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CONTRACT MANAGEMENT

COURSE MATERIAL

BY
MR. K.V. KUPPUSWAMY
B.E., M.I.E., PGDMM., BGL

GENERAL MANAGER / CONTRACTS (Retd)


NEYVELI LIGNITE CORPORATION LIMITED

ADDRESS
Old No.197, New No.382, Llyods Road,
Gopalapuram, Chennai – 600 086
Phone : 044 – 28350916
Cell : 9840650916
E-mail : kvkseven@yahoo.co.in
ABOUT THE AUTHOR

Shri K.V.KUPPUSWAMY, the author of this Course Material - Project – Contract


Management – Technical – Commercial – Legal Implications, a Multi-
engineering Degree Holder in Civil; and Mechanical branches with Post-
graduate in Materials Management, Bachelor of General Law, is a retired
General Manager- Contracts, M/s Neyveli Lignite Corporation Ltd, Neyveli
after 37 years of service. During the service, had handled, project contracts for
mining, power generation, power transmission, other allied services in Seven
Major Projects on ICB, DCB, basis. Familiar with procedures, terms, conditions
of funding agencies like World Bank, IDBI, KFW and visited (then) USSR,
Germany, Italy, Saudi Arabia.

Also conversant with FIDIC, CIDC terms and conditions.

Had successfully tackled, solved critical issues, problems, pitfalls in the


formation of contract, implementation and discharge of contract with project and
result oriented approach and objective.

After retirement sinch 1992, he is actively engaged as a Consultant, Advisor to


many Public Sector Enterprises, Private Companies, on contractual issues,
claims, compensation, resolving technical, commercial and legal issues.

He had conducted more than 700 programmes on contract management to


many PSE, Private Companies, Institutions, EDs, all over India and trained about
10,000 Executives in this area.

He had also prepared contracts manual to few and updated in few cases

Since large number of projects on various sectors, with huge investments, long
gestation period have been undertaken, proposed due to liberalization,
privatization, globalization, the Author feels this Course Material shall be
extremely useful and helpful in dealing with contracts, to all Engineers,
Architects, Finance – Planners, Contractors, Arbitrators, to plan, implement the
projects as per agreed terms and conditions, time and cost.
OBJECTIVE

The Programme will be organized and conducted in an interactive


environment providing full and greater scope for discussion.
Emphasis will be on a highly participative style of learning. The
faculty will act as aprovocator and resource person rather than a
teacher. The participants are expected to play a very active role not
only as a learner and facilitator but also as experts and practitioners
in their own area.
1

INDIAN CONTRACT ACT 1872

The enactment of the various laws is the outcome of the necessity of


regulating their dealings, habits, convention, culture, customs, rights, duties
etc. of the people and to establish the society towards the needs and
demands growing day by day. The object of law relating to contract is to
regulate the dealings between individuals, between individual and company,
between companies and so on between two different parties. Before the
proper codification of the law on this subject, dealing between the parties as
stated above, were governed on the basis of customs, conventions,
precedents and the usage of the religion. Towards the contracting parties,
along with the growth of society, advancement of civilization, science and
technology, the codification of the law relating to dealing with these matters
became an absolute necessity. Parties become aware of their needs,
obligation rights etc. in the deals between them. In order to achieve this
objective, the State thought it necessary and imperative towards the law to
govern these dealings between the parties concerned in certain uniform way
and accordingly enacted the law which is called “LAW RELATING TO
CONTRACTS” and in India it is mainly incorporated in THE INDIAN
CONTRACT ACT 1872. Thus the Indian Contract was born in 1872
exclusively to deal and regulate the commercial business transactions
between parties to the contract.

In short it is defined and described as according to the ordinary meaning


attached to the word contract, all agreements made by parties are contracts.
But it is not so according to Law related to contracts. According to the
definition of ‘Contract’ maintained in the law of contracts, only those
agreements are contracts which are enforceable in law.

A contract has been defined as an agreement enforceable in law. In order


to constitute an agreement, there must be an offer and an acceptance. For
such an agreement to become legally binding and result in a valid contract, it
is essential that-There must be free consent by the parties concerned
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Parties must be competent to contract


There must be a lawful consideration
The object of the contract must be lawful
The agreement must not be expressly declared to be void
The agreement must comply with the provision of any law requiring it to be in
writing or attested or registered.
And there shall be consensus ad idem.
A valid binding contract originated from an offer given by a person who
signifies to any other his willingness to do or to abstain from doing anything
with a view to obtaining the assent of the other to such act or abstain, which
is called a proposal. When a person to whom the proposal is made, signifies
his assent the proposal is said to be accepted. A proposal when accepted
becomes a promise. The person making the proposal after its
acceptance of the offer by the other, is called the promisor and the
person accepting the proposal is called the Promisee.
The Scope of work agreed and to be performed is called promise
Every promise has a consideration

The Indian Contact Act-1872


It contains 238 sections under 10 Chapters out of which Sections 76 – 123 of
Chapter VII is taken out and Sale of Good 1930 enacted.
The most important sections of the Contract Act 1872 which are essential, are
as under:

Section Chapter Items


10 II What agreement are contracts
11 II Who are competent to contract
18 II Misrepresentation
20 II Agreement void where both parties are under mistake as to
matter of fact
22 II Contract caused by mistake of one party as to matter of fact.
37 IV Obligations of parties to contract
38 IV Effect of refusal to accept of performance
39 IV Effect of refusal of party to perform promise wholly
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40 IV Person by whom promise is to be performed


41 IV Effect of accepting performance from third person
4 IV Time and place for performance of promise, where time is
specified and no application to be made
50 IV Performance in manner of, at time prescribed or sanctioned
by promise
51 IV Promisor not bound to perform unless reciprocal Promise
ready and willing to perform.
52 IV Order of performance of reciprocal promises.
53 IV Liability of party preventing event on which contract is to take
effect.
54 IV Effect of default as to the promise which should be performed
in contract consisting of reciprocal promises.
55 IV Effect of failure to perform at fixed time in contract in which
time is essential.
67 IV Effect of neglect of Promise to afford Promisor reasonable
facilities for performance.
70 V Obligation of person enjoying benefit of non gratuitous act.
73 VI Compensation for loss or damage caused by breach of
contract
74 VI Compensation for breach of contract where penalty
stipulated for.
126 VIII Contract of guarantee, surety, principal debtor and creditor.

Sale of Goods Act-1930

Goods means every kind of movable property other than actionable claim and
money and includes stock, shares, growing crops, grass and things attached to and
forming part of the land. Future goods means goods to be manufactured or
produced.

Since, in most of the Commercial transactions in the contract between the agreed
parties, involve transfer goods, movement of goods and transfer of ownership / title
of goods, it has become necessary to enact this Sale of Goods Act to define it
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clearly. Born out of the Indian Contract Act 1872, is the Sale of Good Act was
enacted in 1930

There are (66) sixty six sections under (7) seven chapters.

The most important sections of the Sale of Goods Act 1930, which are essential, are
as under.

Sections Chapter Items


5 II Contract of Sale how made
6 II Existing or future goods
11 II Stipulation as to time
12 II Condition and warranty
18 III Goods must be ascertained
31 IV Duties of seller and buyer
32 IV Payment and delivery are concurrent conditions
33 IV Delivery
42 IV Acceptance
46 V Unpaid sellers right
56 VI Damages for non acceptance
57 VI Damages for non delivery
59 VI Remedy for breach of warranty

Doctrine of CAVEAT EMPTOR


Caveat Emptor means “Purchaser beware”, which a person enters into a contract for
the purchase of goods, this maxim comes into operation and the buyer will be
obliged to fulfill contract even if he has made any mistake in assessing the quality of
the goods which he is buying.
5

The Arbitration and Conciliation Act, 1996

The most important sections of the act which are essential are as under.

Section Chapter Items


7 III Arbitration agreement
10 III Number of arbitrators
11 III Appointment of arbitrators
12 III Grounds of challenge
13 III Challenge procedure
15 III Termination of mandate and substitution of arbitrator
16 IV Competence of arbitral tribunal to rule on its
jurisdiction
17 IV Interim measure ordered by arbitral tribunal
18 V Equal treatment of parties
20 V Place of arbitrators
21 V Commencement of arbitral proceedings
23 V Statement of claims and defence
24 V Hearings and written pleadings
25 V Default of a party
26 V Expert appointed by arbitral tribunal
29 VI Decision making panel of arbitration
30 VI Settlement
31 VI Form and contents of arbitral award
32 VI Termination of proceedings
33 VI Correction and interpretations of award - additional
award.
34 VII Application for setting aside arbitral award
35 VIII Finality of arbitral awards
36 VIII Enforcement
LAW OF CONTRACTS

Objects of Contract

The purpose of law of contract is to ensure the realization of reasonable expectation


of the parties who enter into contract.

Essential of a contract

Two parties
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Offer and Acceptance


Promise
Consideration
Capacity
Free consent of the parties
Must be for a legal object
Not opposed to public law
Possibility of performance
Not prohibited by law

Classification of contracts as per Law of contracts


1. Void contract A contract which is not enforceable by law is a void
contract
2 Voidable contract A voidable contract is binding and enforceable contract
but because of lack of one or more of the essentials of
a valid contract, it may be repudidated by the
aggrieved party at his option.
3 Executory contract An executory contract is one in terms of which both the
parties have not yet performed their obligations
4 Executed contract An executed contract is one that has been completed
or performed.
5 Unilateral contract Unilateral contract is a contract in which one party to
the contract has performed his obligation at the time of
contract and the obligation is outstanding only against
the other.
6 Bilateral contract A bilateral contract is a valid legal enforceable contract
wherein promise reciprocal promise, rights,
obligations between the parties are stipulated
7 Implied contract The implied contract is one which can be inferred from
the conduct of the parties, the contract may not
express terms in so many words, orally or in writing.
8 Contingent contract A contingent contract is a contract to do or not to do
something if some event collateral to such contract
does or not happen.
Its performance depends upon something happening
or not happening some event. The event is uncertain
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future event.
9. Indemnity contract Indemnity Contract is a direct agreement between two
parties whereby one promises to save another
harmless from the result of the conduct of the promisor
himself or any other third person.
10. Guarantee Contract A Contract of guarantee is to perform the promise or
discharge the liability of a third person in case of
default.

Formation of a contract
Agreement over an offer and an acceptance

Offer
Must be definite
Intended to give rise to legal consequence
Must be from a competent personQualified to make an offer
Must be communicated

Acceptance
Must be communicated in a reasonable manner & time specified
Must be made before the offer is revoked or rejected
Must be absolute, unconditional and shall correspond with the mutually agreed terms
Must be made only by a person or party to whom the offer has been made.
Lapse of offer
After the stipulated time
Due to enactment of law
Due to the death of the offeror.
Due to counter offer
Due to rejection by the offeree

Revocation of the offer


May be revoked by the offeror before its acceptance even though originally agreed to
hold it open for a definite period.

Discharge of contract
By accord and satisfaction
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By novation
By an agreement
By breach
By impossibility to perform
By waiver

DEFINITION

GENERAL terms

Acceptance Acceptance shall mean the manifestations by the offeree of his


assent to the mutually agreed terms of the offer by the offeror.
Agreement Agreement shall mean mutual understanding between the
parties which creates obligations between each other.
Base date Base date shall a notional date generally fixed as 1 month prior
to the date set of opening of tenders Part I to reckon the
Published indices for raw materials / labour etc. for computing
the Price Variation.
Bid Bid shall mean a valid offer made against any tender enquiry,
indicating terms, conditions and prices.
Bidder Bidder shall mean a person / party / firm / company /
consortium who submits an offer / bid against a tender enquiry.
Bill of Quantity Bill of Quantity shall mean the completed bill of quantities for
various item descriptions forming part of the bid.
Billing Billing schedule shall mean the items, description and
Schedules quantities arrived at, after detailed deigns and engineering are
prepared. It generally occurs in lump sum price contracts,
where rates are not fixed up for each item.
Bid Bond The bid bond is a bank guarantee in lieu of Earnest money.
This is furnished so that bidder executes the contract if the
same is awarded to him. The Purchaser thus protects himself
from the bidder backing out of the offer after an agreement
reached.
Codes and Codes and standards shall mean such codes and standards as
Standards prescribed in ISS/DIN/BSS/ASM Test Codes – AIEE Codes –
Indian Electricity Act, Indian Explosives Act, Indian Petroleum
Act, Indian Mines Act. as applicable to the equipments,
components, plants machinery, consumables.
Completion Successful completion of the work and issue of Final
certificate acceptance certificate / completion certificate.
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Conditions Condition shall mean the conditions agreed between the


parties and stipulated in the contract agreement.
Contract price Contract price shall mean the price accepted in the contract
between parties and adjustment if any during contract period.
Consultant Consultant shall mean the consultant / consulting firm,
independent professional engaged by the employer /
purchaser.
Contract period Contract period shall mean the period / time schedule agreed
in the contract during which period the contracted work shall be
performed / executed.
Contract The contract shall mean an agreement between the employer/
purchaser and contractor for execution of certain works as per
agreed specifications, terms, conditions prices and enforceable
as per law.
Contractor Contractor shall mean successful bidder whose bid/offer has
been accepted by the employer / purchaser
Day Day shall mean the period between midnight to next midnight.
Defect Defect shall mean the lack of something necessary for
completion / performance.
Defect liability Defect liability period shall mean the agreed period specified in
period the contract following the taking over/commissioning during
which period the contractor shall be responsible for making
good the defects if any occurred at his cost.
Demurrage Demurrage shall mean the detention of a vessel /ship by the
freighter for loading and unloading operation beyond the
allowable time for sailing.
Dimensions Dimensions shall mean length, area, volume etc all expressed
in metric system.
Drawing Drawing shall mean such drawings provided along with bid
documents those submitted by the bidder along with the offer
and that submitted during the progress of work by the
contractor, employer, consultant and later approved.
Employer Employer shall mean the person, firm, company named who
shall engage/ employ the contractor to carry out / perform the
works.
Final Final acceptance certificate / Completion certificate shall mean
acceptance the certificate issued by the Engineer / Employer / purchaser to
certificate/ the contractor after satisfactory completion / execution of the
completion works and compliance of all the applicable terms and
certificate conditions covered by the Contract agreement / letter of
award / LOI and the accepted modifications thereon which will
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enable the Contractor to get his final payment.


