Overview of Contract Management & Contract Law

Dr S N RaoDirector, ESCI

Contract

A Promise enforceable by Law

Offer +Acceptance (Legally binding)

To be legally binding as a contract, a promise must be exchanged for adequate consideration. i.e., benefit a party receives

Contract Law

CONTRACTS ARE GOVERNED BY

Indian contract Act 1872 ( as amended by Act 1 of 1997)

Deals mainly with general and limiting principles such as – formation, Validity, performance or breach and remedies therefore.Not a complete code on contract since statutes dealing with negotiable instruments Act 1881, the Indian Arbitration & Conciliation Act 1996, the sale of Goods Act 1930 are not covered by the Contract Act

WHAT IS AN AGREEMENT

“Every promise and every set of promises forming the consideration for each other is an agreement

” Section 2 (e) of the Indian Contract Act.

AGREEMENT AND CONTRACT

An agreement which is enforceable by Law is considered to be a Contract – Section 2 (h) of the Indian Contract Act.

CONTRACTING IN GOVERNMENT

Government is, by far, the largest contractor in any Country, so too in India . Supply products (purchases ) and services (Consultancy, labour etc.,)

WHAT IS THE SIGNIFICANCE OF GOVT. CONTRACTS ?

Contract between private parties is absolutely binding and valid if section 10 of the Indian Contract Act 1872 is satisfied.

SECTION-10

“All agreements are contracts if they are made by the 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______”

Contracts entered into between private persons and the Government are governed by Article 299 of Constitution of India.

ARTICLE 299

“All contracts made in exercise of the executive power of the Union or the State shall be expressed to be made by the President or by the Governor of the State as the case may be and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by such person and in such manners as he may direct or authorise”

Neither the President nor the Governor shall be personally liable_______”

Contract Management

Pre – Award Stage (Tenders)

Award of Contract (Agreement)

Performance of the Contract (Execution Process)

Post Completion of Stage

Pre – Award Stage (Tenders)

GENERAL CONDITIONS OF CONTRACT

Formulated in advance

Not individually negotiated

Any ambiguity in the interpretation of clauses is likely to lead to litigation, loss of resultant goodwill and waste of time.

ESSENTIAL CHARACTERISTICS OF A CONTRACT

The terms of the contract must be clear and precise.

Time is the essence of contracts

The terms of contract should be enforced strictly. This responsibility rests with both parties.

Revision of rates in accepted agreements during the currency of such agreement is prohibited.

CONTRACT DOCUMENT CONTAINS

NOTICE INVITING TENDERS

INFORMATION & INSTRUCTION TO TENDERERS

GENERAL CONDITIONS OF CONTRACT

SPECIAL CONDITIONS OF CONTRACT

SCHEDULE OF QUANTITIES & COST

TENDER DRAWING

SPECIFICATION OF WORKS

FORMS FOR BANK GUARANTEE IN RESPECT OF EARNEST MONEY

PERFORMANCE GUARANTEE

MOBILISATION ADVANCE

CONTRACT CONDITIONS THAT HAVE MONETARY IMPLICATIONS

EXTENSION OF TIME LIQUIDATED DAMAGES PENALITIES PAYMENT TERMS LIKE MOBILISATION

ADVANCE, SECURITY DEPOSIT, TIME LIMIT WITHIN WHICH BILLS ARE TO BE PAID, STAGES OF PAYMENT

ARBITRATION CLAUSE MACHINERY AND MATERIALS ISSUED BY

CLIENT WHETHER FREE OR AT FIXED COST ESCALATION LIMITATIONS OF LIABILITIES

MODES OF INVITING TENDERS

NEGOTIATED TENDERS

LIMITED COMPETITION

OPEN COMPETITION

REQUIREMENTS TO BE FULFILLED BEFORE INVITING TENDERS

SANCTION TO BE OBTAINED

URGENT WORKS WITH NO TIME

SPLITTING OF WORKS TO BE DISCOURAGED

TENDER DOCUMENTS TO BE READY BEFORE INVITING TENDERS

NOTICE INVITING TENDERS

STANDARD FORM OF TENDER

SCHEDULE OF QUANTITIES OF WORK

COMPLETE SET OF DRAWINGS

COMPLETE SET OF SPECIFICATIONS

ESSENTIAL ARCHITECTURAL

DRAWINGS

INFORMATION TO BE PROVIDED IN NOTICE

QUALIFICATIONS NAME EMD SECURITY DEPOSIT TIME LIMIT COST MODE OF SUBMISSION DATE, TIME AND PLACE OF OPENING

TENDERS

PREPARATION AND SUBMISSION OF TENDER

PURCHASE OF BLANK TENDER FORM STUDY OF TENDER DRAWINGS VISIT TO THE SITE OF WORK ROUGH VERIFICATION ANALYSIS OF RATES DECIDING THE PERCENTAGE WORKING OUT THE LUMPSUM CHECKING OUT THE RATES COPIES OF DOCUMENTS

