Contract Drafting Rules (Part 2)

In the previous post, we discussed why a contract writer should follow certain rules (i.e. Contract Drafting Rules) amid drafting a commercial agreement. Also, we briefly discussed first 2 rules from the total 6 as mentioned below;

  1. Use appropriate language
  2. Avoid Contradiction
  3. Avoid Duplication
  4. Use Reference and Cross-references
  5. Write mutually explanatory & complementary clauses
  6. Maintain Uniformity and consistency

In this post, we will cover balance 4 rules (3, 4, 5 & 6) with brief explanation;

6 Contract Drafting Rules (Part 2)

3) Avoid Duplication

Duplication means repetition of certain provisions in the Contract again and again. It could be either in the same document or across different documents.

Duplication is a serious and commonly observed problem. One could easily find few provisions getting repeated at many places in the Contract with slight changes in the wording

As a general practice, contract department prepare a DRAFT Contract. The DRAFT is then reviewed by cross functional team. So, each reviewer start modifying certain clauses pertaining to his domain. He/she generally does NOT look at other part of the contract.  Accordingly, he fails to notice that the clauses added by him already exists in other part the contract

The above result in repetition of certain provisions in a particular document or across contract documents. Consequently, this duplication with slight change of wording may invite contractual disputes. Hence the contract writer to ensure that there is no/minimum repartition of any provision in any contract document. Similarly, no duplication of same intent/liability across various documents, which are part of the contract

4) Use References and Cross-references:

We know that a contract is not a collection of independent statements. Actually it is accumulation of various interdependent clauses which are linked to each other. The real test of contract writer is how well it can link various clauses thereby avoiding duplication and contradiction. This is achieved by using references and cross-references rather that repeating a provision each time (or starting afresh)

5) Write mutually explanatory & complementary clauses:

Each contract clause is drafted with specific purpose & intent. Also, each document, forming part of contract, covers the set of promises and counter-promises of particular nature or type. Therefore, an individual clause/document may not cover all aspects of the transaction or requirements.

For examples, Conditions of Contract covers mainly the commercial and legal aspects of the transaction. Technical specification more specifically mentions the technical attributes or operational requirements of the product or service. A drawing gives blue print of finally delivered product or projects or a facility.

Hence, it is necessary that various clauses and different documents should further explain each other and fill the gaps between them. The ultimate goal is to write a contract where various clauses and different documents explains/complement each other. This will ensure that all documents put-together represent a complete agreement between parties

6) Maintain Uniformity and consistency

This is one of the golden rules among all contract drafting rules.

As per this rule, let us first define the key terms then use the same words and phrases uniformly throughout the contract. This will bring convenience in better knowing the intent. Also, this will avoid un-necessary confusion or misunderstanding. The confusion normally arises because a party may draw a different meaning because of use of another term/word

Moreover, since the team forming a contract and administrating it are generally not same, the use of same words and phrases ensure quick understanding and smooth execution of contract. Further, in the event of dispute, it is easy for the third party to quickly understand the context with the se of same words & phrases throughout the contract

For example:

  • if we use the term Program to define project schedule, then, please use this term everywhere throughout the contract. Please avoid using other terms such as Schedule, Completion Schedule or Execution Schedule even through these terms have same meaning.
  • Similarly, if we use the terms Employer to define the owner of the facility, then, please do not use other terms such as Owner or Purchaser

For disclaimer statement, please click the link Disclaimer Statements5) 

Contract Drafting Rules (Part 1)

In previous posts, have discussed various kind of Contracts based on the Nature of Transaction, Mode of Project Delivery and Compensation Methods.

The next step in the journey is to learn How to Draft a Good Contract, which is simple, error free and easy to execute. In this post we are going to discuss 6 important Contract Drafting Rules necessary to form a dispute-free contract

Contract drafting highly specialized skill

Contract drafting is highly specialized skill and requires lot of experience, maturity and wisdom. Moreover, the contract writer should have good understanding of industry practices and in-depth knowledge of contract & procurement laws.

In addition to the above, contract drafting requires a different attitude and mind-set. This is because any extreme (or casual) approach could make the agreement VOID or impossible to operate. Consequently, it may render the contract subject to litigation thereof. This situation may result into wastage of lot of time, money and efforts. Even if the things do not go to such extremes, poorly drafted contracts could lead to lot of confusion and misunderstanding. As a result, it could give room to unnecessary correspondence and contractual tussle between the parties thereby defeating the intended purpose.

