PURCHASES AND CONTRACTS NOTES

PURCHASES AND CONTRACTS

CONTRACT

A voluntary, deliberate, and legally binding agreement between two or more competent parties. Contracts are usually written but may be spoken or implied, and generally have to do with employment, sale or lease, or tenancy.

A contractual relationship is evidenced by

(1) an offer,

(2) acceptance of the offer, and a

(3) valid (legal and valuable)

  1. consideration.

Each party to a contract acquires rights and duties relative to the rights and duties of the other parties. However, while all parties may expect a fair benefit from the contract (otherwise courts may set it aside as inequitable) it does not follow that each party will benefit to an equal extent. Existence of contractual-relationship does not necessarily mean the contract is enforceable, or that it is not void (see void contract) or voidable (see voidable Contract). Contracts are normally enforceable whether or not in a written form, although a written contract protects all parties to it. Some contracts, (such as for sale of real property, installment plans, or insurance policies) must be in writing to be legally binding and enforceable. Other contracts (see implied in fact contract and implied in law contract) are assumed in, and enforced by, law whether or not the involved parties desired to enter into a contract

law is a contract. An agreement which is enforceable at law cannot be contract. Thus, the term agreement is more wider in scope than contract. All Contracts are agreements  but all agreements are not contracts.

An agreement, to be enforceable by law, must posses the essential elements of a valid contract as contained in section 10 of the Indian Contract Act.

  • ESSENTIALS  ELEMENTS OF A VALID CONTRACT :

    1. Offer and Acceptance.  In order to create a valid contract, there must be a ‘lawful offer’ by one party and ‘lawful acceptance’ of the same by the other party. Offer must be capable of creating legal relations. The offeror must intend the creation of legal relations. Acceptance must be absolute and unconditional. An acceptance must be unconditional and unqualified.2. Intention to Create Legal Relationship.  In case, there is no such intention on the part of parties, there is no contract. Agreements of social or domestic nature do not contemplate legal relations.

    3.Lawful Consideration. Consideration has been defined in various ways. According to Blackstone,”Consideration is recompense given by the party contracting to another.” In other words of Pollock, “Consideration is the price for which the promise of the another is brought.”
    consideration is known as quid pro-quo or something in return.

    4. Capacity of parties. The parties to an agreement must be competent t contract. If either of the parties does not have the capacity to contract, the contract is not valid.
    According the following persons are incompetent to contract.
    (a) Miners,                 (b) Persons of unsound mind, and
    (c) persons disqualified by law to which they are subject.

    5. Free Consent. ‘Consent’ means the parties must have agreed upon the same thing in the same sense.
    According to Section 14, Consent is said to be free when it is not caused by-
    Coercion, or

  •  Undue influence, or
  •  Fraud, or
    Mis-representation, or
  •  Mistake.
    An agreement should be made by the free consent of the parties.6. Lawful Objective . The object of an agreement must be valid. Object has nothing to do with consideration. It means the purpose or design of the contract. Thus, when one hires a house for use as a gambling house, the object of the contract is to run a gambling house.

    The Object is said to be unlawful if-

    (a) it is forbidden by law;
    (b) it is of such nature that if permitted it would defeat the provision of any law;
    (c) it is fraudulent;
    (d) it involves an injury to the person or property of any other;
    (e) the court regards it as immoral or opposed to public policy.

    7. Certainity of Meaning. According to Section 29,”Agreement the meaning of which is not Certain or capable of being made certain are void.”

    8. Possibility of Performance. If the act is impossible in itself, physically or legally, if cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not enforceable.

    9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country. Agreements mentioned in Section 24 to 30 of the Act have been expressly declared to be void for example agreements in restraint of trade, marriage, legal proceedings etc.

    10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases where writing, registration etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum and articles of association of a company, etc. Registration is required in cases of documents coming within the scope of section 17 of the Registration Act.

    All the elements mentioned above must be in order to make a valid contract. If any one of them is absent the agreement does not become a contract

ACTIVITIESINVOLVED IN CONTRACT FORMATION

TYPES OF CONTRACT

Types of contracts can include:

  1. Written contracts
  2. Verbal contracts
  3. Standard form contracts
  4. Period contracts

1.   Written contracts

Written contracts provide more certainty for both parties than verbal contracts. They clearly set out the details of what was agreed. Matters such as materials, timeframes, payments and a procedure to follow in the event of a dispute, can all be set out in a contract.

A written contract helps to minimise risks as it is much safer to have something in writing than to rely on someone’s word. A written contract will give you more certainty and minimise your business risks by making the agreement clear from the outset.

Benefits of a written contract

A written contract can:

  1. provide proof of what was agreed between you and the hirer
  2. help to prevent misunderstandings or disputes by making the agreement clear from the outset
  3. give you security and peace of mind by knowing you have work, for how long and what you will be paid
  4. clarify your status as an independent contractor by stating that the contract is a ‘services contract’ and not an ’employment contract’. This will not override a ‘sham’ contract, but a court will take the statement into account if there is any uncertainty about the nature of the relationship reduce the risk of a dispute by detailing payments, timeframes and work to be performed under the contract
  5. set out how a dispute over payments or performance will be resolved
  6. set out how the contract can be varied
  7. serve as a record of what was agreed
  8.  specify how either party can end the contract before the work is completed.

Risks of not having a written contract

When a contract is not in writing, you are exposing yourself and your business to a number of risks:

  • the risk that you or the hirer misunderstood an important part of the agreement, such as how much was to be paid for the job or what work was to be carried out
  • the risk that you will have a dispute with the hirer over what was agreed because you are both relying on memory
  • the risk that a court won’t enforce the contract because you may not be able to prove the existence of the contract or its terms.

Get advice before you sign

Before you sign a contract, it is a good idea to seek advice from your industry association, lawyer, business adviser or union.

When a written contract is essential

It is always better to have your contract in writing, no matter how small the job is. Any contract with a hirer that involves a significant risk to your business should always be carefully considered and put in writing. This is advisable even if it means delaying the start of the work. A written contract is essential:

  • when the contract price is large enough to make or break your business if you don’t get paid
  • where there are quality requirements, specifications or specific materials that must be used
  • where there is some doubt that the hirer has enough money to pay you
  • when you must have certain types of insurance for the type of work you are doing
  • where the contract contains essential terms, such as a critical date for the completion of the work before payment can be made
  • where you or the hirer need to keep certain information confidential
  • when it is required by your insurance company for professional indemnity purposes
  • where there is a legal obligation to have a written contract (eg. trade contracts for building work in Queensland).

2.   Verbal contracts

Many independent contracting arrangements use verbal contracts, which only work well if there are no disputes. A handshake agreement may still be a contract and may (though often with difficulty) be enforced by a court. However, verbal contracts can lead to uncertainty about each party’s rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do.

Part verbal, part written contracts

Some ag reements may be only partly verbal. For example, there may be supporting paperwork such as a quote or a list of specifications that also forms part of the contract. At the very least, you should write down the main points that you agreed with the hirer to avoid relying on memory. Keep any paperwork associated with the contract. The paperwork can later be used in discussions with the hirer to try to resolve a problem. If the dispute becomes serious, it may be used as evidence in court.

The most important thing is that each party clearly understands what work will be done, when it will be completed and how much will be paid for the work.

Examples of paperwork that may support a verbal contract

  • E-mails
  • Quotes with relevant details
  • Lists of specifications and materials
  • Notes about your discussion—for example, the basics of your contract written on the back of an envelope (whether signed by both of you or not).

If the contract is only partly written or the terms of the work are set out in a number of separate documents (e-mail, quote etc.), it is to your benefit to make sure that any formal agreement you are being asked to sign refers to or incorporates those documents. At the very least, make sure the contract does not contain a term to the effect that the formal document is the ‘entire agreement’.

3.   Standard form contracts

A ‘standard form’ contract is a pre-prepared contract where most of the terms are set in advance and little or no negotiation between the parties occurs. Often, these are printed with only a few blank spaces for filling in information such as names, dates and signatures.

Standard form contracts often include a lot of legal ‘fine print’ and terms that you may not understand. They tend to be one-sided documents that mostly benefit the person who prepared the contract (for example, by shifting as much risk as possible to the contractor). If you don’t understand the fine print or any other part of the contr act, you should get advice. If you sign the contract, you will be required to comply with the fine print even if you didn’t actually read it.

Tips for standard form contracts

Read every word before you sign

Read the fine print carefully and get advice about any terms you don’t understand before you sign. Once you sign a contract you are bound by all of its terms. If there is an indemnity clause, don’t sign until you understand the risks you are agreeing to accept if something goes wrong.

Cross out any blank spaces

Don’t leave any spaces blank. If you don’t need to fill in a blank space, always cross it out so the contract can’t be changed after you sign it.

Negotiate

You have the right to negotiate any contract before signing, including a standard form contract. But remember that both parties must agree to any changes and record them in the contract you sign. Your union or industry association or a lawyer can help you prepare for negotiations.

Keep a copy

You should always have a copy of any contract you sign. It is best if you and the hirer sign two copies of the contract, so that you can both keep an original. If this isn’t possible, ask for a photocopy and check that it is an exact copy. Remember to keep your copy somewhere safe for future reference.

A lawyer, your union or industry association might be able to provide you with information about some common standard terms used in contracts in your industry. They may also be able to provide you with a standard form contract for you to use.

4.   Period contracts

Some independent contractors and hirers use a ‘period contract’, which is a contract template that sets out the terms for a business relationship where the contractor is engaged to perform work from time to time.  In the building and construction industry, these contracts are called ‘period trade contracts’.

The contract template will apply each time the hirer offers work to the contractor and the contractor accepts it.  This c an occur when the contractor provides a quote and receives a work order from the hirer, or the parties might sign an addendum (an addition to the contract) that sets out the specific work to be done or result to be achieved. Once the work starts, the contract template and the work order or addendum will form the total contract for the specific work.

Period contracts can work well for both parties. They allow for the flexibility of performing intermittent work over an agreed period.  However, you should check the terms of the agreement to do each new job. Are they the same as those set out in the original contract template? Any term or condition that is different for a particular job, may change the terms of the original contract template.

If you are unsure about anything related to a period contract, get advice before you sign or agree to new work, even if you have performed work for that hirer previously.

RIGHTS ,OBLIGATIONS AND RESPONSIBILITIES

METHODS OF CONTROLING & EXCECUTION OF CONTRACS

Procurement Methods

Generally speaking, there are six procurement methods used by the procurement team in a company. The actual names of these could vary depending on your company and industry, but the process remains the same. The six times of procurement are open tendering, restricted tendering, request for proposal, two-stage tendering, request for quotations and single-source procurement.

Open Tendering

Open tendering is shorthand for competitive bidding. It allows companies to bid on goods in an open competition or open solicitation manner. Open tendering requirements call for the company to:

  1. Advertise locally
  2. Have unbiased and coherent technical specifications
  3. Have objective evaluation measures
  4. Be open to all qualified bidders
  5. Be granted to the least cost provider sans contract negotiations

Arguably, the open tendering method of procurement encourages effective competition to obtain goods with an emphasis on the value for money. However, considering this is a procedures based method a lot of procurement experts feel that this method is not very suitable for large or complex acquisitions due to the intense focus on the output process instead of stringent obedience to standards. In this Quality Management course learn about the ways to evaluate quality products on incoming orders, and to create quality products for sale.

There are course also disadvantages to this kind of procurement method including:

  1. Complex requirements are typically not suited for this method
  2. The timeline for needing the goods
  3. Complications in defining the exact needs of the requirement by the procuring company

Restricted Tendering

Unlike open tendering, restricted tendering only places a limit on the amount of request for tenders that can be sent by a supplier or service provider. Because of this selective process, restricted tendering is also sometimes referred to as selective tendering. Like open tendering, restricted tendering is considered a competitive procurement method, however, the competition is limited to agencies that are invited by the procuring team. The procuring entity should establish a set of guidelines to use when selecting the suppliers and service providers that will be on the invitation list. Randomized selections will not bode well for procuring. This method is selective to find the best-suited and most qualified agencies to procure goods and services from. It’s also employed as a way for the procuring team to save time and money during the selection process.

Request for Proposals (RFP)

Request for Proposal is a term that is used all across the business world. Social media managers receive RFP’s from potential clients all the time when a client is seeking a new manager of their venture. This kind of proposal is a compelling and unique document stating why the business is the best fit for the type of project at and. Similarly, in the procurement world, a RFP is a method used when suppliers or service providers are proposing their good or service to a procurement team for review. If you’re a supplier, understanding the in’s and out’s of quality service management is key to winning your bid. Read more about this in service quality management.

Procurement teams are often on the hunt for the best valued, most marketable items to bring into circulation. A client may feel they have all of the qualifications to fit the needs of fulfilling a specific requirement of a procurement team – but they have to prove it. The agencies writing the RFP’s should submit a two-envelope proposal to the procurement manager. The two-envelope process allows the procurers’ to review the proposal through and through without knowing the financial component. The financial proposal is sealed in the second envelope and should only be opened after the content of the first-envelope proposal is approved or rejected. This eliminates any persuasion by cost and allows an objective lens to look through when analyzing a good fit. The proposal with the best fit qualifications and best price will be selected. If a lesser qualified (yet still qualified) selection has a lesser price, no contract should be negotiated. The most qualified and appropriate proposal, regardless of price, should be selected. Are you a supplier? Learn how to price your goods based on value in the course Value Centric Selling.

Two Stage Tendering

There are two procedures that are used under the two stage tendering method. Each one of the procedures has a two stage process. This can be disadvantageous for some procurement teams if there is a time limit on securing a contract. In the same vein, this option is more flexible for both parties, allowing more room for discussion to meet mutual needs.

The first procedure is very similar to the RFP method as discussed above. The procurement team receives a proposal with two envelopes – one with the proposal itself and one with the associated financial information. The difference is the bidder is required to submit a technical proposal that highlights their solutions to fulfilling the requirements as specified by the procuring department. This proposal is scored according to the relevance of the solution to the needs of the procurer. The highest scored proposal is invited for further discussion in an attempt to reach an agreement. After the final agreement for the technical proposal is reached, the bidder is invited to submit their financial proposal and then further discussions ensue to negotiate a contract.

The second procedure is much like the above, however, instead of the bidder submitting a fully-completed technical proposal, a partial proposal is submitted. The methodology and technical specifications will be included but not to the fullest extent. This allows room for even more customization and discussion. Once the highest qualified bidder is selected, they will be invited to submit a thorough technical proposal along with a financial proposal. The technical proposal will be evaluated and only then will the financial proposal be opened. The combined score of both the technical proposal and the financial proposal are the grounds on which a bidder is contracted.

Request for Quotations

This procurement method is used for small-valued goods or services. Request for quotation is by far the least complex procurement method available. If you have the option, use this method to ensure a fast procurement process and not a lot of paperwork. There is no formal proposal drafted from either party in this method. Essentially, the procurement entity selects a minimum of three suppliers or service providers that they wish to get quotes from. A comparison of quotes is analyzed and the best selection determined by requirement compliance is chosen.

Single-Source

Single source procurement is a non-competitive method that should only be used under specific circumstances. Single source procurement occurs when the procuring entity intends to acquire goods or services from a sole provider. This method should undergo a strict approval process from management before being used. The circumstances which call for this method are:

  • Emergencies
  • If only one supplier is available and qualified to fulfill the requirements
  • If the advantages of using a certain supplier are abundantly clear
  • If the procurer requires a certain product or service that is only available from one supplier
  • For the continuation of work that cannot be reproduced by another supplier

In the end, the type of procurement method you choose to use is highly relative to the conditions of the procurement effort and the type of good or service being acquired. All procurement methods follow tight legal frameworks to ensure all standards are being met and quality

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