Contract Management

A contract involves a minimum of two parties although more than two may
be involved. The basic principle of the law is that when one person
(promisor) makes a promise or an offer and creates reasonable expectation
of performance in the mind of the other person (promisee) to whom it was
made, the law enforces the promise.

This objective theory of contract contradicts the subjective theory.

According to the proponent of the subjective theory, the essence of a
contract was said to be "the meeting of the wills of the parties; agreement
was the outcome of free and consenting minds“.

The Law of Contract, on the other hand recognizes a promise and will aid
its fulfillment or at least payment of compensation on its breach, even if
the parties were manifestly not ad idem.

For example, the law recognizes that a binding contract comes into
existence when an offer is accepted by post, as soon as the letter of
acceptance is posted. However, a letter revoking the offer has no effect
until it has been brought to the notice of the promisee. Thus it is quite
probable that an offer might get accepted when the letter of its
revocation is being posted. The contract is valid though no consensus
exists in such a case.
Freedom of Contract

The law of contract is based on the conception that the parties have, by an
agreement, created rights and obligations, which are purely personal in
nature, that is, are only enforceable by action against the party in default.

The law is also based on the political philosophy of the eighteenth century,
namely the concept of human liberty. Every man, it was said, should be free
to pursue his own interest in his own way. This resulted in freedom of
contract that is to say freedom to contract on whatever terms might seem
advantageous to the individual.

Freedom to enter into a contract became the cornerstone of nineteenth

century fair economics. This principle or concept essentially presupposes
that the binding contract is a result of individual negotiations. This
classical concept of freedom of contract suffers from certain grave
weaknesses.

It takes no account of social and economic pressures, which in many

circumstances might virtually force a person to enter into a contract. Thus
the idea that a contract is based on mutually negotiated terms is only true
in a very restricted sense.
Contract of Adhesion
 
In a great many commercial and other every day transactions, a common
man has rarely a say in finalizing terms of the agreement he enters into.
Many examples can be cited. For example, when he applies for a gas
connection, power connection, or for that matter steps into a bus or train
or airplane on a journey. The very nature and volume of transactions
demand that such contracts be standardized with their terms and
conditions drawn in advance. The role of the party accepting those terms
and conditions is rendered to be that of a consumer requiring to sign on
the dotted lines. Such contracts, which force one of the two parties to the
contract merely to adhere to the printed terms, are called contracts of
adhesion or standard form contracts.
 
With the increase in the volume of trade and commerce, advancement of
technology and engineering, the use of standard form contract has become
very common. The construction industry, which is the second largest in the
world being next to agriculture only, remained no exception to this
practice. There are a number of standard contract forms in use in the
world and in India too. Attempts to rationalize and prepare one standard
form applicable to the construction contracts in India have not succeeded.
Exclusion or Exemption Clauses
 
While none can find fault with the idea and concept of having standard
form contracts in trade and commerce, with a view of saving time and
money and avoiding possible disputes arising out of the terms being
misunderstood, such forms invariably suffer from a serious drawback.

The forms are drafted at the instance of one party and the drafters are
tempted to insert certain provisions which exempt that party from the
legal liabilities which may arise in certain eventualities.

Such provisions are termed exemption clauses or exclusion clauses. These

provisions pose a challenge to the judiciary.
Sanctity of Contract
 
The judiciary, the world over, generally attempts to hold a contract
between parties as a sacred document and tries to give effect to the
provisions thereof with the view of giving effect to the intention of the
parties, no matter how harsh the terms may be to one party or the other.
This principle of dispensation of justice had its origin in the basic belief
that an agreement is a bilaterally negotiated document with all the parties
having agreed to the terms with their free will.
 
Standard form contracts falsified this basic belief with the result that if
effect is given to exemption or exclusion clauses, the law to that effect is
rendered impotent and injustice will be caused to the innocent party
signing the contract on the dotted lines.

The judiciary accepted this challenge and found ways and means to avert
patent injustice being dispensed to a party seeking its intervention. The
Courts did this, recognizing the fact that freedom of contract is a
reasonable social ideal only to the extent that equality of bargaining power
between the parties can be assumed, and no injury is done to the economic
interests of the community at large.
CLASSIFICATION OF CONTRACTS

Formal and Informal Contracts

Express and Implied Contracts
Unilateral and Bilateral Contracts
Standard Forms
Central Public Works Department
Military Engineering Services
Railways
P.W.D.
Irrigation and Power Departments
Need for Unified Standard Form as also Change in Types of Contract
 
Due to the vast scope of undertaking massive multi-crore rupees projects
in India a number of companies and firms have developed and operate
nationally and internationally.

It is always desirable that the engineers and executives of such companies

have a thorough knowledge of the conditions incorporated in the Standard
Printed Agreements.