Contract should be easy to understand and interpret

Our ultimate purpose should be to draft a contract which is easy to understanding and interpret. Accordingly, we need to draft contractual provisions in such manner so as to avoid confusion, discrepancy, more than one interpretation and misunderstanding between the parties.

We can achieve this objective by followings certain rules while drafting a contract. These rules are called Contract Drafting Rules and 6 of them are mentioned below;

  1. Use appropriate language
  2. Avoid Contradiction
  3. Avoid Duplication
  4. Use References & Cross-references
  5. Mutually explanatory & complementary clauses
  6. Maintain Uniformity and consistency.

In this post let us discuss first two (2) rules. Balance 4 rules shall be discussed in next post

6 Contract Drafting Rules:

1. Use appropriate language:

This is one of the most important Contract Drafting Rule because Contracts are written and interpreted in English or another language. For seamless execution of the contract, it is imperative that both parties draw the same meaning from the contract clauses. Moreover, parties should understand their rights and obligations in the same sense.

In view of the above, let us consider the followings aspects regarding language while drafting a contract

  • Use language which is easy to understanding and interpret.
  • Choose most appropriate words as used in day-to-day communication
  • Say no to complicated vocabulary, harsh or punitive words
  • Say no to emotions and adjectives

2) Avoid Contradiction:

Contradiction means conflict between two or more provisions. Two or more provisions are said to be in contradiction when they lead to different or opposite meaning. For example, one provision says that Time for Completion is 12 months and another provision says that Time for Completion is 9 months

A large Contract generally consists of various documents such as:

  • Contract Agreement
  • Letter of Acceptance
  • Particular Conditions of Contract
  • General Conditions of Contract
  • Technical Specifications
  • Data Sheet & drawings
  • General Technical Requirements

All the above documents are integral part of the Contract. Also, each document consists of various clauses and sub-clauses that define the rights and obligations of the parties. Accordingly, we should draft all such documents with due diligence so that there is no contradiction between various clauses of a particular document or across different documents.

The above is critical because otherwise it may invite dispute. This is because each party starts referring to those provisions which suits them the most. Both parties become adamant and stick to its stand and use all tricks to prove its points. So it becomes very difficult to resolve the matter or to ascertain who is right. The end result is a lot of wastage of time and effort due to unnecessary correspondence, discussion and meetings.

The contradiction arises, because as a normal practice, a contract document is reviewed by different stakeholders. Accordingly, cross-functional team starts making changes in certain provisions of a document or in a particular clause as relevant to them. However, they missed to make corresponding changes in other clauses or in other documents, as deemed necessary in the context. As a result, we end up forming a Contract with lot of contradictory provisions

Please refer to next post for balance 4 rules

Please read disclaimer statement by clicking: Disclaimer Statements

8-behavioural traits of Corporate Leaders

Corporate leaders and leadership qualities is a favourite subject of everyone in business world. Corporate employees of all levels spend considerable time in discussing their managers and debating about the qualities of a right leader. The topic is as old as one can thing and as new & fresh as you feel. So much has been said and done by academicians, writers and working practitioners for the last many decades on the subject and huge contents available on this subject. And above all, organizations have been spending large amount every year in leadership development training programs

There is a genuine attempt by reputed organization to allocate such position to those who are having right leadership skills. However, despite all such efforts, it is not difficult to find out person sitting on top positions, who are not a so fit for the role. Also, one may see that such persons are sustaining the chair/position for a long time

There may be many reasons and constraints for this role/person mismatch. And one reason could be “whether organizations are fixing right selection criteria” before on-boarding a person for top roles. If the answer is yes, whether recruiters are complying with this criteria while shortlisting, interviewing and evaluating the candidate for the same.

We agree that leadership qualities are more closely associated with a person’s thoughts, beliefs, attitude, values or personality traits. And such attributes are different from aptitude, individual competency, subject knowledge and work related experiences

In view of the above, an organization should appoint its leaders carefully, by giving due important to the behavioural traits and moral values. This is necessary to ensure long term success of the organization by providing healthy work environment for its workforce.

So, now the questions arise:  what are those behavioural traits which make a person fit for corporate leadership position? The purpose of this post is to discuss such traits.

