Contracts Management

Generally contract may be defined as an agreement which creates rights and obligations between the parties. These obligations and right s must be of such a nature that these can be claimed in the court of law.

According to Salmond, “A contract is an agreement creating and defining obligation between the parties.” Section 8(h) of the Indian Contract Act defines contract as an agreement which is enforceable by law.

From the above definitions of contract it is clear that a contract essentially consists of three elements:

  • An agreement
  • Obligation, and
  • Enforceability

An agreement involves a valid offer by one party a valid acceptance by the other party. Enforceability means contract must be legal in nature and which can be claimed in the court of law.

For example, X invites Y to a party and Y accepts the invitation, then it is only a social agreement and not a contract. On the other hand A agrees to sell his house to B for Rs. 5, 00,000. This is a contract.

Contract Elements

An agreement to be enforced in the court has to satisfy certain conditions. On satisfying these, the agreements become a contract, and those conditions become essentials of a valid contract. The essential elements of a contract are contained in the definition of contract given in sec. 10 of the contract Act. According to this Act, “all agreements are contracts if they are made by free consent of parties competent to contract for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.” The essential elements of a contract include:

  • Agreement: – There must be an agreement between the parties of a contract. It involves a valid offer by one party and a valid acceptance by the other party. Agreement is created by offer and acceptance. Therefore an agreement is = offer +acceptance. It is only by an agreement a contractual relation is established between the parties. For example, A sends a proposal to B to purchase a property for Rs. 10 lakhs and B accept the same, then this result into an agreement.
  • Lawful consideration: Consideration means something in return. An agreement is legally enforceable only when each of the parties to it give something and gets something. It may be past, present or future and must be real and lawful. A contract without consideration is not a contract at all. The consideration must be legal, moral and not against public policy.
  • Capacity of parties: The parties to an agreement must be capable of entering into a valid contract. According to sec. 11, the following persons are not competent to enter in to a contract.
    • Persons of unsound mind (Idiots, lunatic person etc.)
    • Persons disqualified by law to which they are subject.
    • Minors (Not completed the age of 18)
  • Free consent: For the formation of a contract one person must give his consent to another person. The consent thus obtained must be a free consent. A consent is said to be free if it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. If the consent is obtained by unfair means, the contract would be voidable.
  • Consensus ad idem: It means the two parties of the contract must agree upon the subject matter of the contract in the same manner and in the same sense. That is there must be identity of minds among the parties regarding the subject matter of the contract. For example, A has two houses one at Calicut and another at Palakkad. He has offered To sell one house to B. B accepts the offer thinking to purchase the house at Palakkad, while A, when he offers; he has his mind to sell the house at Calicut. So there is no consensus ad idem.
  • Lawful object: The object of an agreement must be lawful. It must not be illegal or immoral or opposed to public policy. If it is unlawful, the agreement becomes void.
  • Not declared to be void: There are certain agreements which have been expressly declared void by the law. It includes
    • Wagering agreement
    • Agreement in restraint to marriage
    • Agreement in restraint of trade etc.

Thus an agreement made by parties should not fall in the above category.

  • Certainty and possibility of performance: – The terms of the contract must be precise and certain. They should not be vague. The terms of agreement must be capable of performance. For example A agrees to sell one of his houses. A has four houses. Here the terms of agreement are uncertain and the agreement is void.
  • An intention to create legal relationship:- There should be an intention between the parties to create a legal relationship. Mere informal promise is not to be enforced. Social agreements are not to be enforced as they do not create any legal obligations. An oral contract is a valid contract except in those cases where writing, registration etc. is required by some statute.
  • Parties – The names and addresses of all the contracting parties should be clearly stated.
  • Term of contract – The length of the contract should be stated and it should also be noted whether there are any options to continue the contract. For example, ‘This agreement will continue for another year unless otherwise notified to [other party] by 31 January each year’.
  • Limitation of liability – This section caps the liability of either party to the contract. For example, ‘Neither party shall have any liability to the other party for a claim of loss of profits…’. In an ideal world both parties would be seeking to have no liability to the other side. However, in a commercial context this is unlikely to be agreed and so both parties should try and limit their liability during the negotiation stage to appropriate levels. It is worth noting that there are statutes in force (discussed below) that forbid exclusion of liability in certain circumstances.
  • Termination provisions – The circumstances under which the parties can terminate the contract should be stated clearly. The procedure for giving notice to the other party should be in the contract. For example, ‘This agreement can be terminated by either party giving to the other not less than three months written notice…’.
  • Change of Control – During the course of a contract one party may change the structure of their company. In these circumstances the other party may wish to terminate the contract, for example if the first party transfers a controlling interest to a competitor of the other party. The procedure for this situation should be in the contract.
  • Dispute Resolution – The procedure to be followed if the parties have a dispute should be included. For example, if there is an option for arbitration or mediation where the issue cannot be resolved through internal escalation.
  • Confidentiality – Some contracts deal with commercially sensitive information and the parties are likely to want to keep this information confidential. There should be confidentiality clauses drafted in the contract which identify the information being protected and the circumstances in which it can be used or disclosed.
  • Intellectual Property Rights – Many commercial contracts include a clause stating who will own the intellectual property rights to any products provided under the contracts. This clause should specifically state who owns such rights. Particular attention should be given to the ownership of intellectual property rights in relation to products created specifically for or in connection with the contract.
  • Warranties – It is common for the party providing goods or services under a contract to provide certain warranties in relation to the delivery of the goods or services. For example, if the contract is for provision of a licence the provider should warrant that it has the necessary rights to grant the licence. Warranties give the other party a contractual right to sue for damages if there is a breach of the warranty.
  • Indemnity – Indemnity clauses are an express obligation to compensate the indemnified party by making a money payment for some defined loss or damage. They provide for an immediate right to compensation, without the need for a lengthy dispute as to the circumstances giving rise to the specified loss or damage. For this reason careful attention should be given to the agreement of any indemnities. An example of a typical indemnity is in a software contract under which the supplier indemnifies the customer against any claims made by a third party that the normal use of the software is infringing the rights of the third party.
  • Force Majeure – This clause should cover situations where performance of the contract is impossible through no fault of either party. For example, if there is a natural disaster or civil unrest.
  • Assignation / Assignment – If there is an option for one party to transfer their contractual rights and responsibilities to another party this should be set out in the contract along with the procedure to be followed. If there is no right to assign the contract this should also be noted.

Valid contract

A valid contract is a contract that the law will enforce and creates legal rights and obligations. A contract valid ab initio (from the beginning) contains all the three essential elements of formation:

  • agreement (offer and acceptance);
  • intention (to be bound by the agreement);
  • consideration (for example, the promise to pay for goods or services received).

In addition, a valid contract may have to be in writing to be legally valid (although most contracts may be oral, or a combination of oral and written words).

Void contract

A void contract lacks legal validity and does not create legal rights or obligations. A contract that lacks one or more of the essential formation elements is void ab initio (from the beginning). In other words, the law says that it is not, or never was, a valid contract.

 Voidable contract

A voidable contract is a valid contract that contains some defect in substance or in its manner of formation that allows one party (or sometimes both parties) to rescind it. A voidable contract remains valid and can create legal rights and obligations until it is rescinded. The party with the right to rescind may lose that right by affirmative conduct, or undue delay, or where the rights of an innocent third party may be harmed.

Unenforceable contract

An unenforceable contract is an otherwise valid contract that contains some substantive, technical or procedural defect. Most commonly, such a contract is illegal, either in its formation or its performance, as it offends either public policy (the common law) or some statute. As a general rule, the law will not allow the enforcement of such a contract Alternatively, the law may determine that such is a contract is void (rather than unenforceable) with the consequential loss of contractual rights.

Formal contract

A formal contract is wholly in writing, usually in the form of a deed, and does not require consideration. A promise (or term) of a contract made by deed is called a covenant. A deed can be unilateral (that is, made by only one party) and this is often called a deed poll. A deed made by two or more parties is called an indenture. Some types of contracts must be in writing and must be made by deed to be effective (for example, a conveyance of non-Torrens title land).

Simple contract

A simple contract may be oral or in writing (or a combination of both). Simple contracts are made between two or more parties and require consideration.

Contract Management

Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. The personnel involved in contract administration required to negotiate, support and manage effective contracts are often expensive to train and retain. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.

Common commercial contracts include employment letters, sales invoices, purchase orders, and utility contracts. Complex contracts are often necessary for construction projects, goods or services that are highly regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements, outsourcing and international trade. Most larger contracts require the effective use of contract management software to aid administration among multiple parties.

Contract Management can be divided into three phases namely

  • pre- contract phase
  • contract execution phase
  • post award phase (often referred to as contract compliance/governance)

During the post-award phase, it is important to ensure that contract conditions and terms are met, but it is also critical to take a closer look for items such as unrecorded liabilities, under-reported revenue or overpayments. If these items are overlooked, margin may be negatively impacted. A contract compliance audit will often commence with an opportunity review to identify the highest risk areas. Having a dedicated contract compliance (and/or governance) program in place has been shown to result in a typical recovery of 2-4% and sometimes as high as 20%.

