You are on page 1of 56

WORKSHOP ON

CONTRACT
MANAGEMENT &
CONTRACTS

Vakils Associated
B-3, Mayfair, S.P.Road , Secunderabad
Ph.No. 040-2784 7110 / 2781 9839
Email- invox@vakilsassocaited.com

Introduction - Contract and


Contract Management
Contract

and Contract Management go


hand and glove
Contract is a document which records
what has been agreed
Effective Contract Management assists
in identifying, monitoring and managing
all risks and opportunities during life of
a contract

Effective Contract
Management
Small

or large, simple or complex, all


contracts require effective contract
management mechanisms to assist in
smooth closure and retort incase of an
untoward incident.
A person handling contact should have
overall understanding of requirements,
commercials, risk mitigation aspects of
a projects.

Contract Mangement
Systematic
Approach

Effective
Process

1. Efficient People
2. Robust
Procedures

Minimum
Risks

Contract
Management

1. Proper
Technology
2. Repository

Maximum
Benefits

MANAGEMENT OF A CONTRACT FROM ITS INCEPTION TO


CLOSURE

Effective Contract
Managment
Genesis

Retrieva
l

Effective Contract Management

Closure

Contracts
Everyone

deals with contracts sooner or

later.

Any

person who indirectly deals with a


contract requires working knowledge &
understanding of basic principles of
contract.

Department:

Commercial,

Eg. Purchase, Stores,


SCM,
Procurement,

Agreement and Contract


Contract = A contract should be meeting of the minds
(consensus-ad-idem)
All Contracts are agreements but all agreements
are not contracts.

You promise to gift your wife a diamond necklace and she


accepts.

You promise to son a motorbike if he gets first and he


accepts.

These are social or domestic agreements not a contracts


as there is no legal obligation.
AgreeConside

Offer

Accept

Promise

ration

ment

Enforceab
le

Contract

Essentials of Contract
Offer
Acceptance
Consideration
Free

consent.
Capacity to contract
Lawful object
Certainty and possibility of performance
Agreements not declared to be void

OFFER AND ACCEPTANCE


X writes a letter to Y , will you buy my house for 20 lakhs? Y accepts the offer
and communicates with X.
X writes a letter to Y , will you buy my house for 20 lakh? Y negotiates to Rs. 15
lakhs. Not an offer, its a counter offer. X need not accept such counter offer
X writes a letter to Y, I offer to sell my house Rs.20 lakh if I do not receive your
reply by Monday I will assume you have accepted the offer.

CONSIDERATION
No consideration No contract
Exceptions gift and inadequate consideration
A out of natural love & affection promises to gifts his father a house.
Consideration love & affection
A agrees to sell his house of Rs.10 lakhs for Rs. 5 Lakhs. Consideration is
inadequate. If A out of his free will sells his house for Rs.5 lakhs contract valid
else may be considered void.

FREE CONSENT
Y threatens to kill X if he refuses to sell his house to him .
X, a devotee gifted her property to spiritual guru ,Y, to secure benefits to her soul

LAWFUL

OBJECT AND CONSIDERATION


X promises to pay Y Rs 50000 if he secures employment for him
in Govt sector.

AGREEMENT

IN RESTRAINT TO TRADE
X a seller of imitation jewellery in England sold his business to Y
and agreed not to deal for two years-in imitation jewellery-in real
jewellery in certain foreign countries
X after selling the goodwill of his business to Y promises not to
carry the similar business anywhere in the world.

AGREEMENT

TO DO IMPOSSIBLITY
On 1.9.2015, NSRC agrees supply provide information to Iraq.
There is an embargo A dies on 30.09.2015. Impossibility of contract

Drafting Techniques
Use

clear and simple language


Be crisp & precise
Fair & Transparent terms
Avoid jargon (eg Nothwithstanding the above, subject to..)
Logically sequence clauses of the contract
Dont assume. What is missing? Look for
possible conflicts
Consider "what if" scenario
Answer all the Ws (who, what, when & where)
Example: Purchase of Lazer Scanner

Few Important Terms


Earnest

Money,
Delivery Schedule,
Payment terms,
Performance Bank Guarantee/ Letter of Credit,
Pre-despatch inspection,
Liquidated Damages/Penalty for the delayed
supplies and
Arbitration,
All these clauses are important for safeguarding the
interest of the purchaser and non inclusion of the above
clauses will have indirect financial implications in the
execution of the contracts.

