State of U.P. & Ors. v. M/S Lalta Prasad Vaish and Sons (2025)

Introduction  

The case State of U.P. & Ors. v. M/S Lalta Prasad Vaish and Sons (2025) is a landmark Supreme Court judgment that examines the extent of constitutional obligations on the State in contractual dealings. It addresses whether government actions in contracts must comply with the principles of fairness, reasonableness, and non-arbitrariness under Article 14 of the Constitution, reaffirming that the State is not an ordinary contracting party but a public authority bound by constitutional mandates. 

Facts of the Case 

• The dispute in this matter originated from a contractual agreement between the Government of Uttar Pradesh and the contractor firm, M/S Lalta Prasad Vaish and Sons. The firm was awarded a government contract concerning supply and execution of certain works. 
• Initially, the parties entered into the contract on mutually agreed terms. However, disagreements soon emerged regarding the performance of contractual obligations and settlement of payments. 
• The contractor alleged that despite fulfilling their part of the obligations under the contract, the government authorities acted in a manner that was arbitrary and unfair, causing losses to the firm. The firm accused the State of delaying payments, adopting discriminatory practices, and refusing to honour its contractual commitments.  
• In response, the State defended itself by arguing that contractual obligations are distinct from constitutional guarantees and that the matter fell strictly within the domain of contract law rather than constitutional scrutiny. 
• The contractor challenged this reasoning by asserting that since the State is not an ordinary party to a contract but a public authority bound by constitutional obligations, its actions—even in contractual dealings—must satisfy the tests of fairness, reasonableness, and non-arbitrariness under Article 14 of the Constitution of India.

Issues Raised 

• Whether the State and its instrumentalities can act like private parties in contractual matters, or are they bound by constitutional principles of fairness and reasonableness? 
• Whether Article 14 of the Constitution extends to protect individuals and contractors against arbitrary actions of the State in purely contractual dealings. 
• Whether the actions of the State authorities in withholding payments and allegedly discriminating against the contractor were unconstitutional. 
• To what extent can the judiciary interfere in contractual disputes involving the government on grounds of arbitrariness and violation of fundamental rights?

Court’s Observations

• The Court observed detailed examination of the intersection between constitutional law and contract law. Its reasoning revolved around the principle that when the State enters into contracts, it cannot shed its character as a constitutional authority.  
• Unlike private parties, the State is bound not only by contractual obligations but also by constitutional mandates that require fairness, equality, and reasonableness in its dealings. 
  • Doctrine of Fairness in State Action 
    • The Court reiterated that arbitrariness is antithetical to equality. Article 14 of the Constitution ensures that no State action can be arbitrary, whether in legislative, administrative, or contractual spheres. Thus, when the government deals with private individuals in contracts, it is duty-bound to act in a manner that is transparent, just, and reasonable. 
  • Distinction between Private Parties and the State 
    • The Court stressed that while private individuals may act in self-interest, the State cannot. The State carries with it an obligation of public trust, which means it must act to promote fairness and equality, even in commercial dealings. The government, therefore, cannot adopt practices that would otherwise be permissible for private contracting parties if such practices are arbitrary or discriminatory. 
  • Judicial Review of Government Contracts 
    •  The Court observed that ordinarily, disputes relating to contracts are to be resolved according to the terms of the contract and the principles of contract law. However, when allegations of arbitrariness, mala fides, or violation of constitutional principles are raised, the Court has the power to scrutinize State actions through judicial review. This jurisdiction flows from the need to ensure that the State, as a constitutional authority, does not abuse its power. 
  • Application of Article 14 to Contractual Matters 
    • The Court rejected the State’s argument that constitutional guarantees have no place in contractual dealings. It observed that the doctrine of equality before law applies to all spheres of State action. Hence, if the State unfairly withholds payments or discriminates between contractors, such conduct would be violative of Article 14, even if the dispute arises from a contract. 
  • On the Role of the State as a Model Litigant 
    • The Court emphasized that the government should behave as a model litigant and set an example of fairness and honesty in contractual and legal disputes. It noted that the State must not take technical or unfair advantages over citizens, particularly contractors who depend on timely and fair execution of agreements for their livelihood.

Decision of the Court 

Based on these observations, the Court concluded that: 

• The State of U.P. had acted in an arbitrary and unreasonable manner in its dealings with M/S Lalta Prasad Vaish and Sons. 
• Such conduct amounted to a violation of Article 14, since the State is constitutionally obliged to act fairly even in contractual matters. 
• The Court reaffirmed that constitutional principles override contractual terms when State action is under scrutiny. 
• The authorities were directed to remedy the arbitrariness by settling the dues fairly and ensuring that no discrimination is exercised against the contractor. 
• The judgment thus strengthened the doctrine that the State is not an ordinary contracting party and that its actions—even in commercial or contractual engagements—are subject to constitutional limitations.