International contract contents

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International contract contents

  1. 1. • International Contracts • Contracts and Their Management www.StudsPlanet.com 1 INTERNATIONAL CONTRACTS
  2. 2. INTERNATIONAL CONTRACTS • Chapter-I : Introduction • Chapter-II: Legal Characteristics of CIC • Chapter-III : The Need to Preserve CIR www.StudsPlanet.com 2
  3. 3. CHAPTER-I INTRODUCTION NOTION OF COMPLEX INTERNATIONAL CONTRACTS Result of development Complex international contracts are a result of the - technical, - economic and - social development of the last hundred years. - As a result they can not be undertaken - by a single, even a large company; - some projects even exceed the capacity of a whole national economy. Tools The tools for such cooperation are Complex International Contracts, particularly complex international long-term contracts. www.StudsPlanet.com 3
  4. 4. CONTD… Why these Complex International Contracts essential? These complex international long-term contracts are essential means “to implement commercial transactions for scientific, technical and industrial development”. Parties Complex international long-term contracts today usually involve parties of different countries; the parties themselves are often large and multinational companies, which are active all over the world. How Projects offered Projects of complex long-term contracts are offered in international tenders; international joint ventures and other forms of cooperation are commonplace. www.StudsPlanet.com 4
  5. 5. CONTD… Drafting In today’s world, which has become a “global village”, complex long-term contracts are a “significant factor in establishing conditions which assist in maintaining world progress”. This international background makes it even more important that complex long-term contracts are carefully drafted to serve this cooperation and to provide efficient and fair solutions. Pacta Sunt Servanda (the parties are obliged to adhere to the terms agreed) to be applied due to the prevalent of various legal systems. www.StudsPlanet.com 5
  6. 6. CONTD… • Examples of such Contracts Construction and Civil Works Contracts Turnkey Agreements (delivery of whole factories) Technology Transfer and Project Financing Contracts (Aircraft Leasing) Primary Sector (Mining) Concession or Work Contracts Joint Venture, Management, Cooperation, Franchising Agreements Simple Output or Requirements contracts (deliver of goods or services) www.StudsPlanet.com 6
  7. 7. CONTD… • International Arbitration as usual dispute resolution mechanism for Complex International Contracts The overwhelming majority of complex international long-term contracts contain arbitration clauses. This includes the expertise of the arbitrators, the neutrality of the procedure (with regard to nationality of the arbitrators, applicable law, venue, language etc.), its privacy, simplification and speed, the facilitated enforcement of the awards, the avoidance of a “rush to the courthouse” and the enhanced predictability. In fact, today only in rare cases judges get the opportunity to deal with complex long-term contracts. In complex long-term contracts, parties plan the solution of future disputes, and in most cases, they do that with arbitration clauses. Since both the parties know that and since they usually want to preserve their relationship and go on with the project, they rarely address courts in Complex International Contracts. www.StudsPlanet.com 7
  8. 8. CHAPTER-II LEGAL CHARACTERISTICS OF COMPLEX INTERNATIONAL CONTRACTS • Most Legal Systems focus on domestic and discrete contracts CIC are the result of the technical, social and political development of the last one hundred years. The vast majority of contracts concluded in a national legal system are domestic contracts. CIC, although important in terms of volume, are relatively rare in number. www.StudsPlanet.com 8
  9. 9. CONTD… CICs are typically associated with special problems for which traditional law does not provide appropriate answers. Our legislatures have not fully analyzed: - disturbance in the execution of the project, - time delays, - problems regarding contract termination - involvement of multiple parties from different States, or - questions regarding applicable law and - dispute resolution mechanisms in an international context. - In practice, legal actors are forced to find their own solutions by drafting elaborate contracts and excluding inappropriate legal rules (for instance by excluding the general right of cancellation in case of default). www.StudsPlanet.com 9
  10. 10. CONTD… Different Treatment Required: International commercial transactions require treatment that is different from national transactions because the parties must foresee different situations. For instance, an international sale over long distance and by means of different carriers necessitates much greater risk- prevention measures than a traditional local sale, which is performed on the spot. National laws are often not tailored to these kind of needs. Problems regarding the determination of the applicable law and enforcement of arbitral awards are limited to international transactions and do not arise at all in purely domestic relations. www.StudsPlanet.com 10
