Contractual liability of state during the period of east india company

The year of 1600 is significant for the history of India, for in that year far away from this land a small body of the merchants of London secured from Elizabeth the Great, Queen of England, a Royal charter whereby was constituted the East India Company then named “The Governor and company of Merchants of London trading into the East Indies.” The East India Company entering into India as a trading corporation and for business but due to weak political position in India, it got control over the territory of India. This shows that after entering into India this trading company soon changed its character and by 1765, territorial sovereignty of company on behalf of crown begins; when Lord Clive obtained the rights of collecting revenue in Bengal, Bihar and Orissa which automatically involved in the administrative function. This territorial power moving fast towards the creation of an empire and was bound to control the destinies of India for about two centuries that followed.  But it never enjoyed immunity as enjoyed by the crown. In fact company was acting in a dual capacity; the East India Company was subject to jurisdiction of court in case of breach of contracts etc. The contractual liability of East India Company was subject to the jurisdiction of municipal courts in matters and proceedings undertaken by them as a private trading company as held by Supreme Court of Calcutta in Moodalay v. Morton. So the company was held liable for contractual obligations.

The history of legal liability of company in India can be traced by the Regulating Act of 1773, which made all officers of company with regard to administrative functions subject to the jurisdiction of Court of Justice. It means that the suit could be brought against them in their official capacity by any person whose interests were injured without sufficient lawful justification. This makes it clear that the actions of administration were governed by the rules and regulations of the company and further any violation of those rules made the concerned officials subject to jurisdiction of the courts. Moreover, the administration could be sued in Court of Law for breach of contracts or torts committed by the officer of the company.

It follows the view that the East India Company was acting in the capacity of Commercial Corporation and also as delegate of British Crown. This dual character had its impact on its contractual liabilities as well. Thus the company was liable for commercial activities like as an individual in the Court of Law. Besides, it was also liable to be sued in its sovereign functions because it was not enjoying the immunity or privileges of crown. As Lord Chatham said in 1767, “no subjects would acquire the sovereignty of any territory, for themselves, but only for the nation to which they belonged. This view was taken by Sir Thomas Sewell, Masters of Rolls, in Moodalay v. The East India Company in 1785, in this case the company had granted a lease for ten years to the petitioner for supply of tobacco to the inhabitants of Madras. However the lease was given to another person before the expiration of 10 years. The plaintiff sued the company; and the matter was of great importance to the company and incident to their character as a sovereign power. But the Master of Rolls held that it is the fact that no suit will lie in the court against a sovereign power, for anything done in that capacity; but East India Company do not fall under this rule. Moreover, the extension of the English doctrine ‘the king can do no wrong’ was not favoured by the Privy Council in the next case.

It concludes that every officer of East India Company could bind the company in contractual relationship with private individual as per the rules and regulations. The real fact is that the East India Company ruled India and is recognized by the Constitution makers as predecessor to the present Union and State Governments at least furnishes continuity in the law relating to state liability and this company was unable to claim this feudal privilege available to the Crown in England. In 1831 came the clear observations on government liability in contract in The Bank of Bengal v. The United Company, decided by Supreme Court of Bengal. The decision involved an action for recovery of interest on three promissory notes alleged to have been made by the Governor-General in Council as the authorised agent of the East India Company. The sum borrowed was for the purpose of carrying on wars for extending the territories of the crown. It was argued that if the East India Company were to be liable to an action for a public debt contracted for the purpose of the crown and extension of the British Empire, it would confound and confuse all distinctions between corporate bodies and Government. Sir Charles Grey and Justice Frank held that the East India Company had no sovereign character so as to prevent them from being sued even in matters of Government. It was observed: they are not necessarily exempt from action on account of any sovereign character belonging to them, but even as to matters of Government they may be liable to an action, if it has been the intention of any statute to make them so liable; or in matters of contract they would be liable if it had been their own intention or that of their lawfully authorised agents to render themselves so in any case where the law makes it lawful for them to contract.

But with regard to liability of the crown in any aspect, it is very pertinent to mention here that before the Crown Proceeding Act, 1947, there was no legal right to sue the crown. The historical reason for this lay in the feudal rule that the King could not be sued in his own courts. The injustice of this Crown immunity was somewhat mitigated in that the Crown might permit itself to be sued by granting a petition of right. A petition of right was however only available for breach of contract and certain related matters and not for torts. The Crown Proceeding Act made the Crown sue able in contract. However, it does not say that the Crown is now as liable on its contracts as if it were a private person of full age and capacity. It expresses its liability by saying in Section 1 that where a claim might before the Act has been enforced on the grant of a petition of right or under certain statutes, the claim may now, subject to exceptions, be enforced as of right. The statutory provisions in force before the Act, providing that certain departments could be sued were superseded by the Act. Moreover, the British Government had introduced various provisions or sections dealing with contractual liability of the Crown in numerous Acts passed under the title “Government of India Act”.

POSITION UNDER GOVERNMENT OF INDIA ACT 1858

The British Parliament due to outbreak of revolt in India passed the Government of India Act 1858. By this Act, the Crown took over the Government of India from the East India Company and assumed sovereignty over its territory. A post of Secretary of State was created who was responsible for governance in India on behalf of the crown with the help of a council. The Act provided that the Secretary of State in Council, with the concurrence of a majority of votes at a meeting shall have full power to enter into any contract whatsoever, as may be thought fit for the purposes of the Act. But such kind of authorities found to be inconvenient from the administrative point of view which got removed by adopting another provision which provided that such contracts might be entered into by Governor-General of India in Council and other officers who are entrusted with the Government charge or care of any presidency, province, etc on behalf of the Secretary of State in Council or by the order of Governor- General in Council. But still validity came in favour of the contracts, deeds, instruments which were not in prescribed form.

Moreover Government of India Act, 1858 defined the liability of Secretary of State in council and provides –

“The Secretary of State in council as a body corporate and all persons and bodies politic shall be liable for all the rights and liabilities of the East India Company.” It implies that Secretary of State in council could be sued for legal and equitable obligations in the courts of law in the same manner as the East India Company could have been sued. The Secretary of state was also made immune for the sovereign functions. The Act further provided that in all suits or other proceedings pending against the said Company at the time of commencement of the Act, the name of the Secretary in Council shall come in place of Company. In short, the liability of the Secretary of State in Council was the same as that of the East India Company. It may be noted that in spite of tremendous differences in the position, status and functions of the two, in the matter of the enforcement of the liability both enjoyed the same position and status. It means in matters of liability, the said provision placed both of them at par.

However, in a case, the court has tried to justify the said treatment. It was the first case which throws light on the liability of Secretary of State i.e. Peninsular and Oriental Steam Navigation Company v. Secretary of State. Here while examining the liability of the East India Company for the tortious acts of its officers, the court came to the conclusion that the East India Company could not be sued for acts done in the exercise of sovereign powers but could be sued for non-sovereign acts, i.e. an act which could be carried out by a private individual. This makes it clear that the Secretary of State could be sued for legal and equitable obligations in the courts of law. Since, a contract can be made by a private individual; it follows that the East India Company would be liable in respect of its contractual obligations. By virtue of the aforesaid provision, the Secretary of State also became liable in respect of the contracts made on its behalf. The case which arose in such connection was, Nobin Chander Dey v. Secretary of State, here the plaintiff was the highest bidder in a sale of license for selling liquor and drugs. He performed all the formalities and deposited security among all for getting license. But the officials had not issued license and he had to close his shop. Thereupon he sued the Secretary of State in council for damages. The court held that giving of license and taking of excise duty was a matter entirely done in the exercise of sovereign powers, and so no action would lie.

So far as the distinction between the position of the King and the Secretary of State in respect of liability under a contract is concerned, the observations of Braund J. are relevant. He has observed in the case of-

Secretary of State v. J.C. Maurice that in India, the crown through its character as successor of the East India Company, has submitted itself by statute to the ordinary jurisdiction of its courts to certain remedies, but has also constituted itself a corporate defendant in the form of Secretary of State in council as its representative for the purpose of being sued in respect of those remedies.

POSITION DURING GOVERNMENT OF INDIA ACT, 1919

The problem based on considerations of administrative convenience was abandoned when the Government of India Act, 1915 was enacted. By section 30 of Government of India Act, 1915 the aforesaid provisions of Government of India Act, 1858 and of the Government of India Act, 1859 were repealed. This Act further amended in 1919 on the basis of Montague Chelmsford Report and lead to Government of India Act, 1919. The contractual liability of the Secretary of State was incorporated in sections 30 and 32. Section 30(1) conferred powers on Governor General in council and on any local Government to make contract on behalf of the Secretary of State in council for the purpose of this Act. However, the manner in which the contract had to be entered into and on behalf of the Secretary of State in council was laid down in clause (2) of section 30, which provided…. every assurance and contract made for purpose of sub-section (1) of this section, shall be executed by such person and in such manner as Governor General in Council by resolution directs or authorizes…..

The requirements laid down in section 30(2) were held mandatory and in case of non-compliance with these provisions, the Contract entered into with Secretary of State in council, become void. It was settled view that such a contract must be in writing and oral contract could not be enforced due to mandatory requirement laid down under section 30(2).

The remedies for breach of contract against Secretary of State were incorporated in the aforesaid Act. This Act provides – Rights and Liabilities of Secretary of State in Council as follows:

1. The Secretary of State in Council may sue and be sued by the name of Secretary of State in Council as a body corporate.
2. Every person shall have the same remedies against the Secretary of 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.
3. The property for the time being vested in His Majesty for the purposes of Government of India shall be liable to the same judgments and executions as it would have been liable to in respect of liabilities lawfully incurred by the East India Company if other Acts had not been passed.

In a case Venkata Rao v. Secretary of State, it was held that section 32 of the Government of India Act 1919 relates to the parties and procedures but that did not limit or bar the rights against the Secretary of State, if there had been no right claimed for breach of a contract against East India Company that could not be taken to mean that the person who claimed it for the first time under section 32 of Government of India Act, 1919 had no right against the Secretary of State. The Plaintiff in this case was terminated by the Secretary of State and he sued the Secretary for breach of service contract. Therefore the Privy Council held that suit could be brought against the Secretary of State for enforcing contractual obligations.