Force Majeure: Force majeure shall mean and irresistible force or compelling
circumstance beyond one’s control
Foreign Foreign currency shall mean the currency other than the Indian
currency Rupees.
Gross Gross misconduct shall mean any act or omission of the
misconduct contractor in violation of the most elementary rules of diligence
which a conscious contractor in the same position and the
same circumstances would have followed.
Inspecting Inspecting Officer/ Engineer shall mean any employee of the
Officer / Employer / Purchaser / Consultant / organization or agency
Engineer specified / intimated for the purpose of inspection, goods /
works.
Instruction Instruction shall mean any drawing, instruction written,
directions, explanations issued by the Employer / Purchaser /
Consultant
Letter of Letter of intent/ letter of award shall mean the official
intent /Letter of communication issued by the Employer / Purchaser notifying
award legally to the bidder that his bid has been accepted on mutually
agreed terms, conditions and prices.
Letter of Credit Letter of Credit shall mean a documentary proof of the
availability of credit which can be operated by presenting
documents specified to draw the payment.

Manufacturer Manufacturer shall mean a person/ firm / company who


manufactures and / or produces plant, Equipment, Component
Spare Parts etc.
Minutes of Minutes of Meetings – MoM shall mean officially recorded
meeting statement of points / issues discussed between the parties and
signed by authorized representatives of both the parties.
Month Month shall mean English Calendar month
Notice inviting Notice published by the Purchaser with the intention to invite
tender (NIT) offer / bid for his requirements
Packing list Packing list shall mean a list containing the full details of goods
packed such as description, quantity, weight, volume
description
Plant Plant shall mean equipment, machinery apparatus, instruments
and all other things forming integral part of the work to be
provided in the contract for due performance of the work /
system
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Price Price shall mean the price agreed in the contract between the
parties towards the scope of work.
Programme Programme shall mean a plan of action agreed towards
performance of the scope of work in the contract
Project Project shall mean the project specified in the tender
documents and specification.
Provisional Provisional take over shall mean acceptance in principle
take over subject to completion of / fulfillment of certain conditions. This
is not a complete acceptance of work entitling the contractor to
get full payment or to assume that all the obligations and terms
and conditions of the contract have been fulfilled to the
satisfaction of the employer / Purchaser.
Repel Repel shall mean refuse to accept or agree to
Revocation Revocation shall mean withdrawal.
Risk Risk shall mean an act, / action, hazard that causes injury or
damage or loss to persons and or property.
Schedule Schedule shall mean timed plan of action of event for a project
or work
Site Site shall mean the land acquired and set for the location of the
project / work
Specification Specification shall mean the Technical – commercial
specification including modification set in the tender / contract
documents.
Sub-Contractor Sub-contractor means a contractor selected with the approval
of employer / Purchaser to execute certain work included in the
scope of work
Sub-supplier Sub-Supplier means the supplier selected with the approval of
the employer / purchaser to supply certain items included in
the scope of work.
Taking over Taking over certificate shall mean the certificate issued by the
certificate Employer / Purchaser to the Contractor. It means physical
possession of the erected plant with or without minor defects
and deficiencies in work subject to testing and fulfillment of
guaranteed design parameters.
Tender Tender shall mean the bidder's offer with his specification
terms conditions, and prices to perform the scope of work.
Test Test shall mean such test / tests stipulated or considered
necessary by the inspecting officer /. Engineer
Time of Time of Completion shall mean the time / Period stated /
completion agreed for completing the scope of work specified in the
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contract
Turnkey Turnkey shall mean a method of construction / erection /
installation whereby the contractor assumes total responsibility
from design through completion of the work / project
Work Work shall mean plant, non-plant, buildings, structures,
foundations and all plant Equipment, mechanical, electrical,
controls, instrumentation, Components to be provided and
other construction erection / services that the contract requires
the contractor to provide.
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LEGAL TERMS

Agreement Mutual understanding


Contract Contract is an agreement enforceable by law, which creates
obligation.
Offer When one person signifies to another his willingness to do or
abstain from anything with a view to obtaining the assent of
the other to such act or abstinence, he is said to make an
offer.
Acceptance Acceptance is the manifestation by the offeree of his assent
to the terms of the offer
Promisor The person who makes a proposal is called the promisor
Promisee The person accepting the proposal of the promisor.
Promise When the person to whom the proposal is made signifies his
assent thereto, the proposal to said to be accepted. A
proposal when accepted becomes promise.
Consideration Consideration shall mean what a promisor demands as a
from the Promisee on the price for his promise.

SPECIFIC LEGAL TERMS

Advertisement Advertisement is the publication of an information. A legal


advertisement, made pursuant to law, constitutes due notice of
a proceeding
Amendment An amendment means a correction of an error or an omission,
and it modifies the system without fundamentally changing the
nature and shall operate within the theoretical parameters of
the existing terms, conditions.
Assignment Assignment shall mean transfer of claim, right of property by
an instrument or deed authorizing it.
Beneficiary Beneficiary shall mean a person / party / firm / company to
receive the benefit
Breach Breach shall mean failure to adhere or perform the agreed
terms / promise
Capacity Legal power to enter into binding obligations or to enjoy the
privileges of a legal status. Contractual capacity is the capacity
to enter into a legally binding contract.
Caveat Caveat is an intimation made to the proper officer of a court of
justice to prevent taking of any step without intimation to the
party interested to appear and object to it.
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Caveat emptor Caveat emptor shall mean let the buyer beware, in respect of
quality or quantity of goods purchased.
Claim Claim is the assertion of a right to have the money paid.
Claimant Claimant is one who makes a claim / claims.
Compensation Compensation shall mean anything as an equivalent as to
make assessment for loss or damage.
Consensus ad Consensus ad item shall mean all terms conditions, drawings,
idem tender specification, offer etc. have been clearly understood
and identity of mind created between parties.
Consequential Consequential damages means the damages, claimed in a tort
damages or breach of contract which do not normally follow from the tort
or breach.
Consideration Consideration shall mean what a promisor demands from the
promisee as the price for the promise
Covenant Covenant shall mean a binding and solemn agreement to do or
not to do or keep away from doing a specified thing.
Damage Damage shall mean money claimed by a person to
compensate for injury or wrong caused by the other party.
Default Default shall mean failure to do something agreed upon as
expected.
Discharge Discharge shall mean release of the burden or relieve oneself
from the obligation.
Disclaimer Disclaimer is renunciation of any right, title or interest in any
property or condition, especially by a defendant in a suit, or by
a person against whom a right is claimed.
Dispute Dispute shall mean an unresolved claim among two or more
parties.
Duress Duress means the use of force or threats to compel a person
to make a contract or to commit an unlawful act.
Guarantee Guarantee shall mean a promise to a person to be answerable
for the payment of debt, default, miscarriage or the
performance of a duty by another in case he fails to perform.
Heirs Heirs shall mean person who are legally entitled to inherit
through the natural course of law.
Infringement Infringement shall mean break or impair or violate or fail to
observe to the agreed term.
Instrument A formal written document having legal effect, either as
creating liability or as affording evidence of it.
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Interpret Interpret means to discover the meaning of the statutes either


in part or as a whole. It is sometimes concerned with the
meaning of individual words and sometimes with the terms,
conditions.
Jurisdiction The Jurisdiction shall mean the particular territory within which
the court is vested with powers to render a valid judgment.
Lapse Lapse shall mean to come to an end or cease, generally on
rights or privileges which have not been exercised within the
proper time, or which fail because of the happening of some
contingency.
Latches Latches shall mean failure to do the required agreed thing/ job,
act at the agreed proper due time.
Latent defect A defect in merchandise which would not be apparent on
ordinary inspection, but which come into evidence later, when
the equipment is used.
Liquidated Liquidated damages shall mean a compensation to be made
damages consequent to a damage caused. It can be pre estimated.
Liquidated damages, not as a penalty, is agreed upon between
parties in the contract towards time delay. Liquidated damages
can also be prefixed towards shortfall in performance
parameters agreed in a contract.
Mandate Mandate shall mean a general term for an order for any kind
issued by a court.
Market price The Market price shall mean prevailing price for any
commodity or a specific goods at a given time without
restriction, for public sale.
Memorandum Memorandum is a note or record of a fact or an agreement.
Minutes Minutes shall mean notes or records of a transaction, or of a
meeting of some organization or committee, or of corporate
proceedings, kept in a minute book.
A record of what taken place, which can used as evidence
Negotiable A negotiable instrument shall mean written instrument signed
instrument by the marker or drawer for the unconditional payment of fixed
sum of money and money only at a fixed or determinable
future time or on demand, to a payee or to his bearer.
Notice Notice shall mean information or knowledge by whatever
means communicated.
Novation Novation shall mean that one party to the contract is
substituted by a third party with the consent of the parties to
the contract
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Obligation Obligation shall mean the condition or duty by which one


person / party is legally bound to perform the services for the
benefit of the other person / party.
It is a legal duty, created, however the violation of which may
become the basis of an action at law.
Offer When one person signifies to another his willingness to do or
abstain from anything with a view to obtaining the assent of the
other to such act or abstinence, he is said to make an offer.
Owner Owner shall mean a person entitled to the privileges and rights
of ownership and subject to its obligations
Patent right Patent right shall mean exclusive right granted / obtained to
produce and sell a product so invented.
Power of Power of attorney shall mean a formal legal document by
attorney which an agent is appointed with wide general power with
authority to transact the business.
Prejudice Prejudice shall mean a state of mind in which a person
entertains a judgment about an event, the character of a
person or the validity of a proposition, without examining the
facts or hearing evidence.
Promise A proposal when accepted becomes a promise and it means
on oral or written agreement to do or not to do some thing.
Promisee Promisee shall mean the person /firm / company accepting the
proposal.
Promisor The person / firm / company making a proposal is called a
promisor.
Proof Proof shall mean the process of establishing, by legal evidence
and argument the truth of the facts or allegation necessary to
sustain the cause of action or defence.
Proposal Proposal shall mean that when a person/ firm/ company
signifies the willingness to do or abstain from doing anything
with a view to obtaining the assent of the other to such an act
or abstinence, the person/ firm/ company is said to make a
proposal.
Quantum meruit Quantum meruit shall mean reasonable amount to be paid for
services rendered or work done when the price for it was not
fixed in the contract and also means right to be paid for.
Rate of The rate of exchange shall mean the amount reckoned in one
exchange unit of currency which will be exchanged for one unit of a
different currency. which is often regulated by statute, or
17

administrative order.
Remedy Remedy shall mean an act by which violation of right is
prevented or compensated
Repeal Repeal shall mean the annulling of an existing stature,
constitutional provision or regulation, by the body which
originally passed it.
Repudiation Repudiation is an act or statement by a party indicating he
does not intent to perform his obligation.
Restitution Restitution shall mean giving back to the rightful owner
something that has been lost or taken away.
Revocation Revocation shall mean the calling back of a thing granted or
destroying or making void of some deed that existed.
Revoke Revoke shall mean to withdraw an offer.
Show cause A show cause shall mean an order direction to a party in to
show good reason why certain action should not taken
Sub-let Sublet shall mean to let out the work to another.
Subrogation Subrogation shall mean the substitution of another in the place
of the obligee of an obligation or the creditor of a debt.
Successor Successor shall mean one who succeeds an officer / title.
Title Title shall mean the technical legal word commonly used for
ownership. It implies particularly the power of disposal and the
right and duty to protect the property.
Tribunal Tribunal shall mean a general word equivalent to court, but of
more extensive use in public and international law.
Undertaking Undertaking shall mean a promise, especially one formally
given in the course of a legal proceeding, which may be
enforced by attachment or otherwise.
Valid Valid shall mean having legal effect; binding according to law;
vested with legal authority.
Violate Violate shall mean to disobey the law,to interfere with the rights
of another especially when done forcibly.
Waive Waive shall mean knowingly to surrender or abandon a claim
or a defence which might have been legally made in the course
of procedure. The effect of a waiver is that the claim, defence,
or right is wholly lost and cannot be revived without the
consent of the other party. In many instances, failure to claim a
right or defence, is construed as a waiver.
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Warranty Warranty shall mean Sellers’ assurance to the Purchaser that


the goods or property is or shall be as represented and if not it
will be repaired and reconditioned or replaced by the Seller at
his cost or expenses.
Wear and tear Wear and tear shall mean the amount of surface destruction
and other minor injury that by ordinary use of an equipment is
likely to cause.
Without Without prejudice shall mean an expression indicating that an
prejudice existing agreement or other transaction is not to be considered
a waiver or surrender of any other claim not then asserted.
Witness (tesis) A witness shall mean a person who on oath or solemn
affirmation gives evidence in any cause or matter.
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TERMS RELATING TO IMPORTS.

1 Air way Bills / Air way bill is a receipt a title of ownership of


Air Consignment Notice goods, issued by airways.
2 Bill of Lading (B/L) Bill of lading is a document title, a receipt
from shipping company Co. for the goods
and also legal evidence of a contract of
carriage. Bill of lading normally issued in sets
of two or more, one may be a negotiable
copy.
3 Bill of Entry (B E) Bill of Entry is a legal document issued on
Landing of the goods at the port of discharge.
4 Bill of exchange Bill of exchange shall mean a document
issued in a legal from precisely defined of
which the two following versions are most
common.
Draft, wherein drawer instructs drawee to pay
a certain amount to a named person
Promissory note wherein the issuer promises
to pay a certain amount
5 Certificate origin Certification of origin is a document Issued by
Chamber of Commerce in Seller’s country
certifying origin of goods. This is required as
per Indian Exchange Control Regulations.
6 Certificate of Manufacture Confirmation by a producer that the goods
have actually been manufactured by him in
his factory.
7 Demurrage charges Demurrage charges shall mean extra charge
to be paid if vessel is not loaded or unloaded
within the time allowed
8 Incoterms Publication of the International Chamber of
Commerce regarding delivery terms currently in
use.
9 Inspection Certificate Confirmation that the goods have been
inspected prior to shipment issued by neutral
organization.
10 Dock Receipt Receipt issued by a warehouse supervisor or
port officer certifying that goods have been
20

received by the shipping company.


11 Letter of Credit A letter of Credit (L /C) is a letter issued by
the Bankers at the request of the importer, in
favour of the Foreign supplier informing him
that it undertakes to accept the bills drawn
and effect payment in respect of exports
made to the Importer under the precisely
defined conditions.

Shipping Terms - Abbreviation

1 Ex-works EXW
2 Free Carrier (At a named port) FRC
3 Free on Rail or Free on Truck FOR
4 F.O.B. Air Port FOA
5 Free alongside Ship FAS
6 Free on Board FOB
7 Cost & Freight C&F
8 Cost, Insurance & Freight CIF
9 Freight / Carriage paid DCP
10 Freight / Carriage and Insurance paid CIP
11 Ex-Ship EXS (Deliver goods on Board
at Destination)
12 Ex-Quay EXQ (deliver goods on to quay
at destination)
13 Delivered at Frontier DAF
14 Delivered Duty paid DDP
21

SHIPPING TERMS EXPLAINED

Ex-Works (EXW)

(Basic Price + Packing Charges)

The delivery of goods shall be arranged by the Supplier at his premises and the
purchaser shall make all arrangements at his own cost and risk to take delivery of
the goods and transportation of the same to his destination.

Free Carrier (FRC)

The supplier shall only provide export licence, pay any export taxes and provide
evidence of delivery of goods to the carrier. The purchaser shall nominate the carrier,
arrange for contract for the carriage, pay the freight changes and insurance
premium.

Free On Rail (Or) free On Truck (FOR)

The supplier shall deliver the goods to Railway / truck with freight charges paid. The
purchaser shall notify the destination.

F O B Air Port (FOA)

The supplier shall deliver the goods to Airport of departure and contract for carriage
or notify the purchaser. The purchaser shall pay the freight charges and insurance
premium.

Free Alongside Ship (FAS)

The supplier shall deliver the goods alongside the ship and provide the purchaser
with an alongside ‘receipt’. The purchaser shall nominate the carrier, contract for
carriage and pay freight charges, obtain export licence and pay export taxes and
also insurance premium.

Freight On Board (FOB)

The supplier shall deliver goods on Board vessel and provide a clean bill of lading,
provide export licence, pay export taxes and loading charges and obtain bill of
22

loading. The purchaser shall nominate the carrier, contract for carriage and pay the
freight charges and also insurance premium.

Cost And Freight (C & F)

The supplier shall contract for carriage, pay freight charges to named destination,
deliver goods on board and provide the purchaser with a bill of lading; obtain export
licence and pay export taxes. The purchaser shall accept delivery of goods on
shipment after documents are tendered to him, pay unloading charges, pay
insurance premium.

Cost, Insurance & Freight (CIF)

The supplier shall, in addition to the cost and freight charges as stated above, also
arrange for the insurance of goods, pay the premium and provide the purchaser with
a policy or certificate. The purchaser shall accept delivery of goods on shipment after
documents are tendered to him pay, unloading costs.

Freight / Carriage Paid To (DCP)

The supplier shall contract for carriage, pay freight charges to named destination;
deliver goods to first carrier, obtain export licence and pay any export taxes; provide
the purchaser with transport documents. The purchaser shall collect the documents,
accept delivery of goods when they are delivered to first carrier, arrange and pay
insurance premium.

Freight / Carriage & Insurance Paid To (CIP)

The supplier, in addition to ‘Freight / Carriage paid to …’ as stated above, shall


arrange for contract for insurance of goods and pay the premium, providing the
purchaser with a policy or certificate and the purchaser shall accept delivery of
goods after the documents are tendered to him.

Ex-Ship (EXS)

The supplier shall deliver goods on board at destination provide the purchaser
with documents to enable delivery to be taken from the ship. The purchaser
shall pay the discharge costs, import duties, taxes and fees, if any;
23

Ex-Quay (EXQ)

The supplier shall deliver goods on to quay at destination; provide the purchaser with
documents to enable him to take delivery, obtain import licence and pay import
duties, taxes, fees, unloading costs and insurance. The purchaser shall take delivery
of goods from the quay at destination.

Delivery At Frontier (DAF)

The supplier shall deliver goods cleared for export at a place named on the frontier
provide the purchaser with documents to take delivery of the goods. The purchaser
shall pay for carriage charges obtain import licence and pay import duties, taxes and
fees if any.

Delivered Duty Paid (DDP)

The supplier shall obtain import licence and pay import duties, taxes and fees if any,
Arrange and pay insurance premium, provide documents to enable to Purchaser to
take delivery of the goods at the named place of destination.
24

CONTRACT MECHANISM

COMPETITIVE BIDDING NEGOTIATION

INITIAL DIRECT
OPEN SELECTIVE SELECTIVE
COMPETITION + SELECTION +
COMPETITION COMPETITION NEGOTIATION
NEGOTIATION NEGOTIATION

ICB DCB L.T.E

Engineering Contracts

Turnkey Contract
System Turnkey Contract
Sale Contract
Works Contract
Nominations Contract
Deposit Works Contract
Item Rate Contract
Consultancy Contract
FOB Contract
CIF Contract
C&F Contract
Technical Know - how Contract
Technology Transfer Contract
Service Contract
Maintenance Contract
Servicing and Repair Contract
Forward Contract
25

Rate Contract
Building Operate Own Transfer Contract (BOOT)
Build Operate Lease Transfer Contract (BOLT)
Build Operate Own Contract (BOO)
Public Private Partner ship (PPP)
In each type of contract the obligation to the parties are clearly, specified defined and
determined.
The duty and tax elements are also determined are the basis of the type of the
contract.

INSTRUCTIONS TO BIDDERS

Project information
Project site Location
Communication Facilities
Scope of bid
Source of funds
Qualification Requirements
Cost of bidding
Site visit
Bid documents
Prebid Conference
Evaluation methods
Bid Validity
Bid security
Languages of bid

SUBMISSION OF BIDS

Sealing & Markings


Dead line for submission,
Late bids.

BID RECEIPT AND OPENING

Bid opening procedure


Documentation
26

Evaluation – correction
Short listing.
Bid schedules
Bid price
Price evaluation & comparison
Award of contract

Need Need Based

Quantity – Quality – Time

SOURCING

Domestic International
On shore Off shore
DCB ICB

Local Other country


Other States Trade agreements
Rate contract Tied up credits
Proprietary nature Memorandum of
Understanding.
DOMESTIC SOURCING

Advantage
Direct : Local currency
Accessibility
Follow up
Local – Law
Indirect : Direct negotiation
Communication
Visits

Risks : Strike
Lock out
Non availability of Raw Materials
Local problems
Government regulation
27

GLOBAL SOURCING

Need : Non availability – Locally


Quality consideration
designs – know how
Price consideration
ADVANTAGE

Direct : Guaranteed quality


Price advantage
Quality on inputs
Time Schedule

Indirect : Reduction in overheads


Reduction in investments
Reduction in resources.

Risks : Other country


diplomatic relationship
Laws – different
Formalities
Foreign Exchange
Currency fluctuation
Banking channel
Payments - Letter of credit
Ocean transport
Spares – dependence.

TOWARDS A CONTRACT PROPOSALS

FOR ANY CONTRACT PROPOSALS, IT IS NECESSARY TO KNOW THE


FOLLOWING CLEARLY

1. YOUR COUNTRY
2. YUUR COMPANY
3. YOUR CLIENT
4. YOUR COST
5. YOUR CONSIDERATIONS
6. YOUR CONDITIONS
7. YOUR COMPETITOR
8. YOUR COMPETITIVENESS

CONTRACT PERFORMANCE
28

THEN GET THE CONTRACT CONCLUDED ON THE BASIS OF OFFER AND


ACCEPTANCE – MUTUALLY AGREED TERMS AND THEREAFTER WORK TOWARDS
THE CONTRACT BY RESPECTING AND ADHERING AGREED TERMS - CONDITIONS -
PRICES

A Contract agreement as clearly specified objective or scope of work defined,


to be performed with pre determined time schedule with start and end dates,
with agreed contract terms, conditions and price.

1. CARE FOR IT
2. CONDITIONS ABIDE IT
3. CONCENTRATE ON THE JOB
4. CONTROL ALL THE ACTIVIES
5. CO-OPERATE WITH ALL AGENCIES
6. CO-ORDINATE WITH ALL DEPARTMENTS
7. COMMUNICATE ON ALL MATTERS
8. COMPLETE IT SATISFACTORILY
THEN THE CONTRACT IS PERFORMED AND DISCHARGED SUCCESSFULLY
AND THEREBY

PRESTIGE, PRIDE, ENRICHED

Register of holds / hindrances – documents


Hold / Hindrance
Sl No. Area / Item Signature of Parties
duration
1
2
3
4

Hold is defined as temporary stoppage of work as instructed by the owner due his
failure to provide, approvals to designs, work carried out input on technical details,
data, delay in providing owner sup[ply of materials, plant and machinery, work front
release, water supply, power supply, revisions, additions and alternations and delay
on due payments. The duration of stoppage may or may not be indicated. However
such hold shall have an impact on adhering to time schedule agreed and amount
agreed in the contract. All such holds as recorded and documented shall examined
in a fair manner, and their impacts shall be settled and terms of contract duly
amended.
29

Hindrance is defined as an item not identified in the tender documents or in the


contract, such as encroachment, trees, vegetation at site, occurrence of rock,
different type of soil, non availability of construction materials, external causes by
other contractors working at the same site, breakdown by construction plant and
machineries, accidents. Such hindrances shall have an impact on adhering to time
schedule agreed and amount agreed in the contract. All such hindrances as
recorded and documented shall be examined in a fair manner and their impacts shall
be settled and terms of contract duly amended.

Normally, the holds and hindrances caused, shall not have the liability towards
liquidated damages.

These holds, hindrances are apart from the force majeure conditions specified in the
contract. Holding payments due shall bear interest towards delay on payments.

Payments for work done, accepted is essential part of a contract, as the contractor
has to pay his staff, sub contractors, sub suppliers, taxes, duties.

As per Indian Contract Act 1872, the most sifnifient aspects of any contract are
PROMISOR - PROMISE - PROMISEE - CONSIDERATION. In other words, they
are contractor, scope of work to be performed, owner and the price / amount agreed
in the contract. Generally all contracts do contain, promise, reciprocal promise. It
means, the promise by the party can be performed only reciprocal promise is ready
and willing to perform by the other party – section 52 of the Indian Contract Act 1872.

In construction field, the promise and progress can be achieved only the other party
hands over clear the site free of attachments, approves designs, drawings, provides
input technical data, release of work front making due payments, approvals to
addition, alterations, changes etc.

The injured party, contractor who is prevented to perform the scope of work due, to
holds, hindrances, delays, defaults caused by the other party namely the owner, than
can declare the contract as VOIDABLE and claim compensation. Indian Contract
Act 1872, has a provision for this voidable contract and compensation claims
thereupon.
30

However, if time extension is granted to execute the balance of work beyond the
original agreed time schedule, it shall then be without levy of liquidated damages.
The L.D. can than be applied for delays caused beyond the extended delivery
period.

Such work carried out during the extended period, the contractor is entitled for
compensation, towards price variation due to materials, labour overhead charges,
depreciation of plant and machinery, loss of profit, increase in texes, duties now
levies if any.

The contract can be successfully performed, if the above principles are adhered to.

ENGINEERING CONTRACT AND CONTRACTS MANAGEMENT

Engineering design, manufacture, supply and services contracts concluded between


two parties are generally reciprocal in nature. The basis of bidding system on which
such contracts are drawn and concluded are:

 International Competitive Bidding ICB


 Domestic Competitive Bidding DCB
 Bids invited among limited proven sources; or
or Limited Tender Enquiry basis LTE
 Bids invited from the only known source; or
Single Tender Enquiry basis STE

 On Nomination basis
 Out sourcing basis

In all these, above, there are set procedures laid down and are being followed since
the two contracting parties are not otherwise known or tied up with each other,
except through the contract for the particular stipulated scope, service, time, cost etc.
with certain agreed terms and conditions. It must be ensured that the contract is
carefully drawn as it creates a special legal relationship between them. Any error,
slip, omission may later lead to disputes, differences, litigations and cause for
arbitration.

Huge investments are envisaged towards the creation of assets like factories,
production units, housing complex, power sector, coal mining sectors, chemical
industries, oil industries, transport sector, machinery, equipments infrastructures,
31

airports etc. by Central, State and Private sectors, private and Multi National
Companies. All these proposals, capital invested both in India Rupees and in Foreign
currency shall have to yield results and Return on Investments (ROI) at the
schedule time and within the estimated approved and sanctioned cost. Any over run
of cost and time shall have an adverse effect on the total economy of that region and
ultimately the nation as a whole. Therefore, it is very essential, that every care is
exercised in the tendering procedure, specification both technical and commercial, in
the selection of the Vendor / Supplier / Erector / Contractor, the formation of contract,
execution of contract and discharge of contract, so that the planned and
programmed objective is attained within the sanctioned cost and time and without
their overrun.

In other words as per law the promise made by the promisor and accepted by
promisee is duly performed by both the parties, promisor and promisee duly
discharging their obligation set in the contract.

The scope of work as expected and envisaged at the time of entering with the
contract, is performed

In the process of contracts management man power, money, materials, machines


and mangers are to be managed.

Performance of a contract is a TEAM WORK which means EXECUTIES INVOLVED


WORK as stated below:-

T - Together
E - Every
A - Activity
M - Managed

Further towards performance of a contract there are 5P, 5M, 5C, to avoid different
5D. They are towards a contract concluded on the basis of offer, acceptance with
consensus ad idem its proper discharge/closure, the following are essential P. The
5P are:-

P. Promise - Clear scope work without vaguness ambiguity to be


performed and to be achieved
32

P. Party - Contractor, Qualified, dependable. Reliable


Resourceful – Therefore Qualification requirements
P- Price - Most competitive price fair, justifiable towards
performance of scope of work
P- Period - agreed time schedule – activity event – norms based
P- Payment - Due price agreed to be paid to avoid cash flow,
problems.

If the above 5 P are followed then the performance, scope of work / objective shall
be achieved to the satisfaction without pitfalls problems failures, defects.

Towards achieving the performance as above further the following basis are
required D.

The 5D are:-

D – discipline
D – devotion
D – dedication
D – determination
D – direction

The 5C are:-

C – Contractor
C – Cost
C – Control
C – Complete
C – Commendable
33

The 5M are:-

M– Money DPR – Project – funds – cash flow


M– Manpower – Executives – Labourers – deployment activity based
M- Machines – Constriction – erection equipments. Factory installed equipments
M- Materials – Consumables – equipments components, plant & machineries
M- Management – systems – methods – procedure – controls

5 D should not occur

D - Delays
D - Defaults
D - Defects
D - Difference
D - Disputes

Any contract as executed, the performance shall be commendable and shall not be
condemnable.

How to Conclude - Perform Discharge Contract

Rapid development in various sectors are being executed through selected


contractors, under concluded contract agreement with defined specification,
systems, management with scope of work, contractors being resourceful with
all aspects. These contracts are of hihg value with large gestation period. To
aboid cost and time over run and deriving the benedit, here are few guidelines.