  11. 11. CONTD… Solutions in the practice of international trade: In practice, two developments result from the lack of legislative or judicial guidance for parties drafting complex long-term contracts. On the one hand, standard terms of contracts as provided by business or professional organizations became more and more popular. On the other hand, parties draft very detailed contracts to reduce the uncertainty resulting form the long duration and the uncertainty of the contracts’ content. www.StudsPlanet.com 11
  12. 12. For instance, the extensive contractual practice regarding clauses for contract adaptation is an indication of the deficit of rules provided by various national legal systems. If a contract is very detailed, the importance of the applicable law is reduced. The more detailed and more comprehensive contractual clauses are, the less room there is for questions that must be decided on the basis of the applicable law. The contract then becomes even more internationalized. Needless to say that even with the most detailed contract parties will not be able to foresee all eventualities and possible problems which may occur. www.StudsPlanet.com 12
  13. 13. CONTD… Another reason for detailed contractual formulation is that rules of the applicable national law can seem inappropriate in a given situation. For instance, after a satellite has been launched, or software has been installed, or after a project has been finished in the mining industry, defects appearing after the contract has ended can hardly be allocated to certain causes and failures of one of the parties, and they can rarely be cured. Legal rules that require one party to check the performance of the other or to warrant a particular result must be replaced by more appropriate contractual rules. www.StudsPlanet.com 13
  14. 14. CONTD… • The Characteristics of Complex International Contracts Importance: Despite the differences in various contracts, certain characteristics of complex long-term contracts can be identified. Although they may not appear in all contracts, an analysis of these characteristics is important for a better understanding of Complex International Contracts. These characteristics allow us, if not to give a precise definition, to distinguish Complex International Contracts from other contracts. As there is no uniform category of Complex International Contracts there is also clear borderline between Complex International Contracts and other contracts. These characteristics include: www.StudsPlanet.com 14
  15. 15. CONTD… • Long Term Duration • Technicality/Volume • Probability of Disturbance, Uncertainty • Sensitivity for Disturbance • Complexity • Number of Parties Involved • Interdependence, Cooperation and Solidarity www.StudsPlanet.com 15
  16. 16. CONTD… • Long Term Duration The long duration is an important characteristic of CIC. Examples on Long term Contracts: -Airport Construction (3-10 Years) -Construction Industry (3 Years) In addition to the often-long duration of the contract itself, the relation between the parties may start long before the execution of the contract and last long after the end of the formal contract term. www.StudsPlanet.com 16
  17. 17. CONTD… • Complicated long-term contracts “require too much joint planning prior to any formalized commencement to start sharply”; likewise termination often is not sharp, because, for example, a party may have a renewal right to extend the contract term or may have service or warranty obligations that last much longer than the term of the contract. www.StudsPlanet.com 17
  18. 18. CONTD… • Technicality / Volume Another characteristic of CIC is that their objects in many cases are technical systems or whole new technologies. Examples for the first group (Technicality) are construction or turn-key agreements, Examples for the second group development contracts in aviation technology and contracts in the communication and computer industry. Software contracts can belong to both groups, depending on the content of the contract. www.StudsPlanet.com 18
  19. 19. The Volume of a project and its immense costs often require the contracts to address questions about financing. Example: Aircraft Financing or Aircraft Leasing Once made investments are project specific and cannot be transferred to other projects. www.StudsPlanet.com 19
  20. 20. CONTD… • Probability of Disturbance, uncertainty: CIC contain high risk factors; it is virtually impossible to anticipate all possible contingencies at the time the contract is executed. And when parties from different part of the world are involved, further complicating factors add to the complexities of long-term contracting. Instead of clear fixation of quantities, qualities and prices the text of the contract often must use formulas, such as “best efforts”, “good faith cooperation” etc. This is a result of a contract’ content, more than of its duration. www.StudsPlanet.com 20