There seems to be no specific reason as to why one uniform standard form

cannot be evolved and adopted in India, when for international contracts
over fifty different countries agree to adopt one uniform standard form
and conditions.
There are it seems, mainly two causes for non-adoption of one form for all
contracts in the country as a whole. The first could be normal human
nature to resist change.

The second could be the unwillingness to give up seemingly unlimited

powers and exemptions from liability which the engineer as the owner's
representative gets for himself and the owner under the age-old one sided
conditions of contract by deliberately turning deaf and blind to very many
judicial pronouncements and awards which have held many such powers and
exemptions to be of no effect.
 
There is yet another viewpoint from which the very type of agreements in
use deserve to be looked at. These agreements incorporate the seeds of
disputes and disagreements right at the time of signing by the parties. The
most commonly used type of contracts include:

Lump sum with or without Bill of Quantities.

Item Rate.
Percentage Rate.
By its very nature each of the above type requires the contractor and the
owner to agree upon either the price or rates payable in future based on
probable expenditure of executing the works.

Past experience shows that the consideration so based rarely proves to be

realistic. There are many reasons for this. However, the main reasons
include:

Inaccurate estimate of quantities, changes required to be made in the

designs, drawings and at times in specifications mainly due to inadequate
investigations at the preparatory stage.

Unprecedented trend of rise in prices of materials, machinery and

equipment, and labour wages making it virtually impossible for anyone to
make a correct guess of the probable cost of construction, coupled with
the fact that there has been no satisfactory solution to work out a
reasonable and realistic escalation formula to take care of the probable
rise in cost.
Deliberate unbalancing of tenders by intending tenderers in cut throat
competition somehow to grab the contract and then to rely on the first or
the second factor above, to make good the probable loss or walk away with
a reasonable profit due to success of the gamble of unbalancing the rates.
 
The real solution to innumerable problems faced by both the owner and the
contracting companies the world over would lie in developing and adopting
cost plus type contract form. With determined efforts, it is possible to
evolve a suitable form for the public works also.
Red Flag Clauses
Dispute resolution clause Payment frequency
sovereign Immunity Payments for materials and
Changes clause fabricated items
Differing site conditions Retention
Delays and suspension Mobilsation allowance
No damages for delay clause Final Payment
Default terminations Exculpatory clause
Convenience terminations Disclaimers
Time provisions Insurance requirements
Notice to Proceed Provisions Surety Bond requirements
Stepped notices to proceed Indemnification
Single completion times Basis of quantity measurements
Liquidated damages provision Variation in quantities clause
Actual damages Equal employment
Availability at site Opportunity /disadvantaged/
Restriction to site availability women-owned buss requirements
Payment Provision Escalation provision
Reports of physical site conditions
Dispute Resolution and Governing law clause
A well drafted dispute resolution clause spells out precisely what steps the
contractor, consultant , owner will tale to resolve dispute between them, usually
defining time limits within which various procedures steps must be initiated.

Some contracts specify straight forward and reasonably simple procedures,

whereas others are excessively complicated and time consuming.

In extreme cases the contract states that power of the authority is final and
binding, ostensibly leaving the contractor no recourse in the event of disagreement
with the decision.

It may be submitted to the board or formal trial in the court of law.

Changes Clause
It defines the owners right to change the contract unilaterally, places limitations
on that right, establishes the contractors duty to perform the change, and the
right to be paid for performing the change.

This may be unfair clauses which places the contractor to the disadvantage under
the changes.
Differing site conditions
This clause may not be mandatory . Many contractors put this clause at the head of
the red flag list and will not submit a bid if the contract document do not include a
fair and comprehensive DSC clause. It is also known as concealed conditions.

This clause also normally applies to any physical site condition found during
contract performance that materially differs from those indicated in the contract
documents or from conditions normally encountered in that type of work.

Delays and Suspensions of Work

First construction contracts usually impose severe liabilities on the contractor
because of generally stringent requirements for work to meet narrow technical
standards within fixed time requirement.

However it may happen that certain conditions may be excused from performance
which may be categorized as force majeure .

The delays and suspension of work clause usually carefully enumerates what
constitutes a reason for excusable delay for that particular contract.

In the suspension of work clause and other similar clauses contains provisions that
are complete, explicit and generally state that the government will pay if the
government causes a delay that damages the contractor.
Termination and Partial Termination

This related to owners right not to delay the work but to unilaterally terminate all
the work of the contract or terminate some divisible part of the work.

Can be terminated if the contractors performance is far behind a reasonable time

schedule or results in work that fail to met contract quality requirements, or when
the contractor becomes insolvent. This is on account of default by the contractor.

The other is called convenience termination. The difference is not in providing right
of the owner to effect such termination, but in the provisions dealing with final
payment that the contractor will receive if the owner does decide to terminate the
contract short of completion.

Many contracts are completely silent on determination of a fair and equitable

settlement in the event of a convenience termination, in essence leaving the parties
to fight it out.
Time provision:
Contractor would be held responsible whether the given period is reasonable or not.
If not completed on time LD clause will prevail.

Is a single time specified or a series of milestone is listed that must be met within
the specified time limit, each milestone completion time pertaining to a discrete
part of the contract work.

Liquidated or actual damages for late completion.

The concept of liquidated damages is that the true or actual damages suffered by
the owner are often difficult to determine accurately. Therefore to obviate this
the need for making this determination, the owner and the contractor agree at the
time of contract formation on an amount per calendar day that will be accepted by
both parties as proper and appropriate recompense for any delay in contract
completion.

If milestones are specified the LD clause will apply separately to each milestone
date with the total LD liability being cumulative.
Monetary damages due to the owner in the event of late completion may also be
determined by proof of actual damages.

If a liquidated damage provision is not included in the contract , it is not beneficial

from the contractors standpoint, bidding contractors would be well advised to
determine the potential magnitude of actual damage that might occur.
Site Availability and Access to the Site
An implied obligation to the owner is to make the project site and reasonable
access available to the contractor at the time of notice to proceed without
restrictions unless the contract contains provisions at the time of notice to
proceed without restrictions unless the contract contains provisions to the
contrary.

Some contracts do contain such provisions to the contrary by placing restrictions

to the site, either on the availability of the site or on means of access to it.

Payments and retention provisions

All large construction contract will call for successive progress payments to be
made to the contractor, each based on an estimated value of the work
satisfactorily completed during the progress payment time period.

Duration of the progress period and how long after the end of the payment period
can the contractor expect to receive payment.

Advances towards materials and equipments.

Release of retention money and letter of credit.

Exculpatory Clauses
Bidding contractors who encounters them in a contract documents and assume they
will not be enforced do so at their peril.

In any contract bidding situation, all exculpatory clauses must be identified and
their potential impact evaluated.

Insurance and Bond provisions

Ordinarily bidding contractors will be able to meet the insurance requirements,
provided they are so stringent or unusual that the required policies are not
available in the insurance market.

Sufficient money should be included in the bid cost estimate to pay the required
policy premium for the life of the project.

The key bond is the performance bond. If the contractors surety commits to
furnishing the performance bond, the other normally required bonds will also be
furnished by the surety.
Indemnification Requirements
Hold harmless the owner or consultants from all losses that they may suffer arising
from any act or failure to act of the contractor in the performance of the contract
work

Such indemnification usually extends to providing the legal defense in court for the
indemnified parties if they are sued by persons or entities who allege thy have
been damaged as a result of the contract work.

An indemnification clause imposes serious potential liabilities on the contractor.

Many contractors cannot afford to accept this risk unless the risk is insurable.

Sometimes such extends to certain self inflicting consequences of their own

negligence and the contractor may be required to determine whether they are
insurable.

Measurement and Payment Provision

It shall be essential to understand what quantities are to be paid separately and
what are included in the measurements.
This needs to be understood with the coal provisions on measurements and
payments.
Variation in Quantities
The general applies that the bid price on any bid item in the job will apply for all
actual measured final quantity shown on the schedule of bid items.

If the actual quantities turn out to be less than 85% of the bid quantity , the unit
price will be renegotiated upward so as to recover the distributed fixed costs that
would otherwise be lost.

If the quantity exceeds 115 %, then the exceeded quantity will be paid at a unit
price negotiated downwards to prevent the contractor from recovering fixed costs.

Be based upon any increase or decrease in the costs due solely to the variations
above 115% or below 85% of the estimated qty

Under this form of the clause , the manner in which the contractor distributed the
fixed general cost and profit to the various bid actual costs of performing the
work are directly affected solely by the increase or decrease in the qty of work
actually performed compared to the bid qty, there will be no unit price adjustment.
Equal employment opportunity and disadvantaged business assistance
requirements

The % of the contractor work force that shd be filled by women and members of
ethnic minorities

Specify a % of the total contract price that shd represent either materials
purchased form, or services subcontracted with, disadvantaged person owned
enterprises or women owned enterprises.

Escalation Provision
The contractor s certified payrolls and paid invoices fro all materials , maintained
during contract performance, determine the actual manhours worked, labour rates
paid, actual qty of materials purchased and actual prices paid, all of which
establishes a basis for computing escalation costs.

The contract will provide that the owner pay the contractor for a or a stated % of
the escalation cost, in addition to the normal contract price determined by the bid.