Law of Contract: Doctrine of Executive Necessity

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Through years, the role of government has significantly increased even in those systems that claim to follow ‘laissez faire’ policy. As a result, governments have either voluntarily or for the need of exigencies have taken up multitudinous activities, compelling them to enter into various contracts. The Doctrine of promissory estoppel is an equitable principle that demands the fulfilment of a promise made by one party when the other party has believed and acted upon it. Questions have arisen regarding the government’s liability in such cases. Government is also tasked with various other executive, sovereign and welfare functions that keeps evolving with time in respect to people’s needs. Could these contracts with private parties stand in the way of the implementation of policy decisions or other executive functions of the government?

Here comes the doctrine of executive necessity which is invoked in many cases as an effective defence in favour of the government against the doctrine of promissory estoppel. The doctrine of executive necessity is a general principle which propounds that a public authority cannot prelude itself from exercising its executive functions by undertaking contractual obligations. In other words, obligations arising out of the contract entered into by it will not stand in way to fetter or obstruct the exercise of its future executive powers that need to be exercised, taking into considerations the various needs of public at that time. This doctrine, though has found a place for itself in the legal framework of various commonwealth nations, does not hold much appeal when it comes to India.

Evolution

The doctrine is said to originate in the early English decision of Rederiaktiebolaget Amphitrite v The King(1921)

It was during the time of First World War when British found their ports blocked by the Germans. Hence, they entered into an agreement with all their neutral neighbouring countries that their ships would be able to leave their ports only if they were replaced by other ships of the same tonnage. In pursuance of this, the plaintiff, a Swedish shipping company, applied in writing for an exemption. The British Government issued a written notice stipulating that the plaintiffs’ ship could leave the UK if it arrived with a minimum of 60 percent approved goods. However, even after arriving with the mentioned goods, the ship was not allowed to leave the port.

Holding that Britain could not be held accountable to honour its past contractual obligations, Rowlatt J expounded this new doctrine as follows

“it is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises. It cannot by contract hamper its freedom of action in matters which concern the welfare of the State”

In India, the scope and applicability of this doctrine first rose in the case of Union of India & Ors v. M/s Indo-Afghan Agencies Ltd.. (1968). In this case, in order to promote exports of certain goods, the exporters of woollen textiles goods where provided with some incentives by grant of certificates permitting them to import raw materials of a total amount equal to 100 per cent of the F.O.B. value of their exports. Despite M/s. Indo-Afghan Agencies Ltd. having complied with all the requirements to the fullest, they were issued import entitlement certificate by the Textile Commissioner not for the full F.O.B. value of the goods exported but for a reduced amount. Justice J.C. Shah, speaking for the court observed that the Government was not exempted from liability to carry out the representation made by it as to its future conduct and it cannot on some undefined and undisclosed grounds of necessity or expediency fail to carry out the promise solemnly made by it.

Salient features

The doctrine comes into operation when a contractual obligation made between the government and an individual is found to be a hindrance to the exercise of the latter’s executive power in the future. In many cases, this doctrine was used to give retrospective effect to change in government’s policy which has invited criticism from many legal scholars and jurists.

It is also viewed as great key for a successor government to relieve itself of the obligations made by the previous government. Otherwise a government, well cognizant about the possibility and fact of it winning the elections, might enter into superfluous agreements that is detrimental to the interest of the succeeding government. It also helps uphold the people’s mandate as the elected government is able to act freely without any impediments made by the past government.

This doctrine is not accepted as a rule in India, rather it depends on facts and circumstances of each case. Of late, it was not so welcomed in our country which upholds the rule of law principle that “Be you howsoever high, the law is still above you”. Many jurists have held that there should be no difference between public and private contracts. However, this doctrine stands to a great efficacy and significance in other commonwealth nations such as Australia.

This doctrine has the power of relieving the government from its contractual obligations while it exercises its power as an executive. The principle of executive necessity lays importance to the interests of a vast majority of people as opposed to interests of any individual. But it must also be noted that though this discharges the government of its duty of undertaking the responsibility, remedies could still be claimed through other provisions of the Indian Contract Act, 1872 (ICA) such as section 70. If something was done for the benefit of the government and is proper and legitimate, then section 70 of the ICA could be used to claim compensation for the acts done thereof. A doctrine of executive necessity therefore does not deter the aggrieved party to seek remedies other than specific performance of such contract.