Based on my understanding & experience, I have identified 8 key behavioural traits as mentioned below. This is purely based on my understanding & exposure and I may be totally or partly wrong

8 Behavioural Traits of Corporate Leaders

  1. Secure Person
  2. Humble and Decent
  3. Big Thinker and Macro Manager
  4. Observer and understanding
  5. A Genuine Person
  6. Lead By Example
  7. Fair and Transparent
  8. Inspiring and Motivating

In this post, we will cover two such traits (Secure Person and A Genuine Person). Balance 6 traits shall be discussed in subsequent blogs. However, first, let us see why behavioural traits are important

Why behavioural traits are important

Corporate world is world of orders which flows from top to bottom as per the set organization structure. Accordingly, persons sitting on top positions by default have a right to direct & instruct the persons below. The team is supposed to act the way boss expects. Organization culture generally does not allow team member to counter his/her manager when it is necessary. Consequently, people afraid to put forward a different view even if it could be in the best interest of organization.

Though every employee harp on that he/she works for the organization, but, unfortunately, people works for his/her manager. In reality, your manager is your employer. Therefore, for leading the team effectively, a leader must use his/her authority wisely and only in relation to his/her role for organization. This is possible when leader possess emotional maturity and strong personal/professional values. This explains why to discuss Behavioural Traits of Corporate Leaders

Behavioural Traits of Corporate Leaders

1) A secure person:

Sense of security is vital for a person to remains peaceful & calm. This is one of the essential ingredients to maintain harmony in personal and professional life. A secure person has full confidence and faith in his skills, experiences and abilities. Consequently, he/she does not live in a fear of losing a position or job. He/she maintains healthy relationship with colleagues at all levels and trusts his/her team members and other people in the organization.

On the contrary, insecurity is mother of poor inter-personal relationships. Insecure person easily perceives threats from people and situations. Accordingly, he/she doubts the motives of others and feels jealous when somebody is rewarded. As a result, she/he takes the things personally most of the time and could behaves rudely out of his/her own fears

Leadership role is all about communication, interactions, managing people, motivating and direction the team. Accordingly, a leader must possess a deep rooted sense of security so that she remains focused on the organizational goals without fear. A secure person does not get disturbed easily and never take the criticism personally. Consequently, he is the first one to appreciate others for good work and achievements and last one to criticize them for mistakes and failure. Insecure person is just the opposite. As a result, this is most desirable trait for leadership position

2) A genuine person

A genuine person is sincere and honest in all his dealing whether personal or professional. She is having a deep desire to honour the promises made. Accordingly, she never commits what she cannot deliver. In view of this a genuine person always present factual picture to top management and team members. Such persons do not mislead the team or manipulate things for survival or personal growth

A genuine person enjoys highest credibility and trust in the eye of team above and below. Accordingly, he gets the full support from top management and whole hearted efforts from his team member. This result in superior organization performance because team put extra effort in meeting the set targets

Disclaimer Statements

Difference Among Lump Sum, Item Rate and Cost Plus Contracts (Part 2)

In the last post we discussed that various contracts type based on compensation method may include Lump Sum, Item Rate and Cost Plus Contracts. Also, we further discussed about Lump Sum Contracts. Please click on the link below to read this post

Difference Among Lump Sum, Item Rate & Cost Plus Contracts

In this post, I wish to explain Item Rate and Cost Plus Contracts in more detail. In construction industry, there is enough use of item rate contracts especially for the execution of civil works by Contractor as per Owner’s design. However, Cost Plus are not so common and we see them rarely

Contracts Classification based on Compensation Method

B) Item Rate Contracts:

Item Rate means “contract price” for “unit quantity” of each “work item” as defined under scope of work. Sometime it may not be possible for the Owner to ascertain exact quantities for identified work items. This may happen because of the nature of the work, and/or design not fully completed and/or some inputs are missing to ascertain exact quality. So, the Owner stipulates the “estimated quantities” of each work items. Accordingly, the quantities, finally executed by Contractor, may be different. Therefore, in these circumstances, where quantities are likely to change, it is not prudent to invite Lump Sum Price or sign a Lump Sum Contract. Here Item Rates Contract (i.e. unit price contract) seems best fit, as it extend flexibility to address “quantity changes” within certain range (as agreed by parties), without any need to follow lengthy Variation & Variation Order Procedure.

In Item Rate Contracts, Owner defines the comprehensive Bill of Quantities, which consists of detailed description of Work Items, Unit of Measurement and estimated quantities. Accordingly, Owner invites and bidder quote the “Rate/Price” for “unit quantity” of each BOQ Item. Such contracts where different unit price exists for respective BOQ Items are called Item Rate Contracts.

Unit Rates contractually binding, not total price

The Unit Rate mentioned against each work items is the “contract price” for “unit quantity” of such item. Therefore, it is a contractually binding price. However, the item price which is obtained by multiplying the unit price with estimated quantity is a notional price. The actual item-wise price to be paid contractually shall depend upon the actual executed quantities.

Subject to other contract conditions, Owner is bound to pay for actual executed quantities based on the Unit Prices stipulated in the Contract. This is true as long as actual quantities do not vary beyond the prescribed limits. Total Price which is obtained by adding the item price of all BOQ items is again the estimated Total Price rather than Total Contractual Price. Total Contract Price (or Contract Price) as stipulated in the item rate contracts is necessary for the purpose of ascertaining BG or LD Amount. However, it does not dilute the spirit of Item Rate Contracts

C) Cost Plus Contracts:

In certain situation, in view of nature of work, it may not be possible for the Owner to clearly mention work items as well as quantities with greater certainty. So the scope of work is a stipulation of final requirements with a general description of work items and tentative quantities. Also, there is a high probability that the work items and/or the associated quantities may change.

Therefore, in the above circumstances, it would not be possible for the contractor to quote Lump Sum Price or Unit Rates because both work items and quantities are not fixed. Hence, it is prudent to select a reputed contracting organization having versatile experience and enter onto Cost plus Contract. Under such contracts Owner pay the contractor based on actual cost incurred plus reasonable profit.

Significance and relevance of cost plus contracts

Cost Plus Contracts are best fit and most suitable when there is high degree of uncertainty in the scope of work and both work items & quantities are likely to change. This mainly happened for scope of work where:

a) industry practice is not established
b) scope of work is entirely new or some thing totally different
c) work is being executed first time and
d) Owner and/or Contractor have not executed similar work in the past
e) Owners and/or Contractor are not able to estimate the cost with reasonable accuracy

Disclaimer Statements

Difference Among Lump Sum, Item Rate & Cost Plus Contracts

In the previous post, we covered the contract classification based on Nature of Transaction and Mode of Project Delivery. Accordingly, we discussed the difference among Supply, Service Contracts & Works Contracts and among EPC, EPCM and Multiple Packages Contracts

In this post, we are going to discuss various kinds of contracts under the broad category called Compensation Method / Method of Payment .

One organization may prefer to pay Lump Sum Price for the entire scope of work. However, other one may choose to pay based on rates agreed for each work item multiplied by corresponding quantities. Yet a third one may like to pay the contractor based on the actual cost incurred plus reasonable profit. Each type has its own merits and demits and no one is absolutely wrong or right.

Based on the Compensation Method, contracts are classified as follows;

A) Lump Sum Contracts
B) Item Rate Contracts
C) Cost plus Contracts

We deal with such contracts very frequently in our work life. The purpose of this post is to understand the significance of each type and eventually know their distinguishing features. This will help to choose the right fit for a given situation. 

Let us now discuss above contracts in more details

Classification based on Compensation Payment

A) Lump Sum Contract:

The word lump means to combine, aggregate, bunch or consolidate. The word Lump Sum means Aggregated Amount or Consolidated Amount.

As the name suggests, Lump Sum Contracts consists of Total Consolidated Amount against the given scope of work. In such contracts, Owner defines detailed Scope of Work and/or Materials to be Supplied and/or Services to be rendered by the Contractor and as required to execute and complete the work. And, Owner invites Total Aggregated Price from the bidders for the entire scope of work.

