Indian Contract Act and Contract Management

Contract Management:

By Sandigdha Mishra, Advovate

advocate.sandigdhamishra@gmail.com

Contracts are the foundation of any business. They contain all the terms and conditions that govern the relationship between the organization and any external/internal party, including clients, customers, service providers, suppliers, vendors and employees. Teams such as human resources, sales, operations, finance and legal have multiple contracts—with conflicting deadlines, responsibilities, and terms in effect. When businesses expand, so do the number of contracts the business leaders have to manage. Despite the growing number, overseeing and fulfilling an organization’s commitment to any external party is crucial to ensure the smooth business operation and minimal business risk.

In our day to day lives from ordering food to consulting a Doctor, we enter into several contracts and agreements, some with our knowledge and some without us realizing it has happened. It is important to understand the nature of these contracts. How the contractual relationship will affect us, how the change in the law will affect the contract, and how change in company polices will affect obligations and liabilities are crucial for you to know, through Contract Management.

Let us first briefly visit the provisions of the primary law in India which govern contracts – their creation, interpretation and enforcement – namely, the Indian Contract Act, 1872. This law defines a contract as "an agreement enforceable by law". Some of the essentials which are required to be fulfilled under this law for an agreement to be a valid contract are:

i. An offer by one person;

ii. An acceptance of the offer by the other persons;

iii. The capacity of all the parties to contract;

iv. A lawful consideration;

v. A lawful object; and,

vi. The agreement not being expressly declared void by a law.

Each of the above requirements have been explained in detail under the Indian Contract Act, 1872.

Once the requirements for the existence of a valid contract as mentioned under this law have been fulfilled, the parties are said to have concluded a contract – a legal concept creating a legal relationship and capable of legal enforcement.

As can be seen from the conditions stated above, it is not necessary that the terms of the contract have to be written. Oral contracts are also recognized under this law and are common enough in business transactions. However, oral contracts can be disadvantageous in several ways, the most important ones being: The terms of an oral contract are concluded to an written contract from the conduct of the parties. Many a time, the actual conduct of the parties to a contract may be different from the terms actually agreed upon and hence, the interpretation of the contract may be totally different from what the parties had originally intended;

Certain provisions such as consequences in case of breach of contract, time for performance and manner of performance may be left open to interpretation by a third party in the absence of a written contract, thus leaving room for incorrect interpretations or unintended consequences.

It is therefore in the best interest of the parties (irrespective of whether such party is an individual or a business establishment) that an oral contract be avoided and that the contract be reduced in writing. Such a contract should address not only the commercial terms agreed between the parties, but also the essential legal provisions from the perspective of the law applicable to a particular transaction. For example, in executing a sale deed or an agreement to sell or lease deed, it is important that the commercial terms agreed amounts to a valid contract under the above-mentioned law and such terms are also as per the provisions laid down in the Transfer of Property Act, 1882.

Another strong argument in favour of executing written contracts is that it ensures that most of the terms agreed between the parties are clearly stated in the contract. It is important that the terms are kept simple and lucid, are not ambiguous and are detailed to the extent possible. By ensuring the above, the parties to a contract will, to a large extent, be in a position to ensure that the contract (if disputed and if judged by a competent court or an arbitrator) is given an interpretation as close to the terms intended and agreed by the parties as possible.

It also pertinent to note that if the parties do not detail out all the terms and conditions of the transaction in their contract, certain provisions of the Indian Contract Act may become applicable as the "default" terms. For example, if a contract between two parties does not have any terms on the termination of a contract and one of the parties is wishes to terminate the contract, then such a contract can be terminated by the party only by giving a reasonable notice of termination. This "reasonable notice" is not defined under the law and varies from case to case, being dependent on various factors circumstances, thus allowing the other party to dispute the quantum of notice given. Accordingly, to the extent possible, it is advisable that the parties to a contract detail most of the terms and conditions in the written contract itself instead of leaving such terms open to interpretation under the law.