  21. 21. CONTD… • The framework type character of the contract and the impossibility of precisely foreseeing the future necessarily create gaps in the contract, which again enhance its uncertainty. Specifically, contractual gaps may occur in the following four situations, which all typically occur in CIC: -Parties postpone specific agreement on certain points due to the lack of complete information at the time of contracting; -Unforeseen or unforeseeable events occur due to changes in economic, technical or political conditions; -Inevitably vague expressions are used in the contract; -Parties of joint venture disagree on the conduct of the joint enterprise. www.StudsPlanet.com 21
  22. 22. CONTD… • Sensitivity for Disturbance: Disturbances In traditional exchange contracts, disturbance and delays (like strikes, lockouts, civil disturbances, and commercial impossibility) often do not affect the contract as a whole. In CIC such as aviation contracts, the situation is different. Delays and disturbance in the time schedule of the project will put into question the further cooperation of many parties and will lead o immense additional costs for the contractors. In many contracts in which various contractors work together, one contractor will not be able to start its work before another contractor has finished”. Thus, there is a close interaction between the parties over long duration to accomplish performance. The ability of one party to perform in substantial measure is based on the performance of others. www.StudsPlanet.com 22
  23. 23. CONTD… Sensitivity Another reason for the sensitivity to disturbance is the necessary cooperation of the parties. The intensive contacts between them in the course of their collaboration requires a certain degree of mutual trust and at the same time leads to additional sensitivity of parties whose interests only partially comply with each other. Example: In airport construction contracts, “time related disputes are spawned by the conflict between the employer’s vital interest in having its project completed according to a predetermined agreed schedule, and the contractor’s requirements to consume additional time when he must perform the work under changed conditions, or he must perform different work than was originally anticipate. The conflict between these two very strong interests is the fuel which flames time related disputes. www.StudsPlanet.com 23
  24. 24. CONTD… • Complexity The complexity of CIC lies in the complexity of the parties performances. In most cases, the parties have agreed to provide a whole program of different performances. The performances of the different parties are often dependent on each other, which in turn leads to an intense relationship between them. In some international contracts, the complexity of the contracts is enhanced by the uncertainty concerning the contract’s factual basis. Example: In construction contracts, each project is unique and has unknown circumstances, each project is situated in its own site, having its own combination of design details, environment, project management, contractor personnel and many other factors. In technology contracts, extensive and detailed clauses will be necessary regarding confidentiality and information duties after termination of the contract. www.StudsPlanet.com 24
  25. 25. CONTD… • Number of Parties involved In CIC, it is not only the degree of planning that is different, but also the participation in planning. In relational agreements we encounter joint participation in planning the ultimate cooperation being the merger between formerly independent entities in which all future planning merged within one complex planning entity. Example: Joint Venture agreements often include a network of interconnected executing contracts referring to each other. www.StudsPlanet.com 25
  26. 26. CONTD… • Interdependence, cooperation and solidarity In comparison to other contracts, the number of parties involved in CIC is typically increased. The relationship of the parties is also more intense compared to a discrete (separate) transaction. Without cooperation based on mutual trust, a long-term project cannot succeed. The CIC are characterized by an intensive (rigorous) cooperation of the parties and a network of relationships between them, a typical example being joint venture agreements. The exchange element steps back behind the element of a partnership-like cooperation. • Example: For instance, a complex long-term construction contract is more a cooperative venture than most other contracts. Each party depends upon the performance of the other or those for whom the other is responsible. The contractor cannot perform unless the owner supplies the design, official permits, easements from public authorities or neighboring landowners and, on occasion materials or equipment. The architect cannot approve submittal of shop drawings until they have been submitted by the contractor. www.StudsPlanet.com 26