IRREGULARITY IN SUBMISSION OF TENDER

UNSIGNED TENDER MAY BE BINDING

ESTIMATES AS OFFERS ARE BINDING

PAYMENT OF EARNEST MONEY

WITHDRAWAL OF TENDER PRIOR TO ITS

ACCEPTANCE

PRE QUALIFICATION OF TENDERS

Award of Contract (Agreement)

All Agreements are Contracts if they are made by

Free Consent

Party's Competent to Contract

Lawful Consideration

Lawful Objective

Contents of Contract Agreement

Scope of Work

Schedule of list of work or items of work

General Conditions

Special Conditions

Specifications

Notice of Tender, Correspondence to acceptance and letter of acceptance

Types of Contracts

Lumpsum

Item rate

Percentage rate

BOT family Contract

Design & Build

Turnkey & EPC

As per Section 10 of Indian Contract Act:

All agreements are contracts if they are

made by the 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.

VALID CONTRACT

Performance of the Contract (Execution Process)

Is method by which the sense or meaning of word is understood.

Authentic Interpretation

“Customary” or “Usual” interpretation

“Close”, “Strict” or Literal interpretation

“Extensive” or “Liberal” interpretation

INTERPRETATION WITHOUT PROPER MEANING LEADS TO DISPUTES

INTERPRETATION

Is failure to perform an obligation arising out of the contract.

• Total Breach

• Partial Breach

• Anticipatory Breach

BREACH OF CONTRACT

• Abandonment or total failure to complete either to start with or midway in execution.

• Delay in completion of the works

• Defective work

COMMONEST BREACHES OF CONTRACT

• Failure to handover possession of the site to the Contractor

• Delay in supply of working drawings, details, designs and decisions

• Delay in supply of materials

• Ordering suspension or stoppage of work or entering with the progress of work in any manner.

• Failure / Delay in making payments of R.A. Bills, extra items, excess quantities, including settlement of final bill.

Contd…

BREACH BY THE OWNER

• Failure/Delay in nominating specialist subcontractors and suppliers.

• Delay caused by other agencies employed at the site of work by the owner in addition to the contractor.

• Wrongful deduction of liquidated damages / penalty.

• Termination of contract wrongfully and illegally.

• Failure / Delay in appointing architect or an Engineer or in filling the vacancy.

• Abandonment or total failure to complete

• Delay in completion

• Defective design, materials and / or workmanship

• Failure to submit planned programme

• Unauthorised sub-contracting

Contd…

BREACHES BY CONTRACTOR

• Failure to insure as required

• Failure to employ qualified engineers

• Failure to maintain and submit labour reports

• Payment of unauthorised wages

• Failure to take safety precautions

• Causing damage to property of work of other agencies.

Contractor to do work and supply materials implicitly undertakes:

• To do work in workman like manner that is with care & skill

• To use the material of good quality and where specifications of quality are agreed this will mean good of their expressed kind.

• Both the work and material will be reasonably fit for the purpose for which they are required.

CONTRACTOR’S IMPLIED CONDITIONS

Remedies to Breach of Cotract

• Every Breach of Contract entitles the injured party to damages for the loss he/her suffered.

• The injured party must be entitled to claim the value of the work done in which case he is said to sue upon a “Quantum Merit”.

• The injured party may obtain an order for specific performance of the contract or an injunction to restrain its breach.

• Standard Form Contracts include provisions of forfeiture which take effect upon a breach of contract.

REMEDIES OF BREACH OF CONTRACT

PROVISIONS OF LAW – CONSEQUENCES OF BREACH OF

CONTRACT

Indian Contract Act – Chapter VI

Sec.73 - Unliquidated

Damages

Sec. 74 - Liquidated Damages

Sec. 75 - Compensation for any

damage which a

person who rightfully

rescinds the Contract.