Consolidated Price which include all associated costs for all supplies and services is called Lump Sum Contract PriceLump Sum Price is a consideration for all liabilities and obligations of Contractor. Also, this lump sum amount is a contractual price between the parties. Consequently, Owner is bound to pay such price as long as the scope of work remains unchanged. Any further break up of Total Price in the form of Price Schedule/Priced Bill of Quantities is to facilitate payment. Existence of item price, sub-component or component price in the Price Schedule does not dilute the essence of Lump Sum Contract

Significance and relevance of Lump-sum Contracts

Lump Sum Contracts are very common industry practice for procurement of engineered products, specialized services and for execution of design-build & EPC/Turnkey Contracts. Owner prefers to obtain lump-sum price so as to ascertain the Total Cost before starting the works. Also, it is easy to compare various offers when received on the basis of Lump-sum Price. By doing so, Owner transfer the risk of quantity variations to the Contractor

Lump Sum Contracts are best fit and most suitable when there is a full clarity on the Scope of Work. This means works items and quantities are known with greater certainty and the probability of scope/quantity change is comparatively less. This mainly happened for execution of works where industry practice is established and when bidders have full understanding of scope and enough prior experience to accurately calculate and quote the Lump Sum Price and successfully perform the awarded works

Item Rate and Cost Plus contracts shall be covered in the next post

Disclaimer Statements

Difference among EPCM, Multiple Packages and EPC Contracts (2)

In the last post we discussed how contracts are classified based on the Mode of Project Delivery. We read that depending upon the mode of project delivery; various contracts / contracting approaches could include EPC, EPCM and Multiple Package Contracts. Further we discussed EPC Contract in more detail in the previous post. Please click here to read that post:

In this post we wish to discuss EPCM and Multiple Packages Contracts in further detail. Both posts together shall bring out more clarity on the distinguishing features of each type. A careful analysis and comparison above contracts / contracting methods shall reveal the appropriate usage of each one

Contract Classification based on Mode of Project Delivery:

Please re-read the example of Construction of Ramesh’s House in the previous post by clicking the above link

EPCM and Multiple Packages Contracts in more details:

B) Multiple Packages Contracts

In the last post we discussed that EPC Contracts are best option if Owner intend to award the entire scope of works to a single agency. This is done to minimize the interfacing issues and holding single agency responsible for completion of the entire job within agreed cost and timelines.

However, another Owner may not prefer to award the entire scope of work to a single agency. This Owner may be cost conscious or desire to have better control on the project. Further, a single agency (i.e. EPC Contractor) may not have enough experience in all disciplines of the project. Accordingly, the EPC Contractor may end up subcontracting certain parts of the scope, which are outside his portfolio, to other agencies

In view of the above, Owner may find it better to split the work into various packages keeping in view the nature of work and/or availability of contractors (e.g. Civil, Mechanical, Electrical, Supply, Installation etc.). As a result, the Owner may appoint a separate agency for the execution of each package. 

In the above contracting mode, Owner supervise the work of each contractor. Further, Owner also assumes responsibility for coordination and interfacing between different contractors. Under Multiple Packages approach, each individual package is executed as a separate contract and communication between various contractors is through the Owner.

C) EPCM Contracts:

EPCM means Engineering, Procurement and Construction Management.

This contracting approach is a modification of other types to remove their disadvantages. Multiple Packages method offer advantage of overall lower cost to the Owner. This is because Owner is awarding each package directly to an entity who is most competitive for the given scope under individual package. However, coordination between various agencies and resolving interfacing issues is a major problem in this model.

EPCM is a hybrid model and could help the Owner to take the benefits of multiple packages approach together with managing the interfacing issues through appointment of an expert. Under EPCM Model, Owner appoint EPCM Contractor in addition to various package contractors and place this agency in between owner and packages contractors

EPCM Contractor work as agent of the Owner; complete the design; support the Owner in procurement of Project Plant & Equipment and manage the Construction Services. Construction Contractor work under the supervision of EPCM Contractor. EPCM Contractor responsible for interface management and advise. Owner remains responsible for all technical and commercial matters associated with the Project  

EPCM Contracts are most suitable for smooth execution of project when;

i) Owner does not have enough experience for execution of similar projects
ii) Owner is not very skilled in monitoring the contractors
iii) Owner lacks expertise in resolving interfaces between various agencies
iv) Owner intend to reduce construction cost and ready to take reasonable risk

Please click the link to read disclaimer statements

Difference among EPCM, Multiple Packages and EPC Contracts

In the last post we covered Contract Classification based on the Nature of Transactions. We discussed that based on the kind of transaction, contracts are classified as Supply, Services and Works Contracts. Please click here to re-read last posts:

In the business world, every business entity is dependent on other firms for procurement of goods, services or works. Organizations undertake such procurement activities through mutually agreed Contract Agreements. However, the contracting philosophy of each organization may be different. One organization may prefer to appoint a single agency for entire scope of work and the other one may choose to break the scope into number of work packages. In the second situation, organization prefers to break the scope based on the nature of work and availability of good number of contractor for that work. As a result, they wish to appoint a separate contractor for each package

So depending upon whether Owner intends to execute the work by integrating or breaking the scope, contracts are classified as followings;

A) EPC Contracts
B) Multiple Packages Contracts
C) EPCM Contracts

In this post, we shall cover EPC Contracts. Multiple Packages and EPCM Contracts shall be covered in next post

Contract Classification based on Method of Project Delivery

Let us try to understand the concept of Level of Integration with a common example. Suppose Ramesh want to construct his dream house on 500 SQM plot. He may prefer to execute the work by awarding a single integrated contract for the entire scope of work. In this situation there will be only one contractor (called EPC Contractor) who will be responsible for design, supply of all materials and provisions of all services that are necessary for the construction of house including foundation, structural works, finishing and MEP works etc.

Alternately, Ramesh may divide the works into 3-4 packages based on the nature of work e.g. Civil Works (Foundation and Structural Works), MEP Works and Finishing Works and could award each package to three separate contractors. Further, there is a third approach which is in between and a mixture of the two. Here, Ramesh may follow multiple package approach and additionally could also appoint an experienced consultant, in between, to undertake engineering services, for supporting the owner in procurement and to act as Owner’s advisor to manage the construction contractors. This consultant is called EPCM (Engineering, Procurement and Construction Management) Contractor and type of contract is called EPCM Contracts

Now let us discuss each type in further details

A) EPC Contract

EPC Contracts are the contracts entered between the parties for turnkey execution of works. The party who execute the work on turnkey basis is called EPC Contractor and party who is the owner of the work is called Owner or Employer. Under EPC Contract, owner intends to award the entire scope of the work to one contractor and such contractor is a single point responsibility for design, construction and completion of the project in all respect so that owner could operate the facility just by the turn of a key.

As the entire work is being done by a single agency, EPC contracts are fully integrated contracts. Mostly these contracts are executed through two parties approach, i.e. Owner and Contractor so as to reduce the interfacing and associated risks. Under EPC contracts, Owner does not interfere much and only concerned with on-time completion of work and within agreed Contract Price. Under this type of Contractual arrangements, Contractor takes all risks and remain fully responsible and accountable to meet the critical project parameters such as time, cost and quality. In-fact, Contractor is responsible to meet the outlined or performance specification of Owner rather than detailed specifications.

As all risks under EPC Contracts are assumed by the EPC Contactor, such contracts result into higher cost for the owner. However, such contracts de-risk the owner from the contractual claims of additional cost and time to large extent. This is because there are less interfacing issues and limited/no  opportunity for the EPC Contractor to blame the Owner for claiming additional cost or time. Therefore, in this type of contractual arrangements, Owner is certain about the cost and time for completion of the project.

Disclaimer Statements

Difference among Supply, Service and Works Contract (2)

Hi Readers In the last post we discussed briefly the types of contracts under the broad category called Nature of Transaction. We discussed that based on the Nature of Transactions; contracts are classified as Supply, Service and Works Contracts. Also we further explained supply contracts and their key characteristics.  To read the post again, please click:

In this post, we are going to discuss other two types: Service Contracts and Works Contracts. Eventually two posts together will bring out the underlying differences among Supply, Service and Works Contracts

Service Contracts

These are the contracts for PROVISION and RECEIPT of SERVICES between the parties. The party who provides the SERVICES is known as Service Provider. Party who receive the services is known as Service Receiver.

The Finance Bill provides the Definition of “Service” under Service Tax Act as follows: Service means any activity carried out by one person for another for consideration but does not includes: a) an activities which constitute merely: 1) transfer of title in GOODS or IMMOVEABLE PROPERTY by way of sale, gift or in any other manner; or 2) a transaction in money or actionable claims; b) a provision of service by an employee to the employer in the course of or in relation to his employment; c) a fee taken by any court or tribunal established under any law for the time being in force

Now the Service Tax Act has been replaced with GST Act

Under service contacts, service provider does something of some value, benefit or advantages to service receiver for money consideration and transaction between them is known as Provision of Services. The key differentiator is that in Service Contracts nothing moves physical from one party to another and there is no transfer of property between the parties.

Services are intangible products rather than physical goods. Services include all such actions, deeds and effort performed by one person for another to satisfy a need/desire (of another person) in the course of business or commerce. Service Contracts involves only the exchange of services between the parties without any involvement of sale or purchase of goods between them

Examples of Service Contracts

We deal with Service Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Service Contracts are as follows;

  • Receiving transport facility such as cab, bus, train and flight for moving one place from another; requesting someone for installation of AC, rectification of electrical fault or cleaning our house are typical examples of a service contracts in our personal life.
  • In our work life, we engage design consultants, manpower consultants, legal advisors, Installation Contractors and Transport Agencies as required. These are good examples of service contracts in work life
  • All above examples are pure service contracts which do not involve physical possession or transfer of anything between the parties

Works Contract

Works contracts are nothing but integrated contracts of supply plus services. These are called composite contracts wherein scope involves the supply of goods and provision of services. This is not a third category, but, a combination of supply and services. In certain situation, it may not be possible to divide the scope of work into goods and services. Moreover, sometime one does not intend to break the scope into supply and services. So Works Contract seems ideal type for such situation

Under Work Contracts, the contractor supplies the materials and also render the services to the Owner for money consideration and transaction between the parties is knows as Execution/Performance of Work

Examples of Works Contracts:

We deal with Works Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Works Contracts are as follows;

  • Repair of a computer along with supply of damaged parts; repair of house-hold electric fault including supply of damaged item; painting the house with supply of required paint are typical examples of Works Contract in personal life.
  • Design, supply & installation of a Power Plant on Turnkey Basis and Construction of a Residential Building with supply of all materials and permanent plant are typical examples of Works Contract in our work life
  • Disclaimer Statements

Difference among Supply, Services & Works Contracts (1)

Hi Friends,

In the previous posts, we have covered Basic Concepts and Definition of a Contract. Now the next step in the journey is to discuss different kind of contracts and rationale behind their classification.

Contracts could be classified into various types based on the followings categories;

In this post, we will discuss various types of contracts based on: Nature of Transaction. Contracts types based on other categories shall be covered in the subsequent posts. After reading all blogs under this chapter, we will come to know the characteristics and application of each kind. Accordingly, we would be able to appreciate their distinguishing features

A) Contract Classification based on Nature of Transaction

There exists thousands of firms, companies or commercial organization across the world who are doing business locally, regionally or globally. Can we think off what exactly they are doing? You know that all business entities either sells goods or provides services or both. This is true irrespective of whether a firm is small, medium, large or local, national, multinational

At macro level, nothing exists beyond goods or services, a business entity may be doing or can think of doing. So, all commercial entities around the globe undertake transaction of selling goods and/or providing services to their customers. And they are earning profits out of such transactions.

So, depending upon whether the transaction is a Sale or Service or a combination of both, contracts are classified as Supply; Services or Works, as further explained below

1 Supply Contracts

There are the contracts for SALE and PURCHASE of GOODS between the parties. The party who sells the GOODS is known as Seller or Supplier and party who buy/purchase the goods is called buyer or purchaser.

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

Under supply contracts, seller transfers the property in the GOODS to buyer for money consideration and transaction between the parties is known as SALE (or Purchase) of GOODS.

Important ingredients of Supply Contracts are as follows:

  • Sale of moveable property (called ‘Goods’)
  • Transfer of ownership of ‘goods’ from Seller to buyer
  • Delivery of goods (or transfer of possession) from seller to buyer
  • Payment of money consideration from buyer to seller

The GOODS as described above may be readily available with the seller or alternately, seller need to procure or manufacture it before supply. Accordingly, Seller transfer the possession of goods to buyer if goods already existing or Seller agree to transfer the possession of goods at later mutually agreed date (if goods need to be procured or manufactured) as per the terms of Contract of Sale of Goods between the parties. So under supply contracts there is a physical movement of goods from one party to another. And this is key distinguishing features of Supply Contracts when compared with Service Contracts

Examples of Supply Contracts:

Supply Contracts are pure sale contracts without any element of service. We deal with supply contracts daily sometime consciously or sometime even not knowing that we are doing so. Few examples of supply contracts are as follows;

i) Procurement of general provision items from local retail shops; Purchase of furniture, mobiles phone, garments, TV & AC from a retail stores are typical example of supply contracts in personal life

ii) Procurement of raw materials, components, finished product or a complete package/system from our vendors by the organization buyers are typical example of supply contract in our work life.