  27. 27. CONTD… • The Weakening of the Principle of ‘PACTA SUNT SERVANDA’ First, drafters of contracts try to build in contractual flexibility by formulating cooperation duties, renegotiation clauses, special risk- force majeure- and hardship clauses. Second, in the absence of such clauses, arbitrators, courts and legal scholars use various different concepts in order to escape a strict rule of pacta sunt servanda. www.StudsPlanet.com 27
  28. 28. CONTRACTS AND THEIR MANAGEMENT (DRAFTING OF INTERNATIONAL CONTRACT) www.StudsPlanet.com 28
  29. 29. CHAPTER-1 GENERAL PRINCIPLES • INTRODUCTION Competency Free Consent Lawful Consideration Lawful Object Not Declared to be void • GOOD COMMERCIAL CONTRACT EVOLVES 3 STAGES Preparation Drafting of Clauses Implementation and Management www.StudsPlanet.com 29
  30. 30. CONTD… • TWO ROUTES TO A CONTRACT First Route: GCC & SCC The Buyer/Principal makes known to all the prospective suppliers/contractors the general terms and conditions which are acceptable to him. GCC flows from the policy of buyer/principal on various matters covered in contract. In fact, where the GCC/SCC route is followed, the contract itself is a simple one page document to which are attached the following documents: i) Scope and Technical Specifications ii) General Conditions of Contract iii) Special Conditions of Contract iv) The Bid/Tender submitted by the Supplier/Contractor and v) Buyer’s Principal’s Notification of award. www.StudsPlanet.com 30
  31. 31. CONTD… • Second Route: Self Contained Contract Route As the name itself suggests, each clause in such a contract is self contained and stands on its own. The contract itself is one document with no reference to any other document and contains all the clauses in one place. Each clause in the document is self contained and complete in all respects with remedies incorporated to the logical end. Example: The clause on ‘Defaults and Liquidated Damages’ will deal with both short term and long term defaults. www.StudsPlanet.com 31
  32. 32. CONTD… • Short Term Default: In dealing with short term default, and as remedy for accepting supplies beyond the scheduled deliver date, the clause will specify the predetermined damages, say, @ of 1% per month upto a maximum of 10%. • Long Term Default: Any delay beyond 10 months (or 11 months even if a month’s grace is added) would amount to a long term default, as the 10% maximum liquidated damages runs up to 10 months (arithmetically at the rate of one percent per month). The remedy available to the buyer/principal against such long-term default, ie., where the default continues beyond 10 or 11 months, has to be incorporated in the clause. This is normally a right to terminate the contract. www.StudsPlanet.com 32
  33. 33. CHAPTER-2 STRUCURE OF INTERNATIONAL CONTRACT • Preamble • Interpretation and Definitions • Scope and Technical Specifications • Price • Terms of Payment • Price Variation • Bank Guarantees • Letters of Credit • Taxes and Duties • Scheduled Delivery Date • Force Majeure • Defaults, Liquidated Damages and Penalties www.StudsPlanet.com 33
  34. 34. CONTD… • Export Licence • Inspection and Acceptance • Shipment • Passing of Title and Risk • Warranty • Patents and Copyrights • Indemnities • Spares and Spares Policy • Options • Resolution of Disputes • Termination www.StudsPlanet.com 34
  35. 35. CONTD… • Assignment • Amendments • Confidentiality • Notices • Governing Laws • Survival • Effective Date • Contract Management • Appendix-I: Specimen Clauses in a Contract • Appendix-II: Tendering Procedure www.StudsPlanet.com 35
  36. 36. CHAPTER-3 PREAMBLE • All contracts begin with Preamble • Describes the two parties to contract • Describes their credentials • Describes their legal status /address • Mentions briefly Main Objective and Subject matter of the contract www.StudsPlanet.com 36
  37. 37. CHAPTER-4 INTERPRETATION AND DEFINITIONS • It explains the significance and role of the headings, • And how the contract, its various clauses and appendices shall be harmonious construed. www.StudsPlanet.com 37
  38. 38. CHAPTER-V SCOPE AND TECHNICAL SPECIFICATIONS • This is the most important clause in a contract which sets out: i) the object of the contract (in some detail, the items of equipment and the quantities, spares, services, documentation, training, technical assistance) and; ii) the technical specifications and performance parameters which usually run to several pages, are normally attached as appendices to the contract, a reference being made to them in the main clause in the contract. www.StudsPlanet.com 38
  39. 39. CHAPTER-6 PRICE • There are three aspects of price that have to be dealt with in the clause on price in a contract. These are: i) Price Basis; ii) Base level to which the price is related; and iii) Breakup of the price, particularly where the contract covers, apart from the main equipment, other supplies and services, such as initial supply of spares, documentation, training and technical assistance. www.StudsPlanet.com 39