Landmark judgments

The case of M. Ramanatha Pillai v. The State of Kerala & Anr, 1974 concerns with the government’s power to abolish a public post when a citizen, believing in its continuity, joins and continues to work. Quoting a paragraph from the American jurisprudence with approval, the court held that “Therefore, as a general rule, the doctrine of estoppel will not be applied against the state in its governmental, public or sovereign capacity. An exception however arises in the application of estoppel to the State where it is necessary to prevent fraud or manifest injustice.”

In the case of Ram Shiv Kumar v. State of Haryana,1981, where a municipal committee established a mandi, and for the purpose of providing the incentive for traders and also to develop the same, announced it to be immune from octroi duties forever. Years after, when the mandi was fully developed, the successor municipal commission applied to the state government to revoke the exemption which the state government did. Upholding the government’s move, the apex court went on to observe that: “it is now well settled by a catena of decisions that there can be no question of estoppel against the Government in the exercise of its legislative, sovereign or executive powers”

India Bakul Oil Industries & Anr Vs State Of Gujarat & Anr, 1987 is another respectable case on the point doctrine of executive necessity. In this case, the Gujarat Government, through a notice under Gujarat Sales Tax Act 1969, partially exempted certain categories of sales and purchases from paying the tax with the object of furthering the development of those industries in the rural areas. In pursuance of this, the appellants set up a plant for crushing groundnut seeds for the manufacturing of oil and claimed exemption for the same. However, the government rejected their application and made changes to the original notification that this kind of industry is already prevalent in the area. Though the words ‘executive necessity’ could not be found in the text of the judgment, the rationale is the same. The SC held that the government is not bound to grant the exemption.

Critical analysis

The doctrine of executive necessity provides a huge room and direct opportunities for abuse by the governmental authorities. Unwary private persons, who holds minimal power to that of the government, would be discouraged from entering contract with the government for the fear of its unpredictable future policies. This might also lead to some discriminatory practices through which the government could evade from its promise by citing some future exigency in order to escape from a promise owed to an individual(s).

Denning J. laid down “Crown cannot escape by saying that estoppels do not bind the Crown for that doctrine has long been exploded. Nor can the Crown escape by pressing in aid the doctrine of executive necessity that is the doctrine that the crown cannot fetter its executive action”.

The rule of law propounds that no one howsoever high or law is above the law. Everyone is subjected to law and the government is no exception. When a person believing in its promise has acted upon it to his detriment then the government cannot adduce future exercise of powers to escape liability. Contracts are made to be honoured, be it the government or private individuals everyone should be held accountable to the promise made by them, especially so when the other party has acted upon it. The doctrine of executive necessity that has arose as a defence against the doctrine of promissory estoppel against the government is categorically negated. There is no distinction between the government and private contracts when it comes to the liability. And the government cannot claim protection from the obligations arising out of the contract entered by it except in cases when it is backed up some statute or a provision of the Constitution.

Also, in the case of Union Of India & Ors vs Godfrey Philips India Ltd. Etc. 1985, the SC citied with approval J. Shah’s judgment in the case of Union of India v. Indo Afghan Agencies [1968] as follows:

“Under our constitutional set-up no person may be deprived of his right or liberty except in due course of and by authority of law; if a member of the Executive seeks to deprive a citizen of his right or liberty otherwise than in exercise of power derived from the law common or statute- the Courts will be competent to and indeed would be bound to protect the rights of the aggrieved citizens.”

Conclusion

The doctrine of executive necessity does not hold much ground in India. In many cases, this doctrine was kept at abeyance and the principles governing the doctrine of promissory estoppel were adhered to. The valid grounds for exemptions from promissory estoppel include duties imposed by statute or Constitution. Since the doctrine of promissory estoppel is an equitable principle, it must yield to equity. In other words, equity is a two-edged sword, that could be used both in the favour of public as well as private persons. If the loss suffered by the public because of strict adherence to the contractual obligations by the government outweighs the detriment suffered by a private individual when such a contract is ignored, the court would consider the public interest in priority, and thereby may hold that the government is not bound by its promises. A blanket ban on enforcement of all contracts that fetters exercises of its future executive powers as propounded by the doctrine of necessity does not hold value in itself except in cases where it is backed by a statue or when there is a greater impediment to the public concerned as whole.

Whenever the doctrine of executive necessity is invoked, precaution must be taken that it does not enable the government to give retrospective effect to change in its policies. For example, if the government has decided to remove an exemption from paying a tax, it should be applied only prospectively so that persons who have already entered into a contract and acted in to their determinant in pursuance of such promise will be saved.

Author: Leelavathi P from The Tamil Nadu Dr. Ambedkar Law University, School of Excellence in Law, Chennai.

Editor: Dhawal Srivastava from Rajiv Gandhi National University of Law, Patiala.

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