TO CONCLUDE - CONTRACT TO PERFORM - CONTRACT

A Pre-ward - award B. Performance of contract


1.0 Kick off meet
1.0 Bid documents
Performance security
Clear scope of work to be performed Promise -reciprocal promise
Fair, equitable terms, conditions obligations
Prevailing trend -market conditions Activity -event chart
Technology upto dated Supporting Inspection -quality -control
drawings Simple Language. Holds, hindrance records
Progress monitoring review
Impact on time, cost.
34

2.0 Bid invitation 2.0 Fixed Are


Promise
Notice inviting tender Party
Sale-sale period Price
Period
Type of contract
Performance
Bid Security, Submission
pre-qualification
Pre-bid conference fixed
Bid opening date
3.0 Bid process 3.0 M - needed
Money
Prebid conference Manpower
Consensus ad idem Materials
Machines
Bid submission opening
Management
Evaluation of pre-qualification
Short listing
Technical evaluation
Commercial evaluation
Cost loading
Ranking of bidders
4.0 Pre-award discussion 4.0 D followed
Dedication
Letter of acceptance Devotion
Contract agreement concluded Determination
Duty
obligations fixed
Direction
promise-reciproval promise
Planning process
Co-ordinations - Monitoring
5.0 Functional units 5.0 D - Avoid
Delays
Planning - designing -co-ordination Defaults
Purchase Deficiency
Difference
Inspection
Dispute
Transport
Stores
Construction
Finance audit
35

DISCHARGE - CLOSURE OF CONTRACT

Work completion -take over -site clearance off site facilities construction machines,
Material accounting - reconciliation -surplus - damaged -scrap - disposal - Finance -
bills - duties - taxes settlment. No claim certificate-final bill. Discharge all securities.

The term “Management” is normally meant to achieve the objective, duly controlling
expediting and monitoring all the activities concerned. Management is defined by
various learned people in different contexts. It is defined as a multi purpose organ
that manages the business, the money the managers, the workers and the work.
Some other had defined it as a distinct process consisting of planning, organizing,
actuating, controlling to perform the determined objectives and set goal by the use of
people and all other resources. The Manager or the Management should be effective
and efficient to meet the objective set forth within the time frame, cost frame and
resources. There are different kinds of management functions and broadly they are
classified as under.

1. Personal Management
2. Financial Management
3. Production Management
4. Materials Management

While all the above have been fairly defined and there are a number of text books
and lot of information theoretically and on experience basis available, the
CONTRACT MANAGEMENT at the present moment is not gone into through text
books. It has become today great importance and it had assumed greater
significance to, due to the changes in the country. Business community both within
the country and outside are showing keen interest to invest in all the industrial sector.
Therefore Management of contract is very important and essential.

To achieve the objective in a contract essentially executives involved shall have the
following – characters – Devotion – Dedication – Determination – Discipline –
Direction.
36

CONTRACT MANAGEMENT - FUNCTIONS

The contacts Management embraces all the above management functions. The
contract Management has to manage the scope of work specified in the contract,
Manage the Contractor with his manpower resources, manage the time properly
drawing sequence and priority as set out in the contract, properly manage the
construction machinery, tools & plants for due and proper deployment to complete
the construction / erection as per schedule and also manage the contract within the
amount agreed to in the contract.

From the above, it could be seen that management of contact has a very vital role
which has to manage materials, manpower, machinery and the money besides time.
The contract management, therefore, calls for deep and detailed knowledge on the
principles of management of personnel, finance, materials, and production and
construction / erection technology.

While all the other four management’s require knowledge about particular aspects,
the contracts Management necessarily requires knowledge about all the different
types of management theory. Therefore, from the above preamble, it could be
appreciated easily that contract management is a very difficult and vital task as it has
to control many factors, but with the agreed price, time, without any flexibility in
regard to any one of them.

PRE-AWARD CONTRACT FUNCTIONS

Pre award contract functions are broadly classified as under

- Preparing list of contracts related to Project and developing contract package.


- Preparation and finalisation of tender documents and ensuring conformity with
project
- Preparing detailed schedule for contractual activities ensuring conformity with
project.
- Tender process - prebid conference
- Evaluation and short listing of bidders
- Preparation of Commercial evaluation of qualified bidders/offers.
- Pre award discussion - negotiation
- Issue of Letter of Award to the successful bidder
37

- Co-ordination for the preparation of engineering schedule, site activity


schedule, resource mobilisation plans, cash flow with the contractor and
respective inter departments.
- Plan for input, work front needs.
- Contract agreement concluding,
- Keeping all the original bid, evaluation reports and other documents in safe
custody.

FORMATION OF CONTRACT

Contact is naturally formulated from an offer against an enquiry and acceptance


thereof. Therefore, it is obvious that there should be minimum of two parties - one
who makes a proposal or offer and the other who accepts it. Therefore, it is
imperative that there should be a concurrence of at least two minds. The parties
must have identity of minds and in legal terms it is called "Consensus ad idem".

When a proposal made by one is accepted by the other such a proposal then
becomes a promise. The acceptance must be absolute and unconditional and shall
correspond to the terms of the offer and / or mutually agreed terms.

The offer must be DEFINITE

Intending to give rise to legal consequences

Must be from a competent person qualified to make the offer.

The Acceptance must be ABSOLUTE and UNCONDITIONAL.

Corresponding to the terms of the offer

must be by a competent person

must be by the one to whom the offer is made

must be communicated to the other who had offered.

The contract emerges from the acceptance of an offer.

The contract must be signed by the executives of the parties by who are the holder
of power of attorney issued by the respective company.
38

CHART

FORMATION OF CONTRACT

OWNER BIDDER

NIT BID
SPECIFICATION

DEVIATIONS

SORTING OUT
DEVIATIONS

UNDERSTANDING
AGREEMENT
REACHED

CONTACT
RELATIONSHIP
CREATED

UNDERSTANDING
AGREEMENT
REACHED

CONTACT
RELATIONSHIP
CRETED
39

The Chart explains the position of the Owner with his bid specification and the
Bidder/tenderer with his bid proposals. Naturally bid proposals may not be in line
completely with the bid specifications and may contain deviations. These deviations
are anlaysed and examined and an understanding is reached and an identity of mind
arrived at between the owner and the Bidder. In other words, these two parties
narrowed down the differences / deviations and understood each other.

A privity of contract is created thus, between the parties by which terms and
conditions agreed can be enforceable between them.

On the basis of a contract agreement reached and concluded between the parties
concerned to the contract, these parties create their rights and set their obligations,
risk and liabilities of each to the other. The contract so concluded draws out a written
clear cut relationship between the parties to the contract and set to a time frame.
These obligations are written in the contract under various clauses and each one of
the contracting parties has to perform with due respect and faith and shall not breach
them under normal circumstances. If this is arrived at and achieved by the parties to
the contract, then naturally the contract shall be executed in time and within the
agreed contract price without any dispute and it can be termed as discharge of
contract through accord, perform and satisfaction.

CHART

OWNER CONTRACT CONTACTOR

Timely furnishing
Approvals to
of design,
design, drawing
drawings, work
test certificates
schedule, test
Review of
certificates
Progress
Inspection call
Inspection
Running bills
Acceptance
progress reports
Payment facilities
Quality Work
Decision

Discharge through accord


& satisfaction
40

The Chart explains the obligations under the contract in a broad sense between the
owner and the contractor.

POST AWARD CONTRACT FUNCTIONS

Post award contract functions involve preparations and approvals to design,


drawings, billing schedule inspection expediting and co-ordination monitoring the
progress of work through constant follow-up with the contractors in order to ensure
timely deliveries of equipment, erection, testing and commissioning them as per the
requirements of project. This also includes payment, dealing with disputes and taking
necessary action in the event of inadequate performance in the course of the
execution of the contract, The following are the typical post award activities.

- Finalisation of PERT network of the particular contract


- Finalisation of contract co-ordination procedure.
- Finalisation of quality assurance plans.
- Bar chart with activity, event, time, Manpower chart, Level, Number linked with
schedule on activities - Plant - Machinery - deployment chart - item - quantity -
linked with Bar Chart cash flow chart - linked with Bar Chart inputs, interface,
work front, approvals linked with Bar Chart.
- Preparation and approvals to design, detailed engineering drawings
- Approvals to sub contractors, sub suppliers
- Approvals to bill of materials bill of quantities despatch schedule
- Co-ordination with quality assurance for finalisation of quality plans
- Programme for release of inputs and work front.
- Monitoring and analysis of progress.
- Inspection procedure - methods
- Monitoring of despatch and receipt of goods at project site
- Visit to manufacture's premises to ascertain physical progress of the
manufacture of the equipment
- Payments and monitoring of cash flow
- Finslisation of scope changes, schedule changes and procedure changes
- Co-ordination for customs clearance for goods to be imported
- Co-ordination for obtaining insurance policy
- Co-ordination for erection methodology, performance test and commissioning
procedure
41

- Co-ordination in taking over the equipment/system after performance test.


- Co-orindation in closure of the contact.
The above aspects are to be considered then it will definitely ensure
completion of the scope of work agreed within the cost and time provision.

CONTRACT MANAGEMENT - PERFORMANCE

A contract is to be operated between the parties to the contract as per scope, price,
time schedule, payment terms and other terms and conditions agreed upon. There
cannot be any change unless authorised. Charts explain the liabilities between the
parties.

CHART

PERFORMANCE OF CONTRACT

Owner Contract Contractor

Legal Binding

Technical Liability
Financial Liability
Legal Liability

Indirect
Taxes
Duties
Transport
Clearing
Banking
Exchange Rate
Agency
Insurance

Disputes & Solving

Decisions
42

CHART

PERFORMANCE OF CONTRACT

OWNER CONTRACT CONTRACTOR

Scope of work
Price
Time Schedule
Payments and
other agreed terms

The contract creates a technical, commercial and legal liabilities and obligation,
rights.

Technical liability - obligation

Contractor Owner
a) Preparation of design, detailed drawing Approvals to these activities.
bill of Materials and quantities - pert
chart.
b) Manufacturing sequence - despatch Inspection despatch
sequence. clearance.
c) Mobilisation -at site -manpower- Site handing over,
construction Tools, tackles machines, power supply, water supply
site office. Yard-storage other facilities – arrangements.
Construction. Review
d) Receipt of goods, storage erection- Quality control supervision-
Testing commissioning –Handing over commissioning team - taking
-discharge closure -formalities. over.
e) Warranty – Defect Liability Operating as per O&M-Manual.

Commercial Liability-obligation.
43

Contractor Owner
a) Bank guarantee charges - Advance Approvals -funds allocation
payment if any. -payments.
b) Sub supplier commitments. Followup
c) Despatch of goods - invoices. documents Fund allocation - payments.
payment taxes - duties.
Erection payments price variation.
c) Taxes-duties variation. Admissible as per terms.
d) Letter of credit opening-Bank charges. Release of F.E.
e) Exchange Rate Variation. As per terms.
f) Unforeseen events-workman As per agreed terms
compensation- Insurance -Extras/claim.

Legal liability-obligation

Contractor Owner
a) Performance as per agreed time/work Adherence to Reciprocal
schedule. promise
b) Adherence to Labour Laws. Exercise checks.
c) Disputes – Breach Amicable settlement
d) Arbitration Act to be followed.

Performance of Contracts :

A contract is entered into for being performed; the parties must perform their
respective obligations under the contract.

Tender of performance: A promisor must either actually perform or offer to perform


his obligation under the contract, to the promisee. This offer is called ‘tender of
performance’. The essentials of a valid tender of performance are:

(i) It must be unconditional;


(ii) It must be at a proper time and place;
(iii)It must be made to the proper person;
(iv) It must be of proper quantity and as to the whole of obligation;
(v) It must be made by a person willing and able to perform then and there
:
Acceptance of Performance: Once the promisor makes a valid tender of
Performance, it is then for the promisee to accept the performance. If the tender of
44

performance is rejected by the other party, the promisor is not responsible for non-
performance.

Who can demand performance: The person who can demand performance is the
party to whom the promise is made, even though the promise is made for the benefit
of some third person.

Who must perform the contract : As a general rule the contract must be
performed by the promisor himself according to the terms of the contract. In certain
cases, however, depending on the nature of the promise, the promisor or his legal
representatives can employ another person to perform the contract.

If the contract is intended to be performed personally, e.g. contract involving use of


personal skill of the promisor or contracts of technical nature, then the contract will
have to be performed by the promisor personally.

Time and place for Performance: The following principles may be noted with
regard to time place for performance of a contract:

(i) Where a contract states the performance:


(ii) Where the contract does not specify any time for its performance and
the promisor has undertaken to perform without a request from the
promise, then it must be carried out within a reasonable time;
(iii) Where the contract is to be performed on a certain day and the
promisor has undertaken to perform without a request from the
promise, the promisor may perform it at any time during the usual
hours of business on such day, at the specified place;
(iv) When the promise is to be performed on a certain day, and the
promisor has undertaken to perform without a request from the
promisee, the promisor must make a request for the performance at a
proper place and within the usual hours of business ;
(vi) When a promisor is to be performed without a request by the promise
and no place is fixed for its performance, the promisor must request the
promisee to fix a reasonable place for the performance and perform the
promise at such place.
Effect of Failure to Perform a Promise at a Fixed Time: When a party promises
to do certain thing at or before a specified time and fails to do so, the contract
45

becomes voidable at the option of the promisee, if the parties had intended that time
shall be of essence to the contract.

Time is considered to be of essence to the contract, where: -

(a) The parties have expressly agreed to treat time to be of essence;


or
(b) The delay in performance causes injury; or
(c) The nature and necessity of the contract require it to be so construed.

For example, where a contract becomes voidable on account of the promisor’s


failure to perform his promise at the agreed time, but the promisee accepts delayed
(or pre-scheduled) performance, the promisee cannot claim compensation for any
loss caused by non-performance of the promise at the agreed time, unless he gives
a notice of the same to the promisor, at the time of such acceptance, where the time
is not intended to be of essence, the contract does not become voidable by the
Promisor’s failure to perform in time, but the promisee is entitled to compensation for
any loss caused thereby.

Performance of Reciprocal Promises: Where a contract consists of reciprocal


promises to be performed simultaneously, no promisor need perform his promise
unless the other promisee is ready and willing to perform his reciprocal promise. For
example, where in a sale contract the goods are to be delivered on payment of price,
the seller need not unless the buyer is ready and willing to pay for the goods on
delivery. Similarly, the buyer need not pay for the goods on delivery. unless the
seller is ready and willing to deliver the goods on payment.

Where the order in which the reciprocal promises are to be performed, is expressly
laid down in the contract, they shall be performed in the same order. Where no such
order is fixed, the promises shall be performed according to the nature of the
transaction.

All contracts invariably are based upon the performance of the reciprocal
promises of the parties. The order in which the said reciprocal promises are
required to be performed, is laid down in Sections 51, 52, 53 and 54 of the Indian
Contract Act, 1872.
46

What is inability to Perform Contract: A party is deemed to have incapacitated


himself from performing his side of the contract, not only when he deliberately puts it
out of his power to perform the contract, but also when by his own act or default
circumstances arise which render him unable to perform his side of the contract or
some essential part thereof.