  40. 40. CHAPTER-7 TERMS OF PAYMENT • Specifies the quantum of payment • Mode of Payment • Bank Guarantee • Advance Payments www.StudsPlanet.com 40
  41. 41. CHAPTER-8 PRICE VARIATION • Based on terms of the Contract • Based on costs of inputs involved (direct & indirect) • Economic Conditions • Short Term Contracts • Long Term Contracts • Price Variation (downward in price levels) (loss to buyer) • Price Escalation (upward in price levels) (loss to seller) www.StudsPlanet.com 41
  42. 42. CHAPTER-9 BANK GUARANTEES • Bank guarantees are guarantees given by supplier’s/contractor’s bank to the buyer/principal, promising to pay on demand and without demur, the sum of money mentioned in the bank guarantee, if it is invoked by the buyer/principal before the date of expiry of the bank guarantee mentioned in it. • Bank Guarantees could be: -Towards earnest money deposit; -As security against performance of the contract; -As security against initial (advance) and stage payments made by buyer to the supplier -Towards liquidated damages in exceptional cases, where contracts are of large value; -Towards guaranteeing specified operational parameters of the equipment - Towards meeting warranty claims in respect of equipments or - Towards performance of maintenance during a specified period (usually one year) in respect of civil work contracts. Note: Bank Guarantee is an independent contract between the Banker and the party in whose favor the guarantee is issued. www.StudsPlanet.com 42
  43. 43. CHAPTER-10 LETTERS OF CREDIT • Letters of credit are guarantees issued by a buyer’s bank in favor of the supplier guaranteeing that payments will be made against documents inter alia evidencing completion of suppliers/services/stages of progress of work before the delivery dates specified in the letter of credit, provided the documents are presented for payment before the last date for negotiation of documents, which is mentioned in the letter of credit. • Two Banks are involved in a letter of credit. The buyer has/opens an account in a bank (issuing bank) in his country which guarantees payment. This bank opens a credit with a bank in the supplier’s country in favor of the supplier. This bank, known as the advising bank (normally, the supplier nominates the advising bank) advises the supplier the last date for delivery of the goods, the documents which the supplier has to deliver to the bank and the time within which he must do so. www.StudsPlanet.com 43
  44. 44. CHAPTER-II TAXES AND DUTIES • There is an incidence of taxes and duties in almost all types of contracts. • In Domestic Contracts, it is necessary not only to specify the nature of taxes and duties attracted, but also to indicate the rate of such taxes and levies prevailing on the effective date of the contract. The clause in the contract dealing with price should also specify as to who will pay for these taxes or duties. The clause should also clearly indicate whether the price is inclusive of all taxes and duties, or whether taxes and duties are to be borne by the buyer, in addition to the base price mentioned. www.StudsPlanet.com 44
  45. 45. CONTD… • In International Contracts, however, the normal practice is to specify that the taxes and duties in the supplier’s country will be borne by the supplier, and the taxes and duties in the buyer’s country will be borne by the buyer. Such a clause, will, therefore, take care of all types of taxes and duties including income tax, export duties, custom duties, etc. • There can be rare case where the goods attract taxes while in transit form the supplier’s country to the buyer’s country. In such a case, the question of incidence of such taxes should be settled and mentioned during negotiation of the contracts. If the incidence of such taxes is decided to be borne by the buyer, the normal wording of the article would be. www.StudsPlanet.com 45
  46. 46. CHAPTER-12 SCHEDULED DELIVERY DATE • The scheduled delivery date clause specifies the point of time when the delivery of various items of equipment, other items such as documentation, and services are required to be provided by the supplier to the buyer. • Generally, these are related to the effective date of the agreement and mentioned by way of number of months from the effective date. • The scheduled delivery date can also be specific dates without being linked to the effective date. www.StudsPlanet.com 46
  47. 47. CHAPTER-13 FORCE MAJEURE • Force Majeure is a situation in which either of the parties to a contract is prevented, temporarily or permanently, from performing its obligations due to circumstances beyond its control. • The clause of force majeure normally starts with a description of the events which are considered as events of force majeure. Acts of God, acts of nature, acts of governments, wars, riots and civil commotion, strikes and lockouts are generally covered as such events. • More specifically, earthquakes, floods, epidemics and fires, etc are mentioned as events constituting force majeure. www.StudsPlanet.com 47
