Understanding Contracts Understanding Contracts “The Basics”“The Basics”

– Loesche India Pvt Ltd.

Why Contracts formed ?Why Contracts formed ?• Contracts help to build relationships between

buyers and sellers• Contracts attempt to allocate risks and

responsibilities between the parties• Contract : “ An agreement enforceable by law

is Contract” • The Commercial Manager/Project Coordinator

must understand and balance the needs of the contracting parties

PO / Contract / Letter of Intent PO / Contract / Letter of Intent / Letter of Award / M O U ?/ Letter of Award / M O U ?• Contracts could be in any form i.e. • Purchase Order (PO):(where Purchaser

issues the PO and seller accept its terms & conditions)

• Contracts : - Owner & Contractor accept mutually all terms & conditions & enter into Contract

• LOI / LOA / MOU : It could be in the form of Letter of Intent (with all terms & conditions) or LOA and MOU if detailed terms & conditions are enforceable as Contract, in future Contract could be signed with agreed clauses by both parties..

Why Contracts formed ?Why Contracts formed ?• Contracts help to build relationships between

buyers and sellers• Contracts attempt to allocate risks and

responsibilities between the parties• Contract : “ An agreement enforceable by law

is Contract” • The Commercial Manager/Project Coordinator

must understand and balance the needs of the contracting parties

Essentials of ContractsEssentials of ContractsCompetent PartiesConsiderationLawful PurposeCertainty of TermsOfferAcceptance

Contracts- Written Vs. OralContracts- Written Vs. OralA contract is a promise between partiesContracts maybe written or oral If the following are present (on a scrap of

paper, or even oral), a contract may exist:

◦The parties

◦The goods/Services

◦Time at which the transaction will occur

Generally contracts are made as per domestic law (The Indian Contract Act, 1872)or UCC (Intl. convention)

Contract Contract Develop contracts that contain clear

deliverables and contractual obligations and standard terms and conditions, while identifying and mitigating all risks.

Contract FormationContract Formation Prepare negotiation planNegotiate major issuesPrepare draft contractNegotiate minor issuesReview and approve contractObtain contract signature

Usual Contentious ClausesUsual Contentious ClausesPricing and Payment Terms

Liquidated Damages/Penalties/Retention

Liability/Indemnification Terms

Warranties (Scope, Duration, Risk

Purchase)

Rejection Clause

Arbitration

Pricing & Payment TermsPricing & Payment Terms Pricing : - On what basis, we are offering our price i.e.

FOB / Ex-Works / CIF/ C&F etc. Here customer wants all responsibilities on supplier and supplier wants minimum responsibilities / scope.

Payment Terms : - Customer wants minimum investment & wants min. advance, wherein supplier’s aim to get adequate initial advance & prorata payments to fund the working capital for assigned project. So, reaching at settlement /mutual agreement point is main aim to offer/sell the product. Customer wants security for making payment for advance.

LD / Penalities / RetentionLD / Penalities / RetentionTo safeguard the delay customers

want to impose LD/ or retention of money / or imposing penalty for not fulfilling performance obligations. Our main aim in these clauses are to reach an agreeable solution acceptable to both parties.

Liability / Indemnification TermsLiability / Indemnification TermsThe liability clause is also

contentious matter, every customer wants to set higher liability to supplier as far as possible & supplier just wants the opposite.

Apart from fixing liability, we have to check whether in contract there should not be indemnification which we shall not able to adhere/fulfil.

Indemnification should be restricted to the offered product, design, engg. & related with its performance only.

Warranties Warranties Scope & its durationRisk purchase ; Is it applicable or

not ?

Rejection clause Rejection clause Customer wants that in case

supplier’s material is not upto the mark (as per contract stipulation), they must have option to reject the goods. This clause should be dealt with care & precision.

ArbitrationArbitration This clause is essential to short

out the disputes, in case its errupts, it defines, dispute resolution method or where disputes should be addresses and related laws.

Standard Contracts Terms : Standard Contracts Terms : Why Why ??Most major companies develop

standard contract forms, procedures and clauses (regarding our Std T&C, we will present separate slides & presentation)

These standards allow contracts to be processed more quickly, cost effectively and with reduced risk

Standards also help to assure that agreements entered into are aligned with the company’s business objectives

Sources of Risk in ContractsSources of Risk in Contracts

• Commercial & Political• Contract Terms and Conditions • Scope and technical risks

The ContractThe Contract

A well written agreement answers who, what, where, when, and what to do if….