The Indian of contract Act 1872 under chapter performance stipulates, as


under

- Section-37- Obligation of Parties to contract.

The parties to a contract must either perform or offer to perform, their respective
promises, unless such performance in dispensed with or excused under the
provision of the act or any other Law.

Must either perform, means immediately perform the promise, that is handing over
the goods, off the shelf item or ready made goods of any nature, consumable, plant
& machinery, spare parts.

Offer to perform, where promise cannot be performed immediately as it involves,


design, Engineering, manufacture testing transporting, storage, erection-
construction, commissioning, it has to be performed in the proper sequence-and
sometimes with reciprocal promise. Therefore, an activity chart, bar chart, work
schedule are fixed for the performance. Here it is offer to perform the promise.

- Section 40- Person by whom promise to be performed

If it appears from the nature of the case that it was the intention of the parties to any
contract that any promise contain in it should be performed by the promisor himself,
such promise much be performed by the promisor. In other cases, the promisor or
his representative may employ a competent person to perform it.

Should be performed by the promisor himself In a contact, where the promisor


only has the particular skill, knowledge, it must be performed by him only. Example:
Carpenter, Welder, electrician – Specialist – Consultant

In other cases the promisor or his representative may employ


47

In a composite contract the promise involves so many activities from design to


commissioning, design, detailed engineering, However manufacture of critical items,
quality control are to be performed by the promisor only and other item can be
performed through sub-suppliers, sub-contractors, agents.

Section 41 - Effect of accepting performance from third person

When a promisee accepts performance of the promise from a third person, he


cannot afterwards enforce it against the promisor.

If the owner, accepts any work under the contract, gets it implemented by other
supplier/ Contractor/ party, namely third party, other than the contractor, then owner
cannot claim or enforce on the contractor.

Section 50 - Performance is manner on at time prescribed or sanctioned by


promisee.

The performance of any promise may be made in any manner or at anytime which
the promisee prescribes or sanctions.

In any manner, the performance can be in any manner as per the practice of the
promise and as per agreed bar activity chart.

At any time the promise, Owner can stipulate stagged delivery period with quality for
each. In a composite nature of contract involving many activities, etc it could be by
activity, event a bar chart, sequence schedule with time frame for each activity and
event.

- Section 51-Promisor not bound to perform, unless reciprocal promisee ready


and willing to perform.

When a contract consists of reciprocal promises to be simultaneously performed, no


promisor need perform, unless the promisee ready and willing to perform his
reciprocal promise.

All engineering contracts are bilateral in nature and contains, promise by one party
and reciprocal by other party. Where design detailed engineering bill of materials-
quantities to be prepared by one party and to be approved by other party, unless it is
approved further procurement action cannot be done. So the promisor / contractor
48

need not perform unless the promisee/owner is ready to approve or willing to


approve it. The activities for performance are not independent, but dependant on the
other.

Section 52- Order of performance of reciprocal promises.

Where the order in which reciprocal promises are to be performed is expressly fixed
by the contract, they shall be performed in that order and where the order is not
expressly fixed by the contract, they shall be performed in that order which the
nature of transaction requires.

In the performance of the scope of work agreed between the parties to a contract,
there are promises and reciprocal promises to be performed by each party, at certain
point of time. In most of the case, the reciprocal promises, events are identified and
expressly fixed, determined with suitable time, and put in a bar chart. In such a case,
where such reciprocal promises are determined and fixed, they shall be performed in
that order only.

However, where it is not fixed, it shall be performed as per the technical work
requirements.

- Section 53- Liability of party preventing event on which contract is to take


effect.

When a contract contains reciprocal promises and one party to the contract prevents
the other from performing its promise, the contract becomes voidable at the option of
the party so prevented and he is entitled to compensation from the other party for
any loss which he may sustain in consequence of the non performance of the
contract.

All engineering contracts contain promises and reciprocal promises. Unless


they are performed in the order agreed upon the total performance or completion of
the scope of work agreed in the contract between the parties, cannot be achieved. If
one party fails /delays to perform its promise to reciprocal promise, the other party
cannot perform his promise or obligation in otherwords, thus this party is prevented
to perform. In much a situation, the contract becomes voidable which in law means
49

repudiation by the party so prevented and the party is entitled to compensation as


deemed fit.

- Section 54- Effect of default as to the promise which should be performed, in


contract consisting of reciprocal promises.

When a contract consists of reciprocal promises, such that one of them cannot be
performed, or that it is performance cannot be claimed till the other has been
performed, and the promisor of the promise last mentioned fails to perform it, such
promisor cannot claim the performance of the reciprocal promise and must make
compensation to the other party to the contract for any loss which such other party
may sustain by the non performance of the contract.

Owner A concluded a contract with contractor B for completion of foundation work for
a transformer to be laid on it and erected. For the design manufacture supply
erection and commissioning of transformer, the same owner A concluded a contract
with another contractor C. The readiness of foundation for the transformer at
suitable time tied up with the supply and receipt of the transformer at the time of
concluding both the contracts. Therefore it is promise and reciprocal promise.

If the transformer foundation is not ready at the agreed time, to be provided by


A to C through B, the transformer placement on the foundation & erection cannot
be performed by contractor C. and the owner A cannot claim the performance from
C. as the owner A failed to provide the foundation. Further if the transformer is ready
either at the factory of C of at project site of A, the owner A has to compensate the
contractor C the loss if any suffered. The contractor C is entitled compensation for
storage, preservation, security charges, in addition interest as the payment due and
loss an capital invested.

- Section 55- Effect of failure to perform at fixed time, in contract in which time
is essential.

When a party to a contract promises to do a certain thing at or before a specified


time, or certain things at or before a specified times and fails to do such thing at or
before a specified time, the contract or so much of it as has not been performed
becomes voidable at the option of the promisee if the intention of the parties was that
time should be of essence of the contract.
50

When time is essence of the contract, the promise or the scope of work shall be
performed and completed at or within the time schedule agreed. But party/ contractor
failed to perform or complete the scope of work at within the time schedule agreed,
then the contract becomes voidable at the option or choice of the promisee.

Then gives a right to the owner to levy the liquidated damages - (L.D) for time
delay.

Effect of acceptance of performance at time other than that agreed upon.

If in case of a contract voidable on account of the promisor's failure to perform his


promise at the time agreed, the promisee accepts performance of such promise at
any time other than that agreed, the promisee cannot claim compensation of any
loss occasioned by the non performance of the promise at the time agreed,
unless at the time of acceptance he gives notice to the promisor of his
intention to do so.

If the contractor fails to adhere to time schedule, where in the time is essence of the
contract, then if the owner accepts the work carried out beyond the time schedule,
without grant of time extension, the owner looses the right to levy liquidated
damages. However the owner can grant time extension or issue a notice retaining
the right to levy the liquidated damages if his intention, that the contractor is to
perform the balance of work, after the time schedule lapsed. The commercial issues
to be settled between the parties.

Section 67- Effect of neglect of promisee to afford promisor reasonable


facilities for performance.

If any promisee neglects or refuses to afford the promisor at reasonable facilities for
the performance of his promise, the promisor is excused by a neglect or refusal as to
any non performance caused thereby.

In engineering contracts particularly design procurement construction, erection many


cases, it may be agreed that the promisee / owner may provide facilities for the
performance of the promise (scope of work) by the promisor / Contractor such as
design inputs and other inputs / workfront release, construction water and power
requirements, residential accommodation, communication facilities, construction
51

plant and machinery. If any one of them is not provided at the agreed time by the
promisee / owner, then the promisor / contractor is excused towards the
performance.

Even though generally contracts are bilateral in nature between the owner and the
contractor, ie two parties, the agencies involved in many contracts during the
implementation/ performance of the contract are.

- Owner
- Consultant
- Equipment manufacturer
- Contractor - construction / erection.

In most of the cases, the owner and Consultant are one of the contracting party and
the equipment manufacturer and the contractor are the other contracting party. The
relationship between these two groups are again governed by a contract between
themselves. The objective of all are to complete and perform, the scope of work
entered into the contract within the time schedule and price agreed. But in real
performance stage of the contract, each, one of the four plays in a different way
mainly to meet its interest first and foremost.

The attitude of the parties to the contract in the due performance of the contract are
explained in Chart-5.

OWNER

- desires to complete the work earlier


- desires to control all activities
- desires all information to be furnished in time
- delays in releasing the fronts / inputs in due time
- delays in clearance and approvals
- delays in release of due payments.

CONSULTANT

- desires his views are final


52

- delays in basic engineering particulars


- delays in approvals, release of drawings, technical data
- delays in inspections and despatch advice.

EQUIPMENT MANUFACTURER

- desires that the equipment as manufactured shall be accepted


- desires total freedom in quality and manufacturing method, and least advice /
opinion from others
- desires immediate inspections, despatch clearance
- desires early payment
- delays in manufacture and inspection call.
- delays in supply of erection methodology;
- delays in supply of operation & maintenance procedures.

CONTRACTOR - CONSTRUCTION - ERECTION

- desires quick release of drawings, data and approval


- desires free area at site
- desires acceptance of work when completed.
- desires quick payment and more profits
- delays in submission of PERT chart schedules, QAP progress reports etc.
- delays in mobilisation, progress and achieving the targets.
- delay in furnishing O and M manuals and as built
drawings.

All these attitudes of these parties cause great problems in the proper performance
and discharge the contract.
53

CHART
ATTITUDE OF THE PARTIES TO THE CONTRACT

CONTRACT
CRR
SCOPE TIME
PRICE &
OTHER TERMS

ASSUMES ASSUMES
Superior Knows the job better
Others subordinates Always correct
Final authority Authority in
C
manufacture, design,
construction O
N
O EXPECTS T
W EXPECTS
Quick action
Freedom
R
N All reports A
Quick Approvals
E Progress Returns
Immediate Payment C
R Full Control
More Profits T
Benefits O
DELAYS R
DELAYS
Approvals
Designs drawings
Clearance
Manufacture
Payments
Works
Decisions
Inspection
Taking Over
Information

Bilateral
Relationship

With the different attitudes of each party as above and these views opposing each of
the other, the contract is to be managed and again within the scope of work, time
schedule and price. Any over run in time or cost and on both are not desirable and to
be discouraged.
54

Payment:

a. Payment due after the scope of work carried out inspected, approved
and certified shall effected as per the agreed payment terms in the
contract agreement. Evens tender s: documents shall stipulate
payment terms with necessary documents and it can be discussed
during pre bid conference, amended if necessary and such agreed
terms on payment shall form part of the contract agreement and
shall be adhered to be the parties to the contract.

b. Terms of payment, normally 100% full value agreed on completion. It is


generally followed in off the shelf items of consumables as cash and
carry. But major contracts of high value it inessential to provide secured
advance payment between 10% to 20% of the agreed contract price. It
shall not bear any interest. It has to be secured in the form of advance
payment bank guarantee to the equivalent value, valid till the end date
of the contract. It also can be extended as and when required
depending upon the performance of the scope of work, time extensions
granted.

c. In the case of item unit rate contract, the next stage payment terms
shall be 80% of the value of work done, while advance is 10% and last
10% on completion of the work. All the stage payments are RA bills,
running account bill, subject to any correction in the final bill.

d. In the case of lumpsums turnkey contracts after detailed engineering


completed, a billing break up is prepared based on the items,
quantities-required for the work and further based on despatch
sequence schedule. The payment terms shall be

1. 65% on proof of dispatch as per agreed dispatch1 sequence

2. 10% advance

3. 15% on receipt of goods at site and

4. Balancel0% on completion of work.


55

e. In the case of lumpsums turnkey, the scope being supplies, and


services, like transport, insurance erection, testing and commissioning,
the payment items shall, supplies as in para 6.4 and terms shall be

1. 10% advance

2. 65% on clear defined erection stage

3. 5% on testing as per approved norms

4. 20% on completion of erections

5. Balance 10% on commissioning after conducting duperformance


guarantee tests.

f. Towards all the payment terms, a cash flow chart shall be prepared for
the full period of contract clearly monthly cash need, based on the
payment terms, billing breakup etc. which will help to regulate the cash
inflow and outflow,

g. On completion of each activity, price variation bill shall be claimed as


per approved formulae indices and total 100% paid.

h. All payments shall be made within30 day of complete, clear and


contract bill raised duly adjusting recoveries of any. However the final
payment shall be made within 60 days as it involves lots of checking all
details and documents.

i. 100% on taxes, duties, transport charges, insurance charges along


with each bill.

TIME EXTENSION AND ITS EFFECT.

Time extension shall be granted only on bonafide request and not in a routine
manner. In case more than one Contractor are engaged on a project and delay
occurs, the case should be analysed on a total perspective and the agencies
responsible for the delay, including the consultant should be appropriately burdened.
There shall be provision in the contract to grant time extension by the owner to
perform the obligation Time extension may need to be granted due to.
56

Causes by force majeure


Causes by contractor
Causes by owner
Causes by contractor and Owner

Wherever necessary, the contractor shall request for extension of time specifying
period up to which time extension is required before the expiry of the contract period.

Time extension shall be granted if the delay is caused by the force majeure and or by
owner without levy of liquidated damages. The delay is caused by the contractor
time extension may be granted retaining the right to levy of liquidated damages. If
the delay is caused by both the owner and contractor, then time extension be
granted on analysis. The liability on liquidated damages can be settled by time delay
analysis. In all cases of time extension, suitable extension of the securities by way
of bank guarantees shall be ensured. Increase in Taxes and duties during the
extended period shall be allowed if delay is caused by owner and if the delay is
caused by the Contractor, the liability shall be to the contractor. But if the delays are
caused by both, the effect of tax liability shall be reviewed, discussed and settled
fixing liability on both parties.

HINDRANCE RECORD

Event that caused hindrance to proceed and progress with the work shall be
recorded daily and duly authenticated and expeditious action shall taken, to settle
the issues.

A record of event shall be maintained as under

HINDRANCE RECORD REGISTER


Name of work: Value of Contract
Name of contractor Schedule Date of Completion
S. Description of Duration Remedy Delay by Signature of the
No hindrance contractor / Contractor Owner

owner
57

REMEDY

The Head of the construction Department shall be vested with full and complete
technical authority, powers to make variation / deviations in the Technical
specifications, Quantity, Quality , substitution if in his opinion it is necessary for the
technical requirement and to complete the scope of work. Such powers shall be
exercised with due care and subject to the Technical and Quality requirements being
met, without any undue benefit to the contractor or loss to the owner. A well and
clearly drawn out activity linked with Time - bar chart, pert / CPM Network etc, shall
act as a Monitor and shall help in the monitoring activities.

