Contract Management

Contract Management refers to the process of managing contracts given to suppliers or vendors.

The need for contract management arises so that the contracts are methodically managed to ensure that the financial and operational risk are minimized such that the vendor performance is maximized. After fairly negotiating the contract and duly signed by both companies, a Service Level Agreements needs to be set-up so as to measure service performance and thereby communicating the expectations to the vendor. Contract management is generally managed by the legal team when problems arise or performance falls.

Contract management is a bunch of management activities to ensure that  vendor relationships are efficient and profitable.

Focus areas of contract management

Following business disciplines are taken into account over the business-standard contract management model, as employed by various organizations,

1. Authoring and negotiation
2. Baseline management
3. Commitment management
4. Communication management
5. Contract visibility and awareness
6. Document management
7. Growth (for Sales-side contracts)
8. Contract compliance/governance

Contract management are divided into three phases,

1. Pre- contract phase
2. Contract execution phase
3. Post award phase

Contract Basics

A contract can be defined as an agreement which creates rights and obligations between the parties. These obligations and right s must be of such a nature that these can be claimed in the court of law. A contract essentially consists of three elements,

1. Agreement – Agreement involves a valid offer by one party in correspondence to a valid acceptance by the other party.
2. Obligation – Obligation to abide by the agreement and guidelines laid down
3. Enforceability – Enforceability means contract must be legal in nature and which can be claimed in the court of law.

For instance, A invites B to a party and B accepts the invitation, then it is only a social agreement and not a contract. On the other hand if A agrees to sell his house to B for Rs. 50, 00,000. This is a contract.

Elements of a Contract

Any agreement that needs to be enforced in the court has to satisfy certain conditions.  Once the conditions are satisfied, then the agreement becomes a contract, such that the conditions become essentials of a valid contract.  Some of the essential elements of a contract are specified in the definition of contract given in section – 10 of the Contract Act.

Essential elements of a contract

1. Agreement: An agreement is between the parties that enter into a contract. It involves a valid offer by one party and a valid acceptance by the other party. An agreement is created by offer and acceptance. We can also say that, Agreement = Offer +Acceptance. So it is only by an agreement that a contractual relation is established between the parties.
2. Lawful consideration: Consideration means something in return. An agreement is legally enforceable only when each of the parties to it give something and gets something. It may be past, present or future and must be real and lawful. A contract without consideration is not a contract at all. The consideration must be legal, moral and not against public policy.
3. Capacity of parties: The parties to an agreement must be capable of entering into a valid contract. According to sectio 11, the following persons are not competent to enter in to a contract –
   • Persons of unsound mind (Idiots, lunatic person etc.)
   • Persons disqualified by law to which they are subject.
   • Minors (Not completed the age of 18)
4. Free consent: For the formation of a contract one person must give his consent to another person. The consent thus obtained must be a free consent. A consent is said to be free if it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. If the consent is obtained by unfair means, the contract would be voidable.
5. Consensus ad idem: It means the two parties of the contract must agree upon the subject matter of the contract in the same manner and in the same sense. That is there must be identity of minds among the parties regarding the subject matter of the contract. For example, A has two houses one at Calicut and another at Palakkad. He has offered To sell one house to B. B accepts the offer thinking to purchase the house at Palakkad, while A, when he offers; he has his mind to sell the house at Calicut. So there is no consensus ad idem.
6. Lawful object: The object of an agreement must be lawful. It must not be illegal or immoral or opposed to public policy. If it is unlawful, the agreement becomes void.
7. Not declared to be void: There are certain agreements which have been expressly declared void by the law. It includes,
   • Wagering agreement
   • Agreement in restraint to marriage
   • Agreement in restraint of trade etc.
8. Certainty and possibility of performance: The terms of the contract must be precise and certain. They should not be vague. The terms of agreement must be capable of performance. For example A agrees to sell one of his houses. A has four houses. Here the terms of agreement are uncertain and the agreement is void.
9. Intention to create legal relationship: There should be an intention between the parties to create a legal relationship. Mere informal promise is not to be enforced. Social agreements are not to be enforced as they do not create any legal obligations. An oral contract is a valid contract except in those cases where writing, registration etc. is required by some statute.
10. Parties: The names and addresses of all the contracting parties should be clearly stated.
11. Term of contract: The length of the contract should be stated and it should also be noted whether there are any options to continue the contract. For example, ‘This agreement will continue for another year unless otherwise notified to other party] by 31 January each year.
12. Limitation of liability: This section caps the liability of either party to the contract. For example, ‘Neither party shall have any liability to the other party for a claim of loss of profits…’. In an ideal world both parties would be seeking to have no liability to the other side. However, in a commercial context this is unlikely to be agreed and so both parties should try and limit their liability during the negotiation stage to appropriate levels. It is worth noting that there are statutes in force (discussed below) that forbid exclusion of liability in certain circumstances.
13. Termination provisions: The circumstances under which the parties can terminate the contract should be stated clearly. The procedure for giving notice to the other party should be in the contract. For example, ‘This agreement can be terminated by either party giving to the other not less than three months written notice…’.
14. Change of Control: During the course of a contract one party may change the structure of their company. In these circumstances the other party may wish to terminate the contract, for example if the first party transfers a controlling interest to a competitor of the other party. The procedure for this situation should be in the contract.
15. Dispute Resolution: The procedure to be followed if the parties have a dispute should be included. For example, if there is an option for arbitration or mediation where the issue cannot be resolved through internal escalation.
16. Confidentiality: Some contracts deal with commercially sensitive information and the parties are likely to want to keep this information confidential. There should be confidentiality clauses drafted in the contract which identify the information being protected and the circumstances in which it can be used or disclosed.
17. Intellectual Property Rights: Many commercial contracts include a clause stating who will own the intellectual property rights to any products provided under the contracts. This clause should specifically state who owns such rights. Particular attention should be given to the ownership of intellectual property rights in relation to products created specifically for or in connection with the contract.
18. Warranties: It is common for the party providing goods or services under a contract to provide certain warranties in relation to the delivery of the goods or services. For example, if the contract is for provision of a licence the provider should warrant that it has the necessary rights to grant the licence. Warranties give the other party a contractual right to sue for damages if there is a breach of the warranty.
19. Indemnity: Indemnity clauses are an express obligation to compensate the indemnified party by making a money payment for some defined loss or damage. They provide for an immediate right to compensation, without the need for a lengthy dispute as to the circumstances giving rise to the specified loss or damage. For this reason careful attention should be given to the agreement of any indemnities. An example of a typical indemnity is in a software contract under which the supplier indemnifies the customer against any claims made by a third party that the normal use of the software is infringing the rights of the third party.
20. Force Majeure: This clause should cover situations where performance of the contract is impossible through no fault of either party. For example, if there is a natural disaster or civil unrