Writ Jurisdiction and the Doctrine of Privity of Contract

[Abhay Singh]

The doctrine of privity of contract is a legal principle in common law, which states that only those who are parties to a contract can sue each other. This principle is foundational to contract law and all the primary basis of litigation in contract is directly in line with this principle. Now, this principle definitely holds true for the two independent parties but what if one party is the government? does "government" as per definition given in the Article 12 of the Constitution, has more obligations while executing its right to enforce a contract? The same question were raised in the case Union of India vs. IMECO Ltd. & Anr where Calcutta High Court took the constitutional position instead of the classical implementation of the legal principles of jurisprudence.

Contract of Privity

Under the common law, a third party—despite being affected by a contract—cannot sue or be sued. Thus, in a contract between A and B, a third party C, even if indirectly impacted, has no enforceable rights.

Facts of the Case

In the case of Union of India vs. IMECO Ltd. & Anr (2023 SCC OnLine Cal 2126), Union of India awarded a contract to BEML Ltd., a government company, for fitting additional berths in railway coaches. BEML, in turn, subcontracted this work to IMECO Ltd. The government later cancelled the contract with BEML, despite partial completion of the work by IMECO. This left IMECO unpaid and aggrieved. With no direct privity with the Union of India, IMECO sought remedy under Article 226, praying for a writ of mandamus to compel the government to release funds to BEML so that BEML could pay IMECO.

The Legal Dilemma

Could a third party, lacking contractual privity with the government, seek a writ to enforce a payment indirectly owed to them?

The general rule of contract would deny this right. However, the Calcutta High Court saw the issue differently. It recognized that public law obligations, especially those involving fairness and non-arbitrariness by the State under Article 12, could override the strict confines of privity in certain contexts.

Locus Standi

The Court held that even though IMECO lacked direct privity with the Union of India, it had sufficient interest or locus standi to maintain the writ. The Hon'ble Court observed that -

1. When a public body contracts with another (here, BEML), and the work is lawfully subcontracted, there exists a derivative obligation towards the subcontractor, especially where the government acknowledges the subcontracting through conduct.

2. That despite a clause prohibiting subcontracts, the government had accepted IMECO's role by conduct and was estopped from denying the subcontract’s validity later.

3. The government’s delay and internal contradictions in decision-making—some officials recommending payment, others denying it—were deemed unfair. This justified judicial intervention under Article 226.

4. Court observed that directing IMECO to civil litigation would be futile, especially when BEML admitted its liability but was constrained by non-payment from the Union. Thus, writ jurisdiction provided a speedy and meaningful remedy.

The Judgement

The Calcutta High Court observed that as per the doctrine, there is no doubt that IMECO is barred from raising a dispute with the Union of India but the government undertakings are bound by principles of natural justice such as equality and fairness. Arbitrarily cancelling the contract is not only against the principles of fairness and equality but also causes unnecessary delay and damage to the petitioner.

Justice Biswaroop Chowdhury observed:

“When due to non-release of statutory fund or payment of contractual debt, by Government Authority to any Government undertaking the said undertaking is unable to pay...the parties who do not receive the payment and suffer hardship may...move the High Court under Article 226... Such a direction would be just and reasonable and mitigate hardships...”

Conclusion

The core of the legal system of a state can be described using the legal maxim "interest reipublicae ut sit finis litium" which means that "It is in the interest of the State to end all litigation". All the principles evolved are in the interest of justice and hence the court shall in interest of justice set aside even the core principles of common law to end the litigation. Especially when the party the Government, it has additional responsibility to uphold the principles of natural justice which includes principles of equality and fairness.