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Vikram Industries holds a contract to supply materials to a government department. The contract includes a clause empowering the government to cancel the contract without notice and without assigning any reason, on the grounds of national interest. The company challenges this as unreasonable. Examining the principle of law, which standard must the government satisfy to sustain such a cancellation?

Although the contract permits cancellation on national interest grounds, the government must exercise this power in good faith and for genuine reasons, not arbitrarily. Courts may review whether the decision was reasonable and made in genuine national interest.

  1. AThe government has absolute discretion; no judicial review applies to national interest decisions
  2. BThe government must demonstrate that cancellation was made in good faith, for genuine national interest, and not arbitrarily or capriciouslyCorrect
  3. CThe government must obtain prior approval from Parliament before cancelling any contract
  4. DThe government must compensate the company for lost profits regardless of the reason for cancellation

Explanation

Even when contracts contain broad cancellation clauses on grounds of national interest, courts apply a reasonableness test to ensure the power is exercised in good faith and not arbitrarily. The principle of judicial review prevents misuse of unfettered discretion. The government does not have absolute immunity, nor is prior Parliamentary approval required for routine contract cancellation, and compensation depends on contract terms and circumstances.

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