Incoterms International
Transactions
Contracts involving international transportation often
contain abbreviated trade terms that describe
matters such as the time and place of delivery,
payment, passing of title of goods, risk of loss
shifts from the seller to the buyer and who
pays the costs of freight and insurance. The
most commonly known trade terms are called
Incoterms, published by the International Chamber of
Commerce (ICC).
The parties to a contract must expressly indicate the
governing law of their terms.

Decoding Important
Incoterms
Delivery

Schedule

EXW: Ex-works
Ex Works (EXW) is an international trade term that describes an agreement in which the seller is required to make goods ready for pickup at
his or her own place of business. All other transportation costs and risks are assumed by the buyer.

CIF Cost, Insurance & Freight


Cost, Insurance and Freight (CIF) is a trade term requiring the seller to arrange for the carriage of goods by sea to a
port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.
FOB Free on Board
A trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfills its
obligations to deliver when the goods have passed over the ship's rail.
When used in trade terms, the word "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier.

CIF vs. FOB


With a FOBagreement, the seller arranges for the transport of goods to a designated port or other point of origin. Once
the seller releases the goods to the buyer, when the goods cross the rail of the ship, the delivery is considered
accomplished. Unlike CIF, however, the point at which responsibility shifts from the seller to the buyer occurs when the
shipment reaches the point of origin. With a CIF agreement, the seller assumes responsibility and pays costs until the
goods reach the buyer's chosen port of destination. Furthermore, unlike CIF, FOB contracts are not limited to sea
freight, and may also be used for inland and air shipments.

Few Important Terms


Earnest

Money,
Delivery Schedule,
Payment terms,
Performance Bank Guarantee/ Letter of Credit,
Pre-despatch inspection,
Liquidated Damages/Penalty for the delayed
supplies and
Arbitration,
All these clauses are important for safeguarding the
interest of the purchaser and non inclusion of the above
clauses will have indirect financial implications in the
execution of the contracts.

Bank Guarantee & Letter


of Credit
Why ?

for security

An underlying contract which is used in


Inland and International trade Bank Guarantee
Letter of Credit
Bank Guarantee is not the same as Letter
of Credit.

Working of BG

ISSUING BANK

Stage 4Recovery

St
a

Custom
er

St
a
ge

ge

2In
vo
3ca
Pa
tio
ym
n
en
tb
y
Ba
nk

Stage 41- Non-performance/


Breach

Beneficiar
y

Bank Guarantee(BG)

Aguarantee from a banker ensuring that the liabilities


of a debtor (Supplier) will be met, if it fails any
contractual obligation.

Bank Guarantee is an independent and distinct


contract between the Bank and the beneficiary
and is not qualified by the underlying transaction

As the bank unconditionally and unequivocally promised


to pay, on demand, various Courts held that the liability
of the bank was absolute and unconditional and could
not be circumvented in any manner.

Cardinal Principles for Invocation of Bank Guarantee &


Types of BG

The bank is bound to honour the guarantee irrespective of any dispute, subject to
two exceptions :
(i) a fraud or
(ii) encashment resulting in irretrievable harm or injustice
Types of BGs
()
()
()
()
()
()

Performance Guarantees
Financial Guarantees
Bid Bond Guarantees
Advance Payment Guarantees
Shipping Guarantees

LC - Letter of Credit

A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the
seller's or
exporter's bank (called the accepting bank, negotiating bank, or paying bank).A letter of credit
guarantees
payment of a specified sum in a specified currency, provided the seller meets precisely-defined
conditions
and submits the prescribed documents within a fixed timeframe.
Elements of a Letter of Credit
A

payment undertaking given by a bank (issuing bank)