Some of the clauses which are usually recommended be included in a written contract are:

i. The objectives that the parties intend to achieve through the transaction;

ii. The scope of work to be performed by the parties.

iii. The description of the goods to be sold or services to be rendered and terms governing the manner in which such sale is to be executed (such as delivery terms);

iv. The consideration agreed to be paid and terms of payment;

v. The indemnities where one party promises to pay the other party in terms of compensation, payments for the loss occurred. Description: Indemnity is based on a mutual contract between two parties (one insured and the other insurer) where one promises the other to compensate for the loss against payment of premiums as agreed by the parties;

vi. The limit of the liability of each person vis-à-vis the other party or a third party (for whom the project is to be performed, for instance) Grounds of termination of the contract;

vii. Jurisdiction;

viii. Governing law;

ix. Arbitration, if necessary;

Depending on the nature of the contract, a contract also has to also be looked into from the perspective of applicable Indian laws, such Foreign Direct Investments, Companies Act, 1956, Foreign Exchange Management Act, 1999, Indian Contract Act, 1872, and applicable tax laws, if necessary.

Contract management is a crucial aspect of the business world and involves contract review, along with review of the governing laws, review of company’s policies and parties to the contract. Engaging in contract management activities can prevent the company, or a party to the contract, from future ambiguities, encountering a situation of default or committing a breach. This is an on-going service which would be beneficial during the life of the contract. We at Paydirt Professionals provide all the necessary contract management services to our clients; keeping their contracts up to date, maintaining their excellent legal health.

Contract Management, which can be defined as the execution and monitoring of a contract for the purpose of maximizing financial and operational performance and minimizing risks, involves tracking purchases against contracts to insure preferred suppliers are used, rates adhered to and discounts and rebates collected. Contract Management is important, because, as ordinary as it sounds, it is another part of the sourcing process that can bring a number of benefits to the organisation.

Need for Contract Management:

We may not realize it, but contracts help to drive and shape pretty much every business: As per our estimates that between 60-80 per cent of all business transactions are governed by contracts or agreements in one form or another, particularly across finance, IT, legal dept, purchasing, sales, operations and HR. So, whether we are aware of it or not, contractual agreements are an important part of an organisation’s underpinning structure. And contracts aren’t just about ‘laying down the law’ with third parties and employees: on a more positive note, they provide the framework for how we work with people and other organisations, they provide the rules and guidelines for obligations so that everyone should be clear what is expected of them. And when managed properly, contracts can even

help organisations to reduce costs and improve profitability, as well, of course, as mitigating risk. So contract management is important in business perspective.

Benefits of Contract Management:

a) Ensures that contractual obligations by both the sourcing supplier and client are met;

b) Helps eliminate potential breach of contract situations;

c) Improves adherence to outsourcing contract objectives;

d) Provides a well-documented audit trail;

e) Ensures more favorable contract outcomes;

f) Improves quality of service and customer focus;

g) Achieves value for money and financial control;

h) Decreases the level of risk;

i) Clarifies the roles and responsibilities of the contract manager, contractors, end users;

j) Provides early identification and resolution of poor performance, other problems or disputes;

k) Provides evaluation of the specification against contract performance and identification of contract changes or variations.

Conclusion:

Whether it is a small, medium or large organisation, developing contracts management processes and working towards performance improvement should be a key objective of every company’s operational mandate. In the age of increasing cost and competition, it can mean the difference between having a sustainable business or a business that takes the time to define and administer superior contract management practices. This applies to all kinds of organisations regardless of the size or line of business. An organisation that fails to pay attention to the contract process is often fails to collect the revenues they could, besides paying too much for the services and assets it buys. Poor management of

contracts means high risks, involving excessive costs. Contract management is an issue of strategic importance both to the organisation and to the projects. A thorough contract management organisation can increase control, increase effectiveness and reduce costs and also provide strategic and competitive advantages.

:Thank You:

advsandigdha@paydirtprofessionals.com

http://paydirtprofessionals.com/ 

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