Current thinking about contract management in complex relationships is shifting from a compliance “management” to a “governance” perspective, with the focus on creating a governance structure in which the parties have a vested interest in managing what are often highly complex contractual arrangements in a more collaborative, aligned, flexible, and credible way. In 1979, Nobel laureate Oliver Williamson wrote that the governance structure is the “framework within which the integrity of a transaction is decided.” He further added that “because contracts are varied and complex, governance structures vary with the nature of the transaction.”

A collaborative governance framework has four components:

  • A relationship management structure (how the parties work together to make both day to day operational decisions as well as strategic decisions)
  • A joint performance and transformation management process designed to track the overall performance of the partnership
  • An exit management plan as a controlling mechanism to encourage the organizations to make ethical, proactive changes for the mutual benefit of all the parties.
  • Compliance to special concerns and regulations, which include the more traditional components of contract compliance

It is the process of systematically and efficiently managing contract creation, execution and analysis for maximizing operational and financial performance and minimizing risk. It consists of all administrative activities associated with handling of contracts, like

  • invitation to bid
  • bid evaluation
  • award of contract
  • contract implementation
  • measurement of work completed
  • computation of payments

It may also include monitoring contract, adding any change or modification in the contract, ensuring both parties meet or exceed each other’s expectations, and actively interacting with the contractor to achieve the contract’s objective(s).

Public Procurement in India is a State subject, and thereby the Regulatory Framework governing the public procurement varies from State to State. ‘General Financial Rules’ (GFR), framed by the central financial ministry acts as the guideline for public procurement, but has only subordinate legislation status.

Various states have adopted their own Legal framework, based on the best practices. Procurement funded by external donors (World Bank, ADB etc) follows guidelines by the donor in this regard.

Purchase & Tender procedure

Government purchases are done through tendering process.

Fundamental Principle of Public buying

  • Procurement of goods in Public Interest for
  • Efficiency
  • Economy
  • Transparency
  • Fair & Equitable treatment of suppliers
  • Promotion of Competition

GFR: Rule 145

  • Purchase of goods without quotation
  • Value up to 15000/-
  • Each occasion

Certificate to be recorded by the competent Authority –

“I,—— am personally satisfied that these goods purchased are of the requisite quality and specification and have been purchased from a reliable supplier at a reasonable price.”

GFR: Rule 146

  • Purchase of goods by Purchase Committee >15000/- and up to 1Lac on each occasion
  • Three members Committee as decided by the HoD

Committee’s responsibilities

  • Market Survey
  • Reasonableness of Rates
  • Quality & Specifications
  • Identify appropriate supplier
  • Joint Certificate by the Committee

Purchase of goods by obtaining bids(Tendering)

Ministry / Departments of Govt. of India have been delegated full powers to make their own arrangements for procurement of goods

Rule 141 of GFR says about Central Purchase Organisation (e.g. DGS&D) RATE CONTRACT

Types of Tender

In broader terms there are three types of tender : –

  • Open Tender
  • Tender value >= 25 Lac
  • Ad in Indian Trade Journal(ITJ)
  • At least one National Daily having wide circulation
  • Publish at own website & NIC website
  • NIT to Indian Embassies abroad as well as foreign embassies in India
  • Three weeks time from date of publication of bid
  • Limited Tender
  • Value up to 25 Lac
  • Bid document should be sent to Regd. Suppliers by Speed Post/Regd Post/Courier/ e-mail
  • of supplier firms in Ltd. Tender should be more than three
  • Web based publicity

Please note sufficient time should be given in Ltd. Tender

  • Single Tender
  • If only a particular firm is the manufacturer
  • Emergent need to procure from a particular source
  • Technical reason to be recorded (standardization of machinery – HP, SONY etc. )
  • Note that single response to an open bid can’t be termed as Single Tender

Standard Bid Document

It is an instruction to bidder and has conditions of contract, schedule of requirement, specifications and allied technical details, Price Schedule. It also has contract form and other standard forms.

Earnest Money Deposit (EMD)

It safeguard the interest of Deptt (withdrawal / alter the bid by bidder). It is usually of 2 % to 5% of estimated project value and can be DD or FDR or Banker Cheque or bank guarantee. EMD is returned for unsuccessful bidders.

Process at a glance

  • Estimate (Qty. and Amount)
  • EOI – Expression of Interest
  • RFP/RFQ – Request for Proposal / Quotation
  • PBC – Pre Bid Conference
  • NIT – Notice Inviting Tender
  • EMD – Earnest Money Deposit
  • TOC – Tender Opening Committee (Tech)

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