of them were acquitted by the appellate court and only the remaining three were ordered to be arrested. The court, however, held that this would not discharge the officer in default from his personal liability in the matter and allowed the plaintiff to recover Rs.500 from him.

It is becoming very difficult for the courts to maintain the distinction between sovereign and other functions of State. Even in the area of police and military functions, the wall of distinction is registering cracks. In Pushpa Thakur v. Union of India, the Government was held liable for injuries caused to the appellant by a military truck being negligently handled by a jawan. Compensation to the tune of Rs.1, 00,000 was awarded. Quite apart from this in many cases arising out habeas corpus petitions against illegal confinement by military or police personnel, the Government has been ordered to pay in the same petition compensation for the detention.

Government Liability in Contract
In some early cases the distinction between sovereign and non-sovereign functions of the Government was also referred to for purposes of determining liability of the Government in contract. But it is now long settled that contractual liability of the Government is in no way different from that of private individuals. The Union and State Governments are both liable in contract according to the same principles which determine liability of a private individual. But Government contracts, in order that they may have binding effect, must observe the mandatory requirements of Article 299 of the Constitution.

Article 299 of the Constitution provides:
“229. Contracts.- (1) 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.”

(1) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.

Remedy against Government under contract
In some early cases the distinction between sovereign and non-sovereign functions of the Government was referred to for deciding Government liability under contract. An early example is Secretary of State v. Sheo Singh Rai.
The plaintiff delivered to the Treasury Officer at Meerut nine Government promissory notes for cancellation and consolidation into a single note of Rs.48, 000. The officials misappropriated the notes. The plaintiff sued the State.

The actions were dismissed on the doctrine of sovereign immunity. Similarly, in Ram Gulam v. Government of U.P.

The plaintiff’s ornaments were stolen. They were recovered by the police from the thieves. While in police custody they were stolen again, never to be recovered.

The doctrine of sovereign functions again stood in the way of the plaintiff and did not permit him to drive home the liability to the State.

But things have now changed. A beginning was made by the Bombay High Court in Lasalgaon Merchants Co-op. Bank Ltd. V. Prabhudas Hathibhai.

Certain packages of tobacco lying in the godown of a particular firm were pledged to the plaintiff bank. Some of the partners failed to clear their income-tax dues. The Income Tax Officer ordered seizure of the goods. The officials of the collectorate accordingly locked the godown and handed over the key to the police. Then came heavy rains. The roof of the godown leaked and the tobacco was damaged.

The court said: “Heavy rains do not (necessarily) amount to an act of God. It was the duty of Government officers to take such care as every prudent manager would take of his own goods. The Government stood in the position of a bailee and it was for them to prove that they had taken as much care as was (reasonably) possible for them and that the damage was due to reasons beyond their control.

This view was accepted by the Supreme Court in State of Gujarat v. Memon Mohamed.

Certain motor vehicles and other goods belonging to the plaintiff were seized by the State in the exercise of its power under the Sea Customs Act. The goods remained totally uncared for.

The contention of the State that there was no obligation to take care was rejected. The State was accordingly responsible for the damage to the goods.

This trend has been again affirmed by the Supreme Court in Basavva K.D. Patil v. State of Mysore. The facts involved a repetition of the Raj Gulam story, namely, theft, recovery of the ornaments by the police and their final disappearance from police custody. The State was held liable to pay the value of the ornaments to the victim of the theft.

Thus the contractual liability of the Government now is in no way different from that of private individuals. The Union and State Governments are both liable in contract according to the same principles which determine the liability of a private individual.

Formalities of a Government Contract

Article 299 of the Constitution of India prescribes the formalities of a Government contract. Contracts of the Union of India have to be made expressly in the name of the President and those of a State in the name of the Governor. They have to be signed on behalf of the President or the Governor by such persons as may be authorized and in such manner as may be prescribed. Neither the President, nor the Governor, nor the signing officers are to be held personally liable.

Questions have frequently arisen before the courts as to what is the position of a contract where such formalities are not observed. The courts have consistently held that such contracts would be void. They are not enforceable against the Government. This occasionally creates a unique problem. The other party has already wholly or partly performed the contract. The State has had the benefit of his services, but is showing its inability to make any payment under a void contract. One such situation was before the Supreme Court in State of West Bengal v. B.K. Mondal & Sons. The court ordered payment to be made under Section 70, Contract Act.