POSITION UNDER GOVERNMENT OF INDIA ACT, 1935

The Government of India Act 1935 took place of Government of India Act 1919. It conferred powers to Governor-General and Governors of provinces to enter into contracts. The necessary conditions for making a valid contract were incorporated in the Government of India Act 1935.

According to the provisionsof the Government of India Act, 1935 three conditions were necessary for a valid contract. The conditions are as follows

1. The contract must be expressed to be made by Governor-General or Governor of a province as the case may be.
2. The contract must be executed on behalf of the Governor-General or Governor of province, as the case may be.
3. The contract must be executed by the authorized person.

These requirements were necessary for the validity of a contract and even for the liability of the Government. Section 32 of Government of India Act, 1915 were also repealed and reenacted in a much modified form in the Government of India Act, 1935 by incorporating section 176. This section of Government of India Act, 1935 laid down that the Federation may sue or be sued by the name of the Federation of India and a Provincial Government may sue and be sued by the name of the Province in case of any breach of contract.

SECTION 176 provides as

1. The federation may sue or be sued by the name of the Federation of India and a Provincial Government may sue or be sued by the name of the Province, and without prejudice to the subsequent provisions of this chapter, may, subject to any provisions which may be made by Act of the Federal or a Provincial Legislature enacted by virtue of powers conferred on that legislature by this Act, sue or be sued in relation to their respective affairs in the like cases as the Secretary of State in Council might have sued or been sued if this Act had not been passed.
2. Rules of court may provide that, where the Federation, the Federal Railway Authority, or a Province sue or are sued in the United Kingdom, service of all proceedings may be effected upon High Commissioner for India or such other representative in the United Kingdom of the Federation, Authority or Province, as may be specified in the rules.

The question then arose whether a formal document or deed was necessary condition for the validity of contract under section 175(3) of this Act remained disputed. The Allahabad High Court in Dhyan Singh v. State of U.P held that formal document was necessary for the validity of a contract under section 175 of the Government of India Act, 1935. However, the different view was taken by Madras High Court in Perumail Mudaliar v. Province of Madras; the court held that a valid contract by correspondence could also be entered into under this section of the Act. So it was essential that the provisions of section 175(3) of Government of India Act 1935 must have been complied with. In other words, the provisions of section 175(3) of Government of India Act, 1935 are mandatory in character. In a case; High Commissioner for India v. I.M. Lal; Privy Council held that a suit could be maintained in the court of law for a breach of contract where the employees had been removed from Government services. This decision of the court gives an impression that suits could be brought against the Government for enforcing contractual obligations irrespective of the fact that the powers exercised were sovereign or non-sovereign.

Thus the above stated Act, on one hand provides the procedural requirement for the validity of contract by or with Government of India and also specifies the provisions related to liability of Government in case of any mishappening or breach of contract on part of the Government irrespective of the fact whether the procedure gets properly followed or not.

1. B. Keith, Constitutional History of India, p. 1 (Allahabad Law Publication, Allahabad, 2nd edn. 1973).
2. 1785 1 Bro CC 469:28 ER 1245 as quoted in C.K. Takwani, Administrative Law, p. 351 (Eastern Book Company, Lucknow, 1992).
3. 1 Bro. Ch. Ca. 469.
4. Farnell v. Bowman L.R. 12 A.C. 643 (1887).
5. (1831) 1 Bignall’s Reports 87-181 (as quoted in M. Krishnan Nair, “Contractual Liability of the State of India”, Vol. 2, The Academy Law Review, p. 125, (1978).
6. D.N. Banerjee, Some Aspects of Indian Constitution, p. 379 (World Press Private Ltd., Calcutta, 1962).
7. David Foulkes, Administrative Law, p. 443 (Butterworths & Co., London, 1990).
8. G L Williams, The Crown Proceeding Act 1947.
9. Section 40, Government of India Act 1858.
10. Section 41, Government of India Act 1858.
11. D.D. Basu, Commentary on the Constitution of India, p. 72 (S.C. Sarkar & Sons, Calcutta, 5th edn., Vol. 6, 1996).
12. Section 63, Government of India Act 1858; Id., p. 73.
13. 1861 5 Bom HCR App. 1.
14. 1875, I.L.R. 1 Cal. 11, 16.
15. AIR 1937 Rang 89.
16. Section 32 of Government of India Act, 1915.
17. Devi Prasad Krishan Prasad Ltd. v. Secretary of State in Council, AIR 1944 All 377.
18. AIR 1937 PC 31.
19. Section 175(3) and 175(4) of Government of India Act, 1935.
20. M.P. Jain & S.N. Jain, Principles of Administrative Law, p. 809 (Wadhwa, Nagpur, 2005).
21. Id., p. 810.
22. AIR 1964 All 128.
23. AIR 1950 Mad. 194.
24. AIR 1948 PC 121, 127.