  48. 48. CHAPTER-14 DEFAULTS, LIQUIDATED DAMAGES & PENALTIES • Law recognizes that whenever there is a breach of a contract, the injured party suffers inconvenience and damage, and is entitled to recover a monetary compensation from the party is put in a position in which it would have been, had there been a performance and not a breach, but the defaulter party is not to be punished. • As a general rule, compensation must be commensurate with the injury or loss sustained arising naturally from the breach. If actual loss is not proved, no damages will be awarded. www.StudsPlanet.com 48
  49. 49. CHAPTER-15 EXPORT LICENCE • In International Contracts, particularly the ones involving high technology equipment, electronic equipment, and defense equipment, export licences are required to be obtained by the suppliers from the governments of countries, before they can supply them in turn. • In International contracts, a separate clause is incorporated about export licences, making it obligatory for the supplier to obtain and maintain export licences; where it is cancelled or withdrawn and the supplier is unable to have it restored, within, say 30 days from the date of cancellation/withdrawal, providing a remedy to the buyer of a right to terminate the contract; and on such termination for the supplier to return all the advance payments forthwith to the buyer, with or without interest. If it is with interest, the rate of interest should be specified. www.StudsPlanet.com 49
  50. 50. CHAPTER-16 INSPECTION AND ACCEPTANCE • This clause in a contract provides the rights and obligations of the parties when inspection and interim acceptance by the buyer in the supplier’s premises is included. • Mainly, such an inspection will not absolve the supplier from any defects which may be noticed at time of final acceptance. • The costs of such tests and inspection at the supplier’s works will have to be borne by the supplier, except that the travel costs or other personal expenses of the buyer’s representative are to be borne by the buyer. www.StudsPlanet.com 50
  51. 51. CHAPTER-17 SHIPMENT • This clause normally spells out the obligations of the supplier and buyer in respect of shipment depending on whether the delivery is: • F.O.B. • C.I.F. www.StudsPlanet.com 51
  52. 52. CHAPTER-18 PASSING OF TITLE AND RISK • In a contract, it is necessary to define clearly the point of time and place at which the title and risk in the goods pass from the supplier to the buyer. • This can be covered by the price clause, where the price basis is stated. www.StudsPlanet.com 52
  53. 53. CHAPTER-19 WARRANTY • This is an important clause through which the supplier is required to guarantee that the equipment supplied shall be free from defects of design, material, and / or workmanship and that if such defects are noticed by the buyer and notified to the supplier, the later will, without charge to the buyer, repair or rectify any defective item or replace such an item, so long as they arise within a period specified in the warranty clause. • What is the remedy under Warranty – Is it a Compensation or rejection of contract? www.StudsPlanet.com 53
  54. 54. CHAPTER-20 PATENTS AND COPYRIGHTS • Notwithstanding the precautions taken and the maxim caveat emptor, occasions may arise when buyers and users of equipment may be charged with infringement of patents and copyrights. • This is failure on the part of the supplier to get legal permission/license to manufacture and sell items of equipment patented by individuals or organizations. • Through this clause in the contract, the buyer seeks protection against such charges being made (through filing of suits, claiming damages, etc) for no fault of his. • The supplier has to indemnify the buyer against losses and damages suffered by the buyer, and also defend at his own cost suits that may be filed by the patent bolder against the buyer. • The additional remedy is to have the supplier obtain that right for the buyer from the original patent holder. www.StudsPlanet.com 54
  55. 55. CHAPTER-21 INDEMNITIES • During the course of implementation of a contract, occasions may arise when the employees of the buyer may be present in the premises of the supplier in connection with the agreement and vice- versa. • They may suffer injuries or die in the course of such visits. If injuries or death are caused by negligent acts or omissions of such employees, this clause in the contact provides that the relevant employer shall indemnify the other party in respect of any costs, claims or liabilities arising from such death or injuries. • This is a reciprocal arrangement between the two parties. www.StudsPlanet.com 55