A good progress regular reporting system is to be drawn, adopted and followed. The
constraints if any, reported in the progress shall be liquidated immediately and shall
not appear in the next report.

In spite of best efforts, pre bid conference, identity of mind etc., during
implementation of scope of work in a project nature of contract, disputes, differences,
changes, additions, omissions, deletion etc. may occur. The owner shall act
expeditiously and in case of difficulty to resolve, prepare an Impact Report.

IMPACT REPORT

The impact report shall generated immediately on occurrence

IMPACT REPORT
Report No.
Date .......................
Name of work : Contractor:
Contract value Time Schedule
S.No.
Description of Problem
Reasons for delay
Impact on progress /cost/ time
Remedies suggested

Discussion can be held with the Contractors with a view to amicable settlement. In
case where it may be difficult to settle, such a case can be treated as "Compensation
Event" and 75% of payment as per the value arrived at by owner shall be paid. For
58

any such situation, decisions shall be taken expeditiously upon occurrence, to avoid
frustration and further delay.

COMPENSATION EVENT CONTRACT - PRICE - TIME - LEGAL POSITION

Compensation Event

In any contract between two parties, the compensation event shall generally be
hereinunder.

The owner does not give access to site of work or does not hand over the site as per
agreed schedule.

The site conditions are substantially more adverse than could reasonably assumed
out of the data, information furnished in the tender specifications and even from
information available publically and form a visual inspection at site.

The owner causes delay in furnishing facilities agreed, in approving designs,


drawings, technical specifications, inspection, data etc. sub contractors, suppliers,
instructions required for execution work.

The owner instructs the contractor to carry out additional work, substituted work,
additional tests which results indicates no defect.

The owner delays in making advance payments and other subsequent stage
payments.

The owner modifies the schedule of other contractors which consequently affects the
performance, like delayed inputs, work fronts.

Other contractor, public authorities, utilities of the owner does not work within the
agreed terms

Any other constraints arising out of the performance of the contract.


59

Contract - price - time extension

The compensation event if any happens, it shall cause additional cost and prevent
the scope of work completed with in the agreed time.

The compensations admissible and time extension needed to complete the entire
scope of work shall be examined, assessed and settled.

Legal Position

The Indian Contract Act 1872 specifies Under section 51, 52, 53, 54, 55, 67, 70, 73,
74 and 75 areas / events where compensation is entitled.

The above sections as in the contract act are herein under:

Section 51 - Promises not Bound to perform under reciprocal promise needy


and willing to perform

When a contract consists of reciprocal promises to be simultaneously only


performed, no promisor need perform his promise unless the promisee is ready and
willing to perform his reciprocal promise.

Section 52 - Order of performance of reciprocal promises

Where the order in which reciprocal promises are to be performed is expressly fixed
by the contract, they shall be performed in that order and where the order is not
expressly fixed by the contract, they shall be performed in that order which nature of
the transaction requires.

Section 53 - Liability of party preventing event on which contract is take effect

When a contract contains reciprocal promises and one party to the contract prevents
the other from performing his promise, the contract becomes voidable at the option
of the party so presented and he is entitled to compensation from the other party for
any loss which he may sustain in Consequence to the non performance of the
contract.
60

Section 54 - Effect of default as that promise which should be first performed


in contract consisting of reciprocal promises.

When a contract consists of reciprocal promises, such that one of them cannot be
performed, or that its performance cannot be claimed till the other has been
performed, and the promisor of the promise last mentioned fails to perform it, such
promisor cannot claim the performance of the reciprocal promise and must make
compensation to the other party to the contract for any loss which such other party
may sustain by the non performance of the contract.

Section 55 - Effect of failure to perform at fixed time in contract in which time


is essential.

When a party to a contract promises to do a certain thing at or before a specified


time, or certain things at or before specified time and fails to do any such thing at or
before the specified time, the contract or so much of it as has not been performed
becomes voidable at the option of the promisee if the intentions of the parties was
that time should be the essence of the contract.

If, in case of a contract voidable on account of the promisor's failure to perform his
promise at the time agreed, the promisee accepts performance of such promise at
any time other than that agreed, the promisee cannot claim compensation for any
loss occasioned by the non-performance of the promise at the time agreed, unless,
at the time of such acceptance, he gives notice to the promisor of his intention to do
so.

Section 67- Effect of neglect of promisee to afford promisor reasonable


facilities for performance.

If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to
any non performance caused thereby

Section 70 - Obligation of person enjoying benefit of non gratuitously act.

Where a person lawfully does anything for another person, or delivers anything to
him not intending to do so gratuitously and such another person enjoys the benefit
61

thereof, the later is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.

Section 73 - Compensation for loss or damage caused by breach of contract -

When a contract has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or
damage caused to him thereby, which naturally arose in the usual course of things
from such breach, or which the parties knew, when they made the contract, to be
likely to result from the breach of it

Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.

Section 74 - Compensation for breach of contract where penalty stipulated for

- When a contract has been broken, if a sum is named in the contract as the amount
to be paid in case of such breach, or if the contract contains any other stipulation by
way of penalty, the party complaining of the breach is entitled, whether or not
actually damage or loss is proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation not exceeding the
amount so named or, as the case may be, the penalty stipulated for.

Section 75 - Party rightfully rescinding contract entitled to compensation - A


person who rightfully rescinds a contract is entitled to compensation for any damage
which he has sustained through the non-fulfillment of the contract.

In a contract agreement entered between parties on the basis of consensus ad idem,


has in it a inbuilt scope of work to be performed and time schedule to be adhered to.
These two critical aspects namely performance of the promise within the agreed time
schedule are fully and adequately secured in the form of security deposit or
performance bank guarantee at a certain percentage agreed. Damage likely to be
caused due to non adherence to the agreed time schedule is adequately covered by
an agreed liquidated damages clause built in the contract agreement.

A good progress reporting system to be drawn, adopted and followed. The


constraints if any reported shall be liquidated expeditiously. Inspite of best efforts,
prebid conference, identity of mind, during pre award stage, yet in the
62

implementation in project nature of contract, disputes, differences, changes,


additions, alterations, deletions may occur and compensation to be arrived at and
settled on the basis of Compensation events.

Compensation

Compensation means anything given as an equivalent of to make, amount for loss or


damage caused due to delays, defaults, holds, hindrances laches, breaches.
Generally it is equivalent value in money. The compensation has to be worked out
based on the event.

Areas of Compensation Claims

 Refinements to original specification


 Delay in issue of drawings and instructions by the Owner.
 In accuracies in designs and drawings and subsequent revisions
leading to changes in material, equipment and work
 Change in equipment specifications due to account for non-
availability of essential raw material, components
 Deletion or reduction of any supplies or work (recovery of
uncovered overheads)
 Delay in handing over the site or other working areas-,
 Delay in obtaining clearances, and right of way.
 Changed site and subsoil conditions
 Discovery of antiquity and hazardous material at site
 Change in applicable laws, codes and standards
 Statutory increase in taxes, duties, wages, etc.
 Technological obsolescence
 On-site refinements for ease of operation and saving 0 & M cost
 Rectification and repair of owner free-issue material and equipment
 Hold-ups by the owner and subsequent acceleration of work to
catch up with the completion schedule
 Idle time due to delay in owner’s instructions
 Suspension of work by the owner for his convenience
 Re-scheduling or deferment by owner.
63

 Delay by other' contractors or utilities-, Delay by owner nominated


subcontractors
 Delay in release of payments
 Owner's delay in decisions on variations and additions and issue of
corresponding Change Orders
 Failure to perform owner part of obligations
 Force Majeure conditions

ARBITRATION

If disputes could not be settled be any one of the methods, then the recourse shall
be through arbitration as per Arbitration and Conciliation Act 1996. Setting aside the
dispute to be resolved by the Arbitral Tribunal, the work shall be proceeded with.

DISCHARGE OF THE CONTRACT- LEGAL

The discharge of the contract means completion of the contract in all respects. It is
generally achieved by any one of the following.

By accord perform and satisfaction

By an agreement

By novation

By impossibility of performance

By insolvency

By bankruptcy

By breach

By termination.

Each one of the above has its corresponding consequences on the contract and on
the parties to the contract.
64

By Accord, Perform and Satisfaction

It is the best and most desirable means of discharge of the contract. By this both the
parties to the contract have performed their obligations set and agreed in the
contract and are satisfied by achieving their rights. Thereby both the parties feel
satisfied that they have carried out their jobs, acts, obligations well in time and
thereby caused no inconvenience to each other. In fact this kind of discharge of
contract by both the parties enriches their pride and prestige.

By an Agreement

Before a contract is fully performed, the parties to the contract may discharge it on
terms mutually agreed upon. Such an agreement for the discharge of the contract
shall also set forth, the terms of settlement of work, bills, payment, accounts and
guarantees. Principles of fairness and natural justice may prevail. There shall be no
further obligations or rights anymore once contract is discharged by an agreement.

By Novation

Novation means the extinguishment of the terms of an earlier contract and creation
of another with another stranger equally competent in the legal sense and
technically, capable. It is essential for the principle of novation to apply, there must
be full mutual consent of all the parties concerned. The new party may enter into the
same contract duly amended wherever necessary so that the rights and obligations
remain unaltered or changed .Thus the new party takes the position of the party who
has agreed for novation including guaranteeing the work done by the earlier party by
novation, the contract with the earlier party get discharged.

By Impossibility of Performance

As a general rule a contract can be discharged if by a subsequent change in law or


act by which renders it illegal or impossible to perform. It also include a change in the
circumstances that the performance under the new conditions will be substantially
different from that contemplated by the contract. It happens mostly in the
international contract due to change in the diplomatic relationship or declaration of
war or any special government embargo restraining any commercial trade / business
65

between the two countries. Impossibility of performance arising from such position
subsequent to the contract, generally discharges the contractor from liability.

By Insolvency

When either owner or the contractor becomes insolvent, the contract will be
discharged. Therefore it is necessary in the bid specification to call for a solvency
certificate to prove and take care of such a situation. In the case of discharge of the
contract by insolvency, dues if any shall be claimed from liquidator while excess, if
any received shall be passed on to the liquidator. The insolvency of the contractor
puts an end to any agency fixed earlier as it is borne out of the contract only.

By Bankruptcy

It is almost similar to insolvency. The contract gets discharged. The contract is


determined. It is the duty of the bankrupt to pass on all information.

By Breach

The breach of a contract is the failure or refusal to perform it. Any such breach of
contract by anyone of the party to the contract gives the other party an immediate
cause of action and a right to damages as compensation for loss following from the
said breach. By breach, the contract is broken and is discharged as it renders, the
contract purposeless. If such a breach of the contract is proved, a claim for damages
is admissible in law. Damages are awarded as a pecuniary compensation for the
injury which the party suffers as a result of the breach by the other party. But law
does not recognise the liability for damage which are remote. Indirect losses and
conseuqential damages are not considered.

By Termination

If a contract is terminated consequent to failure to perform the contract, the contract


gets discharged. The relationship created between the parties to the contract
entered into is just broken by the act of termination. The contract is determined.
66

DISCHARGE AND CLOSURE OF CONTRACT

General

A contract is entered into between two parties for certain agreed scope of work, time
schedule and other terms and conditions. Due to design changes, site requirements,
non availability of certain items, components, changes in taxes, duties etc. and force
majeure condition amendments to the contract would have been issued on the basis
of agreements reached in those areas.

Therefore, work would have been completed as envisaged in the contract with
amendments if any. The contractor's bills are to be settled. All outstanding issues,
like the final settlement of bills, recovery of cost of owner supplied materials, plant
and machinery tools etc., off loaded items if any,. taxes, duties, would have been
settled and the contract would have been completed in all respects, physical and
financial. The guarantees would have been discharged except the warranty
obligations.

Under the circumstances, the obligation rights set out in the contract between the
parties to the contract shall have to be discharged once for all except performance of
the equipments plant and machineries erected, during the agreed warranty period.

Discharge procedure

The following steps have to be followed to issue a discharge and contract closure
certificate by the Owner.

Step -

The contract department shall clearly obtain a certificate from the construction
department and finance department for the respective role responsibility entrusted to
these departments.

Construction department

The construction department shall ensure and clearly certify that the scope of work
agreed in the contract with amendment had been completed in all respects adhering
codes and standards.
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That the equipment, plant, machinery erected, tested, commissioned had been taken
over after the successful performance tests.
That the spares, maintenance tools of all kinds have been supplied, received,
inspected, accounted and taken over and numerical account maintained.
That the essentiality certificate issued for the procurement of materials / construction
equipment have been utilised properly.
That the short supplies, damaged items have been identified, replacements
obtained.
That all the plant & machinery if any loaned/ handed over on hire charge basis have
been taken over.
That all the surplus materials / construction excess / owner supplied materials have
been identified, accounted.
That all the temporary structures put up by the Contractor have been disposed off.
That the liquidated damages, if recovered have been settled.
That the claims lodged with the insurance have been settled.
That all the statutory provisions have been complied with.
That claims if any, on any aspects of the contract have been settled.
That all the contractual obligations have been successfully completed.

Finance department

The Finance Department shall ensure and clearly certify

That the advance payment if any made had been duly adjusted

That all the work / job bills claimed have been paid.

That recovery, if any, had been effected

That the claims, in respect of duties, taxes have been settled.

That the last payment have been cleared and settled

That no dues are outstanding from the contractor

That IT deducted and remittance duly made.

That the Customs duty deposited have all been adjusted and settled.

That the Letter of Credit opened has been duly adjusted.


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Contract department

The Contract Department shall ensure that all the bank guarantees have been duly
discharged.
That the Bill of Lading and Bill of entries in the case of imports have been verified
and tallied.
That the Foreign Exchange release have been utilised properly.
That there is no claim / report from outside agencies / statutory bodies etc.
That there is no suit or arbitration case initiated.

Step-2

A no claim certificate from the contractor. The format is per Annexure - I. no


claim certificate is to be obtained from the Contractor.

Contract closure and discharge certificate

On the basis of the Certificate from all the departments, the contract Department
shall issue to the Contractor a CONTRACT CLOSURE AND DISCHARGE
CERTIFICATE

The no claim certificate to be obtained from the Contractor as well as contract


Closure and Discharge Certificate to be issued by the owner shall be issued by the
respective holder of the Power of Attorney only.

Pitfalls in contracts

1. Offer without clear understanding of Technical, commercial specification.

2. Inadequate, knowledge of liabilities on technical, commercial, time, guarantee,


legal.

3. Acceptance of contract without clear understanding terms, condition, rights


obligations.

4. Non availability of design input data, workfront - in due time.

5. Inadequate mobilisation of executive, labour, construction plant and


machinery tools tackles, funds.
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6. Additional work, scope change - New work

7. Oral instruction

8. Lack of proper progress monitoring co-ordination, co-operation, procedure,


system

9. Inadequate knowledge of site environment, local problems

10. Poor documentation

FEED BACK INFORMATION

TO SALE / MARKETING

Inadequate in Estimate - costing

Lack of clear understanding of specification

Liability undertaken. Known unknown not costed.

Unknown site condition.

TO PLANNING - ENGINEERING

Design defects-inadequate estimate

Manufacturing process priority – not identified

Wrong, assessment of quality, quantity Bought outs

Incomplete , defective specification on procurement

Defect in detailed engineering . drawing, BOM, BOQ

Wrong, sequence of procurement, despatch

Defective inspection procedure - erection methods

Defective Test procedure


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TO PURCHASE

Procurement delays, in bought outs –defects quality, quantity


Non adherence to manufacturing, erection sequence excess /. short supplies -
alternate materials.

TO CONSTRUCTION

Inadequate mobilisation

Improper construction, erection methodology - delay on sub- contracting

Inefficient management - labour problems

Poor - co-ordination

Construction surplus

Delay in handing over

Extra claims

Contract discharge
71

LEGAL - ENGINEERING – TERMS

All purchase order, supply order, work order, contract agreement, Letter of Intent,
Letter of award, Letter of acceptance issued are all binding Legal contract agreement
between the parties to it only and shall be performed as per agreed terms with
promise and reciprocal promise. Any default. delay failure, laches, hindrances, holds,
breaches the parties shall have to meet the burden of consequences there upon.

The governing Laws in this respect are

Indian Law of Contract - 1872


Sale of goods act - 1930
Limitation act - 1963
Evidence act - 1963
Arbitration and Conciliation Act - 1996

LAW OF CONTRACT – 1872


It is regulate the business transaction, between two parties to the contract.
All agreements are not contracts but all contracts are agreements too.
Law of contract has 238 section under (10) ten chapters.

VALID CONTRACT
A valid contract is an agreement enforceable by law between to parties to and
contains all essential elements of valid contract.

ESSENTIALS OF VALID CONTRACTS ARE


1. Two persons / two parties / companies etc.
2. Promisor – Promise – Promisee.
3. Offer and acceptance.
4. Consenses – ad idem.
5. Intention to create legal relation.
6. Lawful consideration.
7. Capacity of the parties to contract.
8. Free consent – not by force.
9. Legal object and not opposed to public policy
10. Possibility of performance.
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ILLEGAL CONTRACT

An illegal contract is one which the law forbids it to be made.

FORMATION OF A CONTRACT

Agreement over an offer and an acceptance

OFFER

Must be definite intended to give rise to legal consequence must be from a


competent person qualified to make an offer must be communicated.

ACCEPTANCE:

Must be communicated in a reasonable manner & time specified.


Must be made before the offer is revoked or rejected.
Must be absolute, unconditional and shall correspond with the mutually agreed
terms.
Must be made only by a person or party to whom the offer has been made.

LAPSE OF OFFER:

Lapses after the stipulated time or due to enactment of law.


Due to the death of the Offerer, by rejection of the offer by the offeree due to counter
offer.

REVOCATION OF THE OFFER

May be revoked by the offerer before its acceptance even though originally agreed to
hold it open for a definite period.

BREACH OF CONTRACT

1. Refusal to perform any of the agreed terms, conditions and clause.


2. Preventing other party to the contract to perform its obligations.
3. Creating conditions for non performance of the contract like delayed
approvals, payments etc.
4. Unilateral amendment to any of the agreed terms, conditions of the
contract.
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CONSEQUENCES OF THE BREACH

Breach of the contract by one party to the contract gives legal right of action to the
injured party to the contract.

To terminate the contract.

To determine the contract

To claim compensation for loss / damage.

LEGAL TERMS VERSUS ENGINEERING TERMS

Engineering Construction Terms– Contracts – Terms Legal Provisions – Protections

All contract agreements concluded, implemented, discharged are governed by LAW


of the land. Towards various procedure, aspects, activities of a contract agreement,
THE INDIAN CONTRACT ACT 1872 provides all legal provisions, protections. This
ACT -1872 is applicable to both the parties to the contract agreement and contains
238 sections in 10 chapters, in the proper sequence. This law of contract differ from
other branches of law as it does not lay down number of rights, duties, obligations
which the law may protect or enforce, but it contains rather a number of limiting
principles subject to which parties may create rights, duties, obligation between
themselves, which law will uphold.

In other words, the parties are free to fix up their own scope of work, terms, condition
and other securities. within which performance is expected. So long as these terms
do not infringe some legal provisions, parties are at liberty to make the rules,
procedures, & system regarding the subject matter of the contract agreement as long
as they are under mutual consent and agreement.

The law of contract is to be regulate the transactions between parties in a fair,


equitable justifiable manner.

The legal terms, words and their meanings related to engineering meanings,
implications are explained.
74

LEGAL TERMS- MEANING - ENGINEERING TERMS/ MEANING –


DEFINITION DEFINITION
OFFER:
TO OBTAIN AN OFFER NOTICE INVITING
An offer means a proposal to enter TENDER ISSUED.
into a contract made by one party A communication advertisement,
called offerer to another party called notification through any media.
offeree.
With basic details with an intention to obtain
offer/ quotation/Bids from possible
sources/vendors/bidders.
ACCEPTANCE
An acceptance shall mean the Acceptance is issued by way of letter of
manifestation by the offeree of his intent, letter of acceptance, letter of award,
assent to the terms mutually agreed supply order, Purchase order, work order,
terms of the offer by the offerer. job order agreement, contract agreement.
CONSENSUS AD IDEM
Consensus ad idem shall mean all Deviations to Tender Specification, counter
terms, conditions, drawings, offer, proposal, shall be sorted out and
specifications have been clearly mutual understanding reached and all items
understood and identity of mind agreed through pre bid conference pre
between parties created. award discussion exchange of letter or
discussions held and minuted.
PROMISOR
A person /firm/company making a Against a Tender issued, a proposal to
proposal is called promisor. undertake the scope of work indicated,
made by a contractor, manufacturer, Trader,
agent, company, firm, seller, and any
service provider.
PROMISEE
Promisee shall mean a person, firm, Another, party, buyer, owner, purchaser,
company who had invited tender employer who accepts the proposal made
and later accepting the proposal and enters into a contract agreement.
made by the promisor.
PROMISE
A proposal when accepted Promise is the scope of work ultimately
becomes a promise agreed between the parties on the basis of
mutual understanding and agreement
between them.
CONSIDERATION
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Consideration shall mean what a It the price, price basis agreed between the
promisor demands from the parties towards performance of completion
promisee as a price for the promise. of the scope of work agreed within the
Consideration is one of the agreed time schedule.
essential elements of contract
without which it is void contract and
is not enforceable in law.
COVENANT
Covenant shall mean a binding and It is binding agreement between the parties
solemn agreement to do or not to to the contract agreement to perform or
do or keep away from doing a complete the scope of work agreed
specific act. between them as per mutually agreed
terms, conditions, specifications drawings
and price.

FORCE MAJEURE
Force majeure - occurrence of an event
beyond the control of both the parties to
Force majeure shall mean on
contract agreement, preventing or disabling
irresistible force or compelling
both the parties to perform the respective
circumstances beyond anyone’s
obligation agreed. Both the parties may
control.
suffer in time and cost and no benefit
accures to anyone.

Generally time extension is granted to the


time schedule agreed without levy of
liquidated damages.

CAVEAT EMPTOR
Under sale of goods act 1930, it is said the
buyer or purchaser be sure of the
Caveat emptor shall mean
requirement in respect of item / goods
buyer/purchaser beware.
proposed to be bought / purchased, on its
quality, make, quantity. Once the
consideration that is the price agreed is
paid and such goods taken into possession,
the right to question on any these aspects
are not available, unless otherwise it is
covered by a warranty obligations.

COMPENSATION
Compensation shall mean any thing Failure to carry out or perform any activity
as an equivalent as to make described in the agreement gives raise to
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assessment for the loss or damage. compensation both time and cost.
Depending upon the scope of work agreed
in the contract, parties have set between
themselves to perform certain promise,
reciprocal promise. These shall be
performed as agreed and any failure may
enter in the time / cost over runs and may
cause delay in achieving the return on
investments. Compensations for time delay
is covered by a liquidated damage clause.
Failure to meet the agreed parameters shall
also be covered by liquidated damage
clause-others compensation are generally
governed by Hudsons formula and for few
events, it has to be determined on the facts
of the issue.

WARRANTY Warranty means the goods offered or sold


Warranty means seller's assurance is manufactured adhering engineering
to the buyer that the goods or codes, standards, and free from design
property is or shall be as defects, manufacturing defects, workman
represented and if not it will defects and shall meet the parameters
replaced repaired, reconditioned at agreed. It is yet another assurance, that
seller expenses. the goods shall truly represent as per
technical specification drawing, data
sheets.

In a project contract job it also means the


systems created shall perform to the
agreed rate of parameters.
In all cases, it shall be for a specific period
only.
GUARANTEE
Guarantee shall mean a promise to Guarantee is a financial support and
make payment of debt, default. assurance to meet the warranty obligations.
In engineering contract a third party stands
for payment if any for warranty obligations
not duly discharged. It is generally from a
bank, called bank guarantee for
performance or bank guarantee for
warranty.
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SCHEDULE
Schedule shall mean a plan of Schedule shall apply to
procedure to cover events. Preparation of designs & drawing
Approval of designs & drawing
Procurement
Billing
Dispatch
Time
Activity
Work
Erection
Construction
Handing over
OBLIGATION
Obligation shall mean a legal duty It means to carry out every activity, work as
created to perform the act agreed per agreed terms, conditions, prices,
upon. payment following such engineering
standards, code specified and agreed upon
between the parties. Any failure to meet
the obligation shall constitute a breach on
the agreed terms.
CLAIM
A claim means assertion of a right It normally arises due to
to have money paid. increase in scope of work
Additional work
Substituted work
Delays caused in payments
Delays caused in inspection
Delay caused in dispatch clearance
In price variation of materials, labour
variation in duties, taxes.
If contract is extended interest on last
payments. Loss of profits.
Overhead changes
Depreciation charges of plant & machinery
Bank charges
Insurance charges
Idle manpower, machinery.
And other issues
WAIVE
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It shall mean knowingly to surrender It means giving way the right provided and
& abandon a claim & a defence agreed in the contract between parties say
which might have been legally for example waiver of inspection of a
made. particular goods, components etc
ASSIGNMENT
Assignment shall mean transfer of It means authorizing a part of work in the
claim right of property through an agreed scope of work in a contract, getting
instrument or deed authorizing it. it done through an approved sub contractor,
and sub supplier
DAMAGE
Damage is a loss or injury caused In engineering contracts towards failure in
by the fault of the another and shall the due performance of the scope of work,
also mean money claimed by a a security deposit is retained or a
party to compensate for it by performance bank guarantee is obtained
another party. and in the case of time delay likely, a
provision by way of liquidated damages pre
estimate provision is made in the contract.
Towards non achieving the performance
parameters specified also a liquidated
damages towards shortfall is stipulated.
DISPUTE
Dispute shall mean a difference Dispute or difference may be cause due to
occurred but unresolved issue the interpretation of the terms, conditions of
leading to claims, compensation. the contract, performance of the contract
and closure, discharge of the contract. It
may lead to claims to be worked out based
on its nature and settled through
negotiations or arbitration.
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INDIAN CONTRACT ACT -1872

LAW OF CONTRACTS
ESSENTIALS OF VALID ENGINEERING CONSTRUCTION/
CONTRACT ERECTION CONTRACTS
Between two persons /parties. It is entered into between two different
companies or two different parties or
between departments/ company /Buyer
/Seller/Trader/Agent. Employer – Employee

Promisor – promise – promise Contractor Owner


- scope of work
Seller Buyer

Offer and acceptance Quotation - Tender / Bid submitted by the


tenderer meeting all the requirements,
terms, conditions, prices and accepted into
by the department/ owner / purchaser.

Consensus – ad-idem Identity of mind –without any omissions


deviations / counter but if any shall be
resolved and mutual understanding
reached.
Intention to create legal object and The scope of work or the promise shall be
not opposed to public policy. to create an asset (i.e.) construction of
building bridge, factories, erection
installation of plant-machinery.
Lawful consideration The amount / price /agreed in the contract
shall be rupees and not in any other form.
Capacity of the parties- not a minor- Capacity of a party to execute the scope of
mentally retarded - debarred by law - work is determined - by stipulating
certain judiciary constitutional and qualification requirements to take part in the
authorities. bidding.
Free consent – not by force. The bidder and / or purchaser shall not act
under force, compulsion to float a tender or
submit a quotation – offer and accept the
one.
Possibility of performance The scope of work shall be possible to carry
out with resources and shall not be
imaginary or prevented by law enacted.
There shall be an offer. An offer means a proposal, bid, tender
quotation. To obtain it, detailed specification
tender documents commercial, technical
are prepared indicating the scope of work,
time frame, performance and terms,
conditions under which it is expected to be
80

performed.
There shall be a notice inviting tender
through communication media. The notice
can be international competitive bidding
domestic competitive bidding depending on
the scope of work.

Fairness in the process – Notice inviting tenders issued to give fair


transparency opportunities to all intending bidders to
participate.
All tenders/ Bids are opened in the
presence of bidders only.
All deviations and other terms conditions,
prices and read out. For sorting out the
deviation, communications are sent to all
bidders participated. Pre bid conference
can also be held.
SECTION -9
PROMISES EXPRESS AND Scope of work will be defined in words and
IMPLIED also expressed is clear terms. For any
In so far on the proposal or goods ordered with express terms, it also
acceptance of any promise is made means, it is implied that the goods ordered
in words, the promise is said to be shall be manufactured according to codes
express. In so far as such proposal standards deploying machineries, quality
or acceptance is made otherwise controls measures, proper supervision, with
than in words, the promise is said to good workmen with the required skill.
be implied. It is implied term that in the absence of any
special terms conditions specification or
directions in the contract specifying the
manner in which work is to be done either
manufacture, construction, erection etc,
there is an implied conditions in all contract
for such works and labour, it shall be
performed as per standards codes,
workmen like manner.
It also implies, inspection checking,
dispatch clearance etc even though not
stated is express terms.
In major contracts involving supplies and
services, it is implied preparation design
detailed engineering drawings and their
approval.
SECTION 10
WHAT AGREEMENTS ARE All engineering contracts are concluded on
CONTRACTS the basis of Tender specification
documents. Notice inviting Tenders, offers.
All agreements are contracts if they Negotiation consensus ad idem -
are made by the free consent of acceptance. All contracts contain the scope
81

parties competent to contract for a of work, a lawful one, price or amount fixed
lawful consideration and with a a lawful consideration, creates of transfer of
lawful object and are not hereby title, creation of assets.
expressly declared to be void.
The parties to the contract are generally
company to company, department to
registered contractors, public companies, all
registered under Indian companies Act.