On
To

behalf of a buyer (applicant)

pay a seller (beneficiary) for a given amount of money

On

presentation of specified documents representing the supply of goods

Within

specified time limits

Documents

must conform to terms and conditions set out in the letter of credit

Documents

to be presented at a specified place

Opening
Bank

4- L/C

Beneficiar
y/
Exporter

3L/C
8- Documents
9- Payment

7Payment

5 - Goods

11 - Debit

10 Documents

2- L/C Application

Applicant
/ Importer

6 - Documents

1 - Contract

Advising
Bank

Distinction
BANK
GUARANTEE

LETTER OF CREDIT

For invocation breach/


non-performance
Primary responsibility is
on client

No invocation its a
direct undertaking by
banker and should be
paid
Primary responsibility is
on banker

Government Contracts
Art

298 and 299 of Constitution of India

Tender

is a compulsory process for


entering into contracts

Tenders Comply

Transparent & Not Arbitrary

- General Financial Rules, 2005

Life Cycle of Tender Bid


Process

Some
Important
Clauses

Categories of Contracts
Some of the contracts regularly entered are:

Supply,

Erection, Installation &


Commissioning
Repair & Maintenance
Annual Maintenance
Manpower
Construction (Civil Construction)
Services
Works Contracts

LOI - MOU - Contract


LOI

Proforma of Letter of Intent


(LOI)
LOI, Term Sheet or
MOU
are
synonymous
LOI
outlines
intention
between
parties
Pending finalization
of
terms
and
definitive document
Not legally binding

Memorandum of
Understanding
MOU

broadly outlines in-principle terms


agreed between parties
Not a definitive Agreement unless there
is exchange of money
Not legally binding document

Basic Distinction
AGREEMENT /CONTRACT

MOU/LOI

Legally enforce
Agreement is final and
binding
and
has
definitive terms and
conditions
Grants substantial rights
to parties
Binding on parties

Cannot legally enforce


Agreement is in-principle
only and Refers about
another definitive
agreement
Does not grant any right
but records intention of
parties
It becomes binding only if
there is monetary
exchange

General Template of MOU

Parties
Effective date
Signatories/
Authorization
Objectives
Scope Of Work (Technical
Specs)
Term
Payment (Price Variation)
Payment Terms

Deliverables
Delivery Schedule
(Project Schedule)
Obligations of Parties
Training (costs /per diem)
Supply & Installation

Contd.

Commissioning Test
Approval Certificate
Indemnity
Warranty
Security /Guarantee
Liquidated Damages/
Damages
Modification

Confidentiality
Termination (cause,
convenience and force majeure)

Consequences of
Termination
Governing Law
Jurisdiction
Arbitration

Boiler Plate Clauses (Misc.


Clauses)
Clauses

which are standard to any


Agreement such as
definitions,
matters of construction
Administration & operation
NOT SPECIFIC OR TECHNICAL

Some of the such clauses


are:

Notices

Independent Parties

Force majeure

Dispute resolution

Waiver

Governing Law

Assignment

Confidentiality

Entire agreement

Severability

Counterparts

Jurisdiction

Drafting of Contract

SESSION II

Proforma of Purchase
Order
PO Number
Name of the Company
Vendor Details

Technical Details of Deliverables

Price

Specific conditions

Terms & Conditions of PO

Standard Terms &


Conditions - Purchase
Order
1. Offer

& Acceptance

2. Scope

8. Change

of Work

3. Price (Price Variation)

9. Delay

and Payment

4. Delivery

(Timelines, Supply,
Commissioning and Installation)

5. Title

& Lien and Risk of Loss

6. Pre-

Delivery & Post Delivery


Inspection

7. Shipping

Terms

Order

& its Consequences

10.Liquidated
11.BG

Damages

/ PBG

12.Stop

Order

13.Warranties
14.Taxes

& Indemnification

& Insurance

15.Termination

Work Orders (WO)


Purchase

Order and Work Orders are


more or less same

PO

is for tangible e.gs raw materials,


capital spares, consumable stores and
the like

WO

is for civil works or services

Civil Contracts

SESSION III

QUESTION & ANSWERS

CATEGORIES OF CIVIL CONTRACT


Fixed

Fee or Lump Sum Rate Contract.

In this system of contract a contractor is required to quote a


fixed sum of money for the completion of a work completed in
all respect according to the Specifications, Drawings and
Designing provided in the Tender within the Completion Period.

Item

Rate / Unit Price Contract.

In this system of contracts a contractor is required to quote rate


of Individual Item of Works in Tender. Suitable for construction and

supplier projects.

Liquidated Damages
It

is a pre-estimate of genuine loss


suffered by non-breaching party
An amount, parties to contract assess
as damages to be paid, whatever may
be the actual damage.
Liquidated Damages
Penalty or
Punishment

Benefits
Assures

that the terms can will be

fulfilled
Facilitates calculation risks
Alleviates difficulty in providing actual
damage (even when damage is
ascertainable)

We

buy cool drink bottles against extra


amount of money. Such money is
termed as deposit but in legal
connotation it could be construed as
liquidated damages. As if such bottle is
not returned, the manufacturer will
suffer a loss which could be recovered
through the amount paid by the
customer.

Contd.
Cost
1.
2.
3.

Seller incurs all costs during the project are charged back to the buyer and thus the
seller is reimbursed costs.
Cost plus fee (CPF) or cost plus percentage of cost (CPPC)
Cost plus fixed fee (CPFF)
Cost plus incentive fee (CPIF)

)Time
)
)

Reimbursable Contracts

& Material Contract

This type of contract is a cross between fixed-price and cost-reimbursable contracts.


Time and materialsis a standard contractforconstructionin which the buyer
agrees to pay thecontractorbased upon the work performed by the contractor's
employees and subcontractors, and for materials used in the construction (plus the
contractor's mark up), no matter how much work is required to complete
construction.

Intricate Clauses of Civil


Contract

Some egs:
EXAMPLE :-FIXED FEE CONTRACTS
VSH Ltd was awarded a tender /contract by a PSU for construction of an
amenities building at Shadnagar for an amount of Rs.10 crores. The
terms mentioned said that the amount will be paid upon completion of
construction and will not have any revision in the amounts for any
reason whatsoever.
EXAMPLE :- COST PLUS CONTRACT
VSH Pvt Ltd is awarded a tender/contract by a PSU to construct a missile.
Since it is a new technology, the PSU could not be ascertain the costs at
the time of floating a tender. Therefore, VSH Pvt Ltd quoted a cost plus
5% as its offer price.

Case Study

On 31.8.2015 a foreign vendor delivered 30 sets of projector lamps


as per tender worth Rs. 30 lakhs.
The package was opened after 90 days.
Out of 30 projector lamps received,5 projector lamps were
different
Efforts made to obtain replacement did not succeed
It had become time barred as per conditions of contract.
RESULT :

LOSS OF TENDER AMOUNT REMITTED TO VENDOR


WITHOUT VERIFICATION.

Concerns for failure of


Contracts
Lack

of Contract Management
Multi-layered hierarchy
Lack of sufficient knowledge of General
Financial Rules and procurement manual
procedures (Govt.)
Unforeseen delays
Lack of resolution /decision making
authority

Common Irregularities
Non recovery of liquidated
damages

Expiry
of
validity
of
Bank
Guarantee due to lack of timely
review.
Delayed payment
Non-adherance to Central Vigilance
Commission(CVC) guidelines;
Lack of provisions for modification

Right to Information Act


Section

8
(iv) of the Right to
Information Act pertains to commercial
confidential information.
Any information which is commercial
confidential information need not be
provided.

THANK YOU
Vakils Associated
Advocates
B-3, Mayfair, S.P.Road , Secunderabad
Ph.No. 040-2784 7110 / 2781 9839
Email- invox@vakilsassocaited.com

Negotiation & Complaince


NEGOTIATION

COMPLIANCE

Technical terms
Specifications
Expertise of Vendor
Delivery Timelines

Commercial terms
Payment terms
Delay and LD

Competence of Vendor
Possess requisite
Approvals /License

Execution &
Implementation
EXECUTION

IMPLEMENTATION

Finalise the document


and execute
Signatories should
have proper
authorization to
execute Agreement
Take a copy of the
same

Keep a watch on the


products/ progress
Check for delay, defect or
deficiencies
Record all communication
in writing/ oral shall be
followed by written mails
Incase of delay check for
options agreed and made
available under the
Agreement for such delay