  56. 56. CHAPTER-22 SPARES AND SPARES POLICY • A contract for supply of equipment focuses on issues relating to the equipment, including the supply of spares for initial operation may vary from three to five years depending on the nature of equipment. • It is necessary to ensure that the supplier is under an obligation to continue to supply spares in future, when required by the buyer at reasonable prices, treating the buyer as the most favored customer. • This is termed as a ‘Fall Clause’ which means that the price at which the supplier agrees to supply spares to any other customer in future will not fall below the prices at which the supplier will supply spares to the buyer. www.StudsPlanet.com 56
  57. 57. CHAPTER-23 OPTIONS • Organizations, particularly in the government sector, are required to follow rigid tendering procedures before procurement of equipment and other items. • Quite often, they also face budgetary constraints which may prevent them from procuring all their requirements at one time. They may also want to reassure themselves of the satisfactory performance of the items before deciding to order more quantities of the same item. The purchase procedures quite often prohibit the placing of repeat orders on the existing supplier without following the procedure of inviting tenders. Under such circumstances, it is customary to incorporate in the existing contract an OPTION CLAUSE which would give the right to the buyer to exercise an option to order more quantities under the same terms and conditions (which include a price variation clause) including the price in the contract, provided it is exercised within a specified period of the effective date in the contract. • The OPTION CLAUSE would specify the maximum quantity that could be ordered by the buyer while exercising the option. www.StudsPlanet.com 57
  58. 58. CHAPTER-24 RESOLUTIONS AND DISPUTES • The normal remedy for resolution of disputes arising between any two parties is for the aggrieved party to approach the Courts of law which takes a long time for its settlement. • Hence, they incorporate an Arbitration Clause allowing the parties to resort to Arbitration instead of approaching the Courts. • Arbitration is a mechanism for resolving disputes that might arise during implementation of a contract, either in interpreting the clauses in a contract or in assessing the effect of event which may occur during the implementation of the contract. www.StudsPlanet.com 58
  59. 59. CHAPTER-25 TERMINATION • During the implementation of a contract there are normally three events which may lead to premature termination of the contract: • Prolonged force majeure, • prolonged default and cancellation / withdrawal • non-restoration of export licence by the Government of the supplier’s country. (Remedy is termination) www.StudsPlanet.com 59
  60. 60. CHAPTER-24 ASSIGNMENT • There may be cases where either of the parties may, for valid reasons, like to assign the performance of the contract to a third party. • In such cases, the party wanting to assign the performance of its rights and obligations will seek written consent of the other party for such assignment. • It is for this reason that in the Preamble to a contract, while describing the parties and their identification for the purpose of the contract, the words ‘which expression shall unless repugnant to the context or meaning thereof be deemed to include its successors and permitted assigns’ are added. www.StudsPlanet.com 60
  61. 61. CHAPTER-27 AMENDMENTS • A contract is mutually agreed between two or more parties and hence, two or more parties make a contract. • There may be a need o carry out amendments to a contract during its implementation. • Such Amendments have also to be mutually discussed and agreed and a formal document of amendment to the contract is to be signed by the parties, if it is to be valid and enforceable. • A clause to this effect is incorporated as part of the contract. www.StudsPlanet.com 61
  62. 62. CHAPTER-28 CONFIDENTIALITY • During the negotiation and implementation of a contract, the parties may exchange organizational information, technical specifications, drawings, performance parameters and data, manufacturing processes, trade secrets, etc. It is obviously not desirable for these to become public knowledge. • A clause requiring confidentiality is, therefore, incorporated in a contract. • As the confidentiality has to be maintained even after completion of performance and expiry of the contract, this clause is added to the list of clauses which survive the contract, in the ‘Survival Clause’. www.StudsPlanet.com 62
  63. 63. CHAPTER-29 NOTICES • During the course of implementation of the contract, it becomes necessary for the parties to issue communications to each other from time to time. • Examples: Notice of occurrence and Cessation of force majeure events, Notice of readiness of items for shipment, Notice of default etc. www.StudsPlanet.com 63