Damages

Damages are claimed under:

Breach of Contract

Force measure

Quantum Meruit

• General Damage – proximity & Remote

• Special Damage

• Nominal Damage

• Exemplary or vindictive Damage

DAMAGES ARE CLASSIFIED AS UNDER

-“An absolute necessity or compulsion, circumstances beyond one’s control”

• Natural Calamities

• Civil War

• Strikes

FORCE MAJEURE

Force Majeure

The contract may excuse non-performance of the Contract (part or Whole) where performance is rendered impossible by specified unavoidable causes:“Act of God”“The Queen’s enemies”“Vis Major”“Force Majeure”

Quantum Meruit

work done or Service rendered by one party

And the fruits of the benefits enjoyed by the other

party

Compensation has to be paid to the party rendered

the service, even no rate is fixed in the contract.

• It must be proved that a contract exists

• It must be proved that defaulting party was under an obligation to perform that part which is alleged to have been breached.

• The party making the allegation should prove there is a breach of contract or on grounds of any audition of contract.

• It must be proved that the breach of contract caused “loss or damage” to the injured party.

Contd…

ESSENTIALS CONDITIONS TO BE FULFILLED BY INJURED PARTY FOR

ENTITLEMENT TO DAMAGES

• It must be further proved that loss or damage caused by the breach of contract naturally arose in the usual course of things from such breach.

• The fact that the parties to the contract knew, when they made the contract, such loss or damage to be likely to result from the breach of it must be established.

• It has further to be proved that the loss or damage sustained by reason of breach is neither remote nor indirect.

• The injured party has to establish that he did take precautions to mitigate the losses to the maximum extent possible

• Depriving the Contractor of the right to his profits upon work which was never carried out.

• Reduction in Contractors profit or increase in cost of work done due to Breach of Contract.

DAMAGE ASSESSMENT

DELAY IN COMPLETION OR TERMINATION OF CONTRACT MAJORITY OF CASES LEADING TO DISPUTES ARE:

• Completion of work getting delayed due to breach of contract by owner.

• Contractor treats himself discharged from further performance due to breach of serious nature.

• Owner terminates contract by granting – non-granting extension of time illegally.

• The Contractor completes or pending completion of the work commences legal proceedings for recovery of damages caused for delay in completion.

• Loss of overheads and profit

• Direct losses on account of idle labour,

machinery and equipment reducing

productivity.

• Increased cost of materials and labour.

CONTRACTOR ENTITLEMENT TO DAMAGES DUE TO BREACH OF

CONTRACT

H.O profit percentage x ___Contract Sum_______ x Period of Delay in weeks

100 Contract period in weeks

HUDSON FORMULA FOR LOSSES DUE TO DELAY

Arbitration is the settlement of dispute by the decision not of a regular and ordinary court of Law but of one or more persons called arbitrators.

Advantages – Efficient, Expeditious, Economical substitute to court actions.

Disadvantages – Legal principles may be violated, rules of evidence may be waived, injustice.

ARBITRATION Arbitration & Conciliation Act 1996

• Department – Contractor Syndrome

• Not understanding even genuine grievances

• Claims as a matte of extra profit – not genuine

CONTRACT MANAGEMENT

FUNDAMENTAL PRICIPLES TO BE FOLLOWED:

Ensuring good workmanship by proper supervision

Keeping proper account of materials used.

Ensuring scheduled inspections .

Recording measurements and obtain signature of the contractor.

Carrying out prescribed test checks as stipulated.

Ensuring adherence to specifications and drawings

EXTENSION OF COMPLETION PERIOD

Granting of extension of time is however a matter of discretion. While so doing care should be taken to ensure that the contract was not placed on time preference terms.

Extension with or without financial implications.

VARIATIONS IN QUANTITIES

World Bank conditions : For a particular item if difference is more than 25% provided the change exceeds 1% of initial contract price, the Engineer shall adjust the rate to allow for the change.

If the quantity exceeds the above, it will be referred to the Employer. The rate in BOQ shall be used. If it does not correspond to any item in BOQ, the contractor shall offer the quotation. Finally mutually agreed rate is paid.

Supplemental rates -as per agreement conditions.

DENIAL CLAUSES

LIQUIDATED DAMAGES : Maximum amount of LD for the whole of the works is 10% of final contract price.

DETERMINATION OF CONTRACTS

Cl. 60 (a) of PS to APSS

Cl. 61 of PS to APSS

World Bank - Fundamental breach of contract

- is almost like Cl. 61

Post Completion of Stage

Disputes arising out - Dispute Resolution

THAN Q