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Disclaimer Statements

Sale of Goods Act – Law Governing Supply Contracts

In the last post we discussed Indian Contract Act, a statue applicable to the contractual relationships between the parties. Please click on the link below to read the post again

In this post we are going to discuss Sale of Goods Act, a specific law related to sale/purchase of good

Sale of Goods Act

Sale of Goods Act, 1930 is the another most important and relevant Business Law for Contracts and Procurement. This law was enacted in 1930 and known as Sale of Goods Act, 1930. The statue came into force on 1st July 1930 and was drafted based on English Sale of Goods Act, 1893

The Act defines set of rules with regards to Sale of Goods. The Statue deals with transaction of sale/purchase of moveable goods between buyer and seller. The term “Goods” is clearly defined under the law and hence statue apply to the things covered in the definition. This act provides the norms with regards to: Formation, Performance and Suit for Breach with regards to the Contract of Sale of Goods between the buyer and seller. It also provides stipulations regarding the rights of buyer and un-paid seller

Sale of Goods Transaction

Chapter VII of Indian Contract Act, 1872 also lay down certain provisions in relation to Sale of Movable Goods. However, subsequently, after few decades, environment of business & trade undergone substantial changes. Hence new relationships developed between business entities. So the provision of Chapter VII of Indian Contract Act appeared to be inadequate to address issues concerning mercantile transaction

Accordingly, need was felt to enact a new law that exclusively set forth the specific provisions in relation to sale/purchase dealings of modern business relationships/methods. However, general provision of Indian Contract Act will continue to apply to newly enacted Sale of Goods Act

Sale of Goods constitutes the majority share of all the business transaction undertaken across the globe. So a thorough understanding of this act is important to fully appreciate the subject

Relationship of Sale of Goods Act with Indian Contract Act

Indian Contract Act and Sale of Goods Acts are: related, interdependent & complementary. They are not totally independent statues. This is clear from the followings provisions of Sale of Goods Act 1930

  • Chapter 1, Section 2 – Definitions, Serial No (15) of Sale of Goods Act, 1930 says that the expression used but not defined in this act and defined in Indian Contract Act, 1872 have the meaning assigned to them in that act
  • Section 3 of Sale of Goods Act, 1930 titled Application of Provision of Act 9 of 1872 stated that all such provisions of Indian Contract Act, 1872, if not inconsistent with express provisions of Sale of Goods Act, shall continue to apply to the Contract for Sale of Goods
  • Sale of Goods Act uses terms such as Contract of Sale of Goods or Agreement to Sell, Offer, Acceptance, void & voidable contracts. The true meaning of such terms has been defined in Indian Contract Act, 1872
  • Sale of Goods Act refers to the Indian Contract Act at number of places. So, this act is a specialized branch of Indian Contact Act rather than a distinct act

Indian Contract and Sale of Goods Act not mutually exclusive

From the above, we can say that two acts are not mutually exclusive. Actually they do consist of common term and overlapping provisions. Hence both Acts must be read together to draw a full understanding on the subject. Sale of Goods Act, 1930 is subsequently step to provide specific provisions in relations to Sale of Goods while keeping the fundamental & general provision of Indian Contract Act, 1872 intact and applicable thereto


Disclaimer Statements:

Agreement not declared void behavioural traits Capacity of the parties Consideration necessary for a valid contract Contract Administration Contract Formation Contract Management Contract Objectives Contract Principles corporate leaders Difference between MOU and Contract Equity Free Consent Indian Contract Act Intention to create legal relationships Item Rate Contracts Justice Lawful Consideration Law Governing Contracts Law governing supply contracts Lump Sum Contracts MOst suitable use of MOU Offer and Acceptance Reasonableness Sale of Goods Act Secure person Significance of MOU Voidable Contracts Void Agreements What is a Contract What is agreement What is consideration What is MOU whether all agreements are contracts