SECTION -13 The offer or bid proposals submitted by any


CONSENT DEFINED TWO OR tenderer/bidder against a notice inviting
MORE PERSONS ARE SAID TO tender means a sort of consent to carry out
CONSENT WHEN THEY AGREE the work as per the tender specification
UPON THE SAME THING IN THE documents.
SAME SENSE.
But many times the offer may have some
deviation on technical as well as
commercial aspects. There are sorted out
between the parties and an identity of mind
reached. Which in turn means parties have
agreed all terms, conditions, specifications
in the same sense at the same time. Thus
there is no ambiguity or difference or
deviation between the offer and its
acceptance.

A clear consent on the mutually agreed


terms, conditions specification thus arrived
at, to form a contract agreement.

SECTION 37
OBLIGAITON OF PARTIES TO In sale contract of goods, consumable, plant
CONTRACTS & machinery, readymade off the shelf items
are immediately handed on to the party. In
The parties to a contract must either all such case the obligation of the parties
perform or offer to perform their are performed than and there with one party
respective promises, unless such delivering it and other party accepting it and
performance is dispensed with or making the payment. HERE PARTIES
excused under the provisions of this PERFORMED.
act or any other law.
In major contracts including design,
engineering manufacture, testing
transporting storing erection/ construction
conducting performance test in the agreed
scope of work, cannot be implemented
immediately. As it involves lots of other
activities, events, the scope of work shall be
performed after the reciprocal promises are
performed. In all these cases, the party
offers to perform their respective promise
in a particular method/ order.
82

For example, concrete connect be laid


unless form work, reinforcements are ready.

Process piping cannot be erected unless


support are ready.

So bar charts are prepared activity wise and


followed.
SECTION 38
EFFECT OF REFUSAL TO When a bidder / Tenderer has made a
ACCEPT OFFER OF proposal to any purchaser /
PERFORMANCE owner/department and where the proposal
has not been accepted, the tenderer /
Where a promisor has made an offer bidder in such as situation is not
of performance to the promisee, and responsible for carrying out the work and
the offer has not been accepted, the cannot claim any payment. In this case
promisor is not responsible for non there is no concluded valid lawful contract.
performance nor does he thereby It can also be a case where the tender itself
lose his rights under the contract. has been cancelled.
SECTION 39
EFFECT OF REFUSAL OF PARTY When a party to a contract fail to perform
TO PERFOM PROMISE WHOLLY the scope of work and refuses to carryout
the work in spite of many notices, the other
When a party to a contract has party may terminate the contract and claim
refused to perform or disabled compensation.
himself from performing, his promise
in its entirety, the promisee may put When a party to contract disables himself
an end to the contract unless he has by way bankruptcy, insolvency, then the
signified by words or conduct his other party may terminate the contract.
acquiescence in its continuance. But a party fails to perform the scope of
work but agrees to perform later, and if the
party accepts it then he cannot terminate
the contract, but allow the party to perform
and can claim compensation for damage.
If the parties fails to adhere to the time
schedule to complete the work, but agrees
to carry out the work later, the party will be
allowed to perform with levy of liquidated
damage.
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SECTION 40
In a contract wherein the scope of work
PERSON BY WHOM PROMISE IS skill, knowledge, expertise involved which is
TO BE PERFORMED. available with the promisor only, it shall be
performed by the promisor only. For
If it appears from the nature of the example painting in a particular way - music
case that it was the intention of theperformance by singer - repair work of with
parties to any contract that any particular technique - teaching a particular
promise containing in it should be subject - it all shall be performed by the
performed by the promisor himself promisor only who possesses the skill,
such promise must be performed by knowledge.
the promisor. In other cases the
promisor or his representative may In engineering, construction erection
employ a competent person to contracts, it can be performed by the sub
perform it. contractor sub supplier also provided they
are qualified.

In a composite contract, promise involves


so many activities from
design to commissioning.

Design detailed engineering, manufacture


of critical items, quality control are to be
performered by the promisor/ contractor
only and others can be performed through
sub suppliers, sub contractors agents.
SECTION 50
PERFORMANCE IN MANNER OR In all engineering contract design,
AT TIME PRESCRIBED OR engineering supply construction erection
SANCTIONED BY PROMISEE. testing and commissioning the scope of
work can be executed in the manner as per
The performance of any promise direction of the purchaser/ owner/
may be made in any manner, or at department.
anytime which the promisee
prescribes or sanctions. Therefore the parties to the contract agree
on a bar or activity chart identifying various
events drawn to time schedule for each,
within the overall time schedule to perform.

SECTION 51
In all engineering design engineering supply
PROMISOR NOT BOUND TO construction erection contracts, there are
PERFORM,UNLESS RECIPROCAL lots of activities dependent on each other
PROMISEE READY AND WILLING and very few are independent. The activity
TO PERFORM. dependent on other activity cannot be
Where a contract consists of performed unless such activity is completed
reciprocal promises to be in due time.
simultaneously performed, no
promisor need perform his promise A promise (ie) an activity can be performed
unless the promisee is ready and if only the other dependent activity namely
willing to perform his reciprocal reciprocal promise is performed.
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promise.
The contractor need not perform the activity
to be performed by him if other party is not
ready and willing.

For example one party. A to the contract


agreed to supply pipes for the work of the
other party B but the party A was not ready
with the pipes. Then the other party B need
not perform his promise namely laying of
the pipes and can claim damages also.
Again the party A is willing to supply the
pipes later, than the mutual agreement
between the parties reached, than the other
party shall perform.
SECTION 52
ORDER OF PERFORMANCE OF In engineering contracts for construction
RECIPROCAL PROMISES. erection, generally involves many reciprocal
Where the order in which reciprocal promise to be performed by the owner
promises are to be performed is purchaser/department, to enable the
expressly fixed, by the contract they contractor to perform his obligation. The
shall be performed in that order and reciprocal promises generally are handling
where the order is not expressly over the site of work, approvals to design,
fixed by the contract, they shall be drawings, supplies, work front design data,
performed in that order which the inputs inspection and dispatch clearances
nature of transaction requires. payments of bills, issue of materials plant &
machineries supervision of works –
acceptance thereon providing input data for
design, battery limits etc. loads/ and
facilities for conducting performance tests.

In the overall time schedule, if the dates for


such performance of reciprocal promises
are fixed in advance either in the tender
specifications or in the contract or by a
mutually understanding with clearly drawn
minutes it all shall be performed in that
order only. It can be reviewed periodically
and changes, if any, can be discussed and
settled.

But if the date for performing the reciprocal


promises are not fixed or determined in
advance it shall be then performed as per
the work requirements.

For example, the owner / purchaser/


department/ had to provide a crane for
erection work as per contract, but the date
on which to crane to be deployed had not
been fixed, then the crane shall be
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deployed the moment the equipment is


ready for erection.
SECTION 53
All engineering construction erection
LIABILITY OF PARTY contracts, have promises – reciprocal
PREVENTING EVENT ON WHICH promises to be performed by the parties in
CONTRACT IS TO TAKE EFFECT. the proper sequence. Failure or default, or
delay in performing any of the reciprocal
When a contract contains reciprocal promise, the other party cannot perform his
promises and one party to the obligations.
contract prevents the other from
performing his promises the contract The various obligations /reciprocal promises
becomes voidable at the option of order in which to be performed are defined
the party so prevented and he is in the contract. If for example the party fails
entitled to compensation from the to make payment for the work done and
other party for any loss which he accepted, the other party can declare the
may sustain in consequence of the contract voidable which means the right
non performance of the contract. legally to put an end to the contract as a
whole and claim compensation for the loss
caused.
Similarly if the party fails to provide the
facilities agreed in the contract, the other
party can be declare it voidable and claim
compensation.

If the parties agreed to perform, they can do


so with all their rights and obligations as
existed.
SECTION 54
EFFECT OF DEFAULT AS TO If a contract for design, engineering
THAT PROMISE WHICH SHOULD manufacture supply, transport, erection
BE FIRST PERFORMED, testing and commissioning of a generated
CONTRACT CONSISTING OF transformer, the reciprocal promise by one
RECIPROCAL PROMISES. party A is the provide the transformer
When a contract consists of foundations as per design data of the
reciprocal promises, such that one transformer manufacturer. The foundation
of them cannot be performed, or that work entrusted to another contractor, B.
it performance cannot be claimed till The time schedule for the readiness of the
the other has been performed and foundation and placing the transformer are
the promisor of the promise last mutually tried up between contractor A and
mentioned fails to perform it, such B The transformer is ready in all respects,
promisor cannot claim the but the foundation is not ready. So with this
performance of the reciprocal position/ situation transformer contractor A
promise and must make cannot place it on the foundation and it
compensation to the other party to cannot be performed. The purchaser or
the contract for any loss which such owner cannot claim the performance
other party may sustain by the non namely placing the transformer on the
performance of the contract. foundation, but he must make
compensation for any loss caused to the
transformer contractor A. Such a loss in this
case, is the cost towards storage,
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preservation of the transformer and delayed


payments, loss of the capital invested.
L.D. can be levied on the another contractor
B for not keeping ready the foundation in
due time.

All project nature of contracts there are


number of such activities linked with others.
They are generally called, inputs, work front
and customer hold point.

EFFECT OF FAILURE TO
PERFORM AT FIXED TIME IN Generally contracts stipulate a specific
CONTRACT IN WHICH TIME IS date/ period for performance of an activity
ESSENCE and its failure to meet that date/period is a
fundamental breach justifying the other
When a party to a contract promises party in treating the contract as repudiated
to do a certain thing at or before a in legal parlance. In the event the contractor
specified time or certain things at or had failed to adhere the time schedule, the
before specified time contract or so purchaser / owner / promisee may put an
much of it as has not been end to the contract by severing a due notice
performed, becomes voidable at the with his intention to do so and levy of
option of the promisee, if the liquidated damages.
intention of the parties was that time
shall be the essence of the contract. However, to keep continuity of work
availability of designs, drawings all other
site facilities, resources, warranty
obligations generally even if the contractor
had failed to adhere to time schedule, the
same contractor is allowed to continue the
performance of the balance of work. In all
such case, a notice shall be served to the
contractor to perform the balance of work
giving extension of time retaining the right
to levy liquidated damages. Thus the terms,
conditions, prices/rates are fully secured.

EFFECT OF ACCEPTANCE OF
PERFORMANCE AT TIME OTHER If the promisee that is owner / purchaser
THAN THAT AGREED UPON. accept the promise after the time schedule
then owner/ purchaser/ promisee cannot
If in case of a contract voidable on claim compensation.
account of the promisor’s failure to
perform his promise at the time
agreed, the promisee accepts The owner / purchaser cannot then Levy
performance of such promise at any liquidated damages unless he serves a
time than that agreed, the promisee notice at the time of accepting the promise.
cannot claim compensation for any
loss occasioned by the non
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performance of the promise at that


time agreed unless at the time of
such acceptance, he gives notice to
the promisor of his intention to do
so.

SECTION 67
All project contracts, contains facilities to be
EFFECT OF NEGLECT OF provided by the owner / purchaser as
PROMISEE TO AFFORD agreed, such as land, area for construction
PROMISOR REASONABLE work, water supply for construction work,
FACILITIES FOR PERFORMANCE. power supply for construction work, others
like to construction plant & machineries
If any promisee neglects or refuses some owner supply materials.
to afford the promisor reasonable
facilities for the performance of his If the owner / purchaser neglects or refuses
promise, the promisor is excused by to provide any one of them as per the
such neglect or refusal as to any agreed schedule, than he cannot claim
non performance caused thereby. performance from the contractor. The
contractor is excused by such an action of
refusal or neglect by the owner / purchaser
and the contractor may claim compensation
for time, money and both.
SECTION 73
In the case which naturally arise, are loss
COMPENSATION FOR LOSS OR due to under utilization of plant and
DAMAGE CAUSED BY BREACH machinery loss of profit, loss due to
OF CONTRACT. components, consumables, procured for the
work.
When a contract has been broken,
the party who suffers by such But the parties knew when they made the
breach is entitled to receive, from contract, is the liquidated damage for delay
the party who has broken the at certain percentage with ceiling and
contract compensation of any loss or security deposit or performance bank
damage caused to him, Thereby guarantee. Which are built in the contract.
which naturally arose in the usual These two can be claimed. Consequential,
course of things from such breach or indirect losses cannot be claimed.
which the parties knew when they
made the contract to be likely to
result from the breach of it. Such
compensation is not to be given for
any remote and indirect loss or
damage sustained by reason of the
breach.

When a contract has been broken, if


a sum is named in the contract as In all contracts, the purchaser/ owner
the amount to be paid in case of expects the scope of work to be completed
such breach or if the contract satisfactorily in all aspects and within the
contains any other stipulation by time schedule agreed upon. To protect,
way of penalty, the party these two essential aspects, generally a
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complaining of the breach is entitled control measure is built in the contract itself
whether or not actual damage or by way of security deposit or performance
loss is proved to have been caused bank guarantee to secure the completion of
thereby, to receive from the party the scope of work and a pre estimated
who has broken the contract liquidated damage cause.
reasonable compensation not
exceeding the amount so named or Since the parties even at the time of bid
as the case may be, the penalty proposal, these liability are known, the
stipulated for. contractor would have taken this liability in
his price offer. Being so fixed determined in
value, the actual loss need not be
established the owner / purchaser can
claims only these provisions.

SECTION 126
Performance bank guarantee is a contract
CONTRACT OF GUARANTEE, of guarantee between banker and owner
SURETY PRINCIPAL DEBTOR /purchaser.
AND CREDITOR
The banker being a third party to the
A contract of guarantee is a contract contract, stands guarantee for the
to perform the promise or discharge performance by the contractor the entire
the liability of a third person in case scope of work. In the event of any failure by
of his default. the contractor in the performance, the bank
guarantee can be encashed by the owner
The person who gives the guarantee /purchaser and the banker is bound to pay
is called the SURETY, the person in the money on mere demand without any
respect of whose default the demur or any recourse.
guarantee is given is called the
‘PRINCIPAL DEBTOR’ and the
person to whom the guarantee is
given, is called ‘CREDITOR’. A
Guarantee may be either and or
written.