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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