  64. 64. CHAPTER-30 GOVERNING LAWS • Notwithstanding that almost all the clauses in a contract, whether based on the GCC/SCC route or self contained contract route, are comprehensive, it is necessary to lay down in a separate clause the laws which generally govern the whole contract. • The second aspect in respect of governing laws in international contracts is about the link of this clause with the arbitration clause, in which arbitration under the Rules of International Chamber of Commerce, UNCITRAL Rules or Rules of the London Court of International Arbitration are provided. • The Clause should be so drafted as to make the arbitral award to qualify being treated as a Foreign Award (A & C Act, 1996) www.StudsPlanet.com 64
  65. 65. CHAPTER-31 SURVIVAL • Some of the terms and conditions in a contract continue to be valid even after the expiry or completion of the main obligations in a contract. • It is necessary to incorporate in a separate clause titled ‘Survival Clause’, a list of all the clauses in the contract which would survive even after the contract is terminated or completed. • Examples are: Warranties relating to equipment, workmanship and performance parameters up to the periods provided, which may fall beyond the completion of the contract. • Other examples of surviving clauses are the obligations of the supplier to continue to supply spares for the equipment, confidentiality, resolution of disputes, and taxes and duties. www.StudsPlanet.com 65
  66. 66. CHAPTER-32 EFFECTIVE DATE • Under GCC / SCC Route, once a bid is accepted and letter of acceptance is issued, the contract comes into effect legally. • Similarly, once the contract document is signed by both parties, under the Self-contained Contract Route, a contract comes into effect legally. • The date of the letter of acceptance or the date of signing the contract normally becomes the effective date for all purposes, and various actions and activities on the part of both the parties start flowing thereafter. www.StudsPlanet.com 66
  67. 67. APPENDIX-I SPECIMEN CLAUSES IN A CONTRACT Preamble • Interpretation and Definitions • Scope, Technical Specifications & Performance Parameters • Price • Terms of Payment • Price Variation • Taxes and Duties (Supply Contracts, & Transfer of Technology) • Scheduled Delivery Date • Force Majeure • Defaults and Liquidated Damages • Export Licence • Inspection and Acceptance www.StudsPlanet.com 67
  68. 68. CONTD… • Shipment • Passing of Title and Risk • Warranty • Patents and Copyrights • Indemnities • Spares • Options • Resolution of Disputes (Involving Domestic & Foreign Supplier) • Unilateral Termination • Assignment • Amendments • Confidentiality www.StudsPlanet.com 68
  69. 69. CONTD… • Notices • Governing Laws i) Domestic Contracts ii) International Commercial Contracts • Survival • Effective Date Signature Portion Form of Bank Guarantee – Earnest Money Form of Bank Guarantee – Advance Payment Form of Bank Guarantee – Performance Form of Bank Guarantee - Warranty www.StudsPlanet.com 69
  70. 70. APPENDIX-II TENDERING PROCEDURE • Objectives • Prerequisites • Tendering Methods • Basic Rules of Procedure • Earnest Money Deposit • Form and Content of Tenders • Negotiations • Evaluation of Tenders • Acceptance of Tenders • Tendering by Govt./Public Authority/Element of Public interest • Judicial Review www.StudsPlanet.com 70
  71. 71. APPENDIX-III GUIDELINES ISSUED BY THE CENTRAL VIGILANCE COMMISSIOIN GOVERNMENT OF INDIA 1. Tendering Procedures Transparency in Tendering System Receipt & Opening of Tenders Members of Tender Committee Tendering Process-Negotiations with L-1 Tenders Shortcomings in Bid Documents Irregularities in the Award of Contracts Recommendations Notice Inviting Tenders Tenders- Clause about submission of samples Recommendations Purchase of Computer Systems by Government Departments Recommendations Above Guidelines Reitereated Delays in Payments www.StudsPlanet.com 71
  72. 72. CONTD… 2. Appointment of Consultants Guidelines laid down by Bureau of Public Enterprises (1978) Recommendations Appointment of Consultants Participation of Consultants in Tender Consultants for Construction Works Recommendations 3. Mobilization Advances 4. Back to Back Tie Up by Public Sector Undertakings 5. Works/Purchase/Consultancy Contracts awarded on Nomination basis 6. Transparency through Effective Use of Website www.StudsPlanet.com 72
  73. 73. APPENDIX-IV SALIENT FEATURES OF WORLD BANK PROCUREMENT PROCEDURES 1. General Conditions Guiding the World Bank’s Requirements 2. Open Competition 3. Must observe highest standard of ethics during procurement 4. Procurement Plan www.StudsPlanet.com 73
  74. 74. CONTD… 5. International Competitive Bidding i) Prequalifications of Bidders ii) Bidding Documents iii) Validity of Bids iv) Bid Security v) Clarity of Bidding Documents vi) Price vii) Price Adjustment viii) Transportation and Insurance ix) Terms & Methods of Payment x) Alternative Bids www.StudsPlanet.com 74
  75. 75. CONTD… xi) Performance Security xii) Liquidated Damages and Bonus xiii) Settlement of Disputes xiv) Time for Preparation of Bids xv) Extension of Validity of Bids xvi) Award of Contract xvii) Publication of the Award of Contract xviii) Rejection of all Bids xix) Domestic Preference www.StudsPlanet.com 75

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