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WORKSHOP ON CONTRACT MANAGEMENT & CONTRACTSVakils Associated B-3, Mayfair, S.P.Road , Secunderabad Ph.No. 040-2784 7110 / 2781 9839Email- invox@vakilsassocaited.comIntroduction - Contract and Contract Management Contract and Contract Management go hand and gloveContract 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 contractEffective 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 MangementContract ManagementEffective ProcessMaximum BenefitsMinimum RisksSystematic ApproachMANAGEMENT OF A CONTRACT FROM ITS INCEPTION TO CLOSURE Efficient People Robust ProceduresProper TechnologyRepositoryEffective Contract ManagmentGenesisRetrievalClosureEffective Contract Management 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: Eg. Purchase, Stores, Commercial, SCM, Procurement, Construction & Maintenance Department

Agreement and ContractContract = 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.

OfferAcceptPromiseConsiderationAgree-ment Enforceable ContractEssentials of ContractOffer AcceptanceConsideration Free consent.Capacity to contractLawful object Certainty and possibility of performance Agreements not declared to be voidOFFER AND ACCEPTANCEX 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 CONSENTY 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 in next world.

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 TechniquesUse clear and simple languageBe 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 TransactionsContracts 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 IncotermsDelivery Schedule

EXW: Ex-worksEx 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 & FreightCost, 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 CreditWhy ? 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 BGCustomerBeneficiaryISSUING BANKStage 3- Payment by BankStage 2- InvocationStage 4- RecoveryStage 41- Non-performance/ BreachBank 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 : a fraud or encashment resulting in irretrievable harm or injustice

Types of BGs

Performance GuaranteesFinancial GuaranteesBid Bond GuaranteesAdvance Payment GuaranteesShipping Guarantees20LC - 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 behalf of a buyer (applicant)

To 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

Applicant / ImporterOpening BankAdvising BankBeneficiary / Exporter1 - Contract2- L/C Application3 - L/C 4- L/C5 - Goods6 - Documents 7 - Payment8- Documents9- Payment10 - Documents11 - DebitDistinction Bank GuaranteeFor invocation breach/ non-performance

Primary responsibility is on client

Letter Of Credit

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

Government ContractsArt 298 and 299 of Constitution of India

Tender is a compulsory process for entering into contracts

Tenders- Transparent & Not Arbitrary

Comply - General Financial Rules, 2005

Life Cycle of Tender Bid Process Some Important ClausesCategories of Contracts Some of the contracts regularly entered are:

Supply, Erection, Installation & CommissioningRepair & MaintenanceAnnual Maintenance ManpowerConstruction (Civil Construction) Services Works Contracts

LOI - MOU - Contract Proforma of Letter of Intent (LOI)LOI, Term Sheet or MOU are synonymous LOI outlines intention between parties Pending finalization of terms and definitive documentNot legally binding

Memorandum of Understanding MOU broadly outlines in-principle terms agreed between parties Not a definitive Agreement unless there is exchange of moneyNot legally binding document

Basic Distinction Agreement /ContractLegally enforce Agreement is final and binding and has definitive terms and conditions Grants substantial rights to parties Binding on parties MOU/LOI Cannot legally enforce Agreement is in-principle only and Refers about another definitive agreementDoes not grant any right but records intention of parties It becomes binding only if there is monetary exchange

General Template of MOUParties Effective dateSignatories/ Authorization ObjectivesScope 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 CertificateIndemnity WarrantySecurity /GuaranteeLiquidated Damages/ DamagesModification

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

Force majeure

Waiver

Assignment

Confidentiality

Severability

Independent Parties

Dispute resolution

Governing Law

Jurisdiction

Entire agreement

Counterparts

Drafting of ContractSESSION II

Proforma of Purchase Order PO Number

Name of the Company

Vendor Details

Technical Details of Deliverables

Price

Specific conditionsTerms & Conditions of PO

Standard Terms & Conditions - Purchase OrderOffer & Acceptance

Scope of Work

Price (Price Variation) and Payment

Delivery (Timelines, Supply, Commissioning and Installation)

Title & Lien and Risk of Loss

Pre- Delivery & Post Delivery Inspection

Shipping Terms

Change Order

Delay & its Consequences

Liquidated Damages

BG / PBG

Stop Order

Warranties & Indemnification

Taxes & Insurance

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 ContractsSESSION IIIQUESTION & 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 DamagesIt 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

BenefitsAssures that the terms can will be fulfilledFacilitates 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 Reimbursable Contracts 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 & Material ContractThis 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 ContractSome 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 StudyOn 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 differentEfforts made to obtain replacement did not succeedIt had become time barred as per conditions of contract.

RESULT : LOSS OF TENDER AMOUNT REMITTED TO VENDOR WITHOUT VERIFICATION.

Concerns for failure of ContractsLack of Contract ManagementMulti-layered hierarchyLack 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 paymentNon-adherance to Central Vigilance Commission(CVC) guidelines;Lack of provisions for modification

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

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

THANK YOU Negotiation & Complaince NegotiationTechnical terms Specifications Expertise of Vendor Delivery Timelines Commercial terms Payment termsDelay and LD

Compliance Competence of VendorPossess requisite Approvals /License

Execution & ImplementationExecution Finalise the document and executeSignatories should have proper authorization to execute Agreement Take a copy of the sameImplementationKeep a watch on the products/ progress Check for delay, defect or deficienciesRecord 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