The plaintiff, on the request of an officer of the State of West Bengal, constructed a road, guard room, office, kitchen, room for clerks and storage sheds for the use of Civil Supplies Department. The State accepted the works but tried to escape liability under the pretence that no contract had been concluded in accordance with the requirements of Section 175(3) of the Government of India Act, 1935 (corresponding to Article 299).

The Court found that the requirements of Section 70 of the Contract Act were satisfied. The services were rendered at request. They were accepted. The contractor had no intention to render them free of charges. The court was not thereby enforcing a void contract. Court only awards compensation under a quasi-contract, which is a relation resembling those created by a contract. The court observed:

It is well known that in the functioning of the vast organization represented by a modern State, the Government officers have invariably to enter into a variety of contracts which are often of a petty nature. Sometimes they have to act in emergency, and on many occasions, in pursuance of the welfare policy of the State the Government officers may have to contract orally or through correspondence, without complying with the provisions of Section 175(3). If in all these cases, what is done in pursuance of contracts is on behalf of the Government and for their use and enjoyment and is otherwise legitimate and proper, Section 70 would step in an support a claim for compensation made by the contracting parties notwithstanding the facts that the contracts had not been made as required by Section 175(3). We are referring to this aspect of the matter not with a view to detract from the binding character of the provisions of Section 175(3), but to point out that like ordinary citizens even the State Government is subject to the provisions of Section 70.

Under the business laws of India, the terms of contract, whether valid or not, may be relevant for the purpose of determining the amount of compensation that ought to be paid to the contractor. In Pillo Dhunjishaw v. Municipal Corporation of the City of Poona the corporation tried to escape liability for spare motor parts supplied to it on the ground that the contract was not made in accordance with the Bombay Municipal Corporation Act, 1949. The corporation was held liable to pay under Section 70. One of the questions was what should be the measure of compensation. The court cited with approval the decision of the Lahore High Court in Secretary of State v. G.T. Sarin & Co., where it was held that a person without an enforceable contract in his favor supplying goods to a Government Department is entitled to a money equivalent of the goods delivered assessed at the market rate prevailing on the date on which the supplies were made. In the present case the rates quoted by the supplier in his invoice were considered to be fair measure of compensation giving the State the right to show that the market price was less than that, but the corporation did nothing in this respect. Thus, though the claim under Section 70 is not based upon any contract, yet the contract between the parties is relevant at lease for indicating the fair measure of compensation.

For the same reason the absence of an agreement executed in accordance with article 299 has not been regarded as a bar to recovering excise dues under Section 39 of U.P. Excise Act, 1910. Where the matter arising under the Land Acquisition Act, 1894, were referred to arbitration under an agreement, the contractor wanted, to get out of it on the ground that the agreement was not executed as required by Article 299. The Supreme Court did not permit this matter to be raised for the first time at the appellate stage.

Contracts made in the executive power of the State have to be distinguished from those made by officers in the exercise of their statutory power. The business laws in India has developed very clean on this issue and ultimately this distinction was upheld by the Supreme Court in a case where a liquor shop was auctioned in the exercise of statutory power and which did not require compliance with Article 299.

When the Government forfeited a contractor’s security deposit to recoup the extra-cost of work completed by the Department because of the contractor’s failure to complete the work in time, the forfeiture was held to be wrongful because of the Government’s failure to prove the amount of extra cost incurred by it. The contractor was allowed to recover back his security. No penalty was allowed to be imposed on a contractor whose tender was accepted by a letter signed by the executive engineer who did not sign it on behalf of the President. The letter having not been issued in the name of the Governor, it was not valid. It could create no liability. We can thus clearly say that the emergence of the business laws in India was gradual during the British rule and has now taken a definite shape through various judicial pronouncements which are the guiding factors for the courts as well the executive.

NOTE: As a Law Firm Delhi, we provide all services in the fields of Business Laws in India, call our board No. 9-11-2335 5388 or mail us through contact us page of our website for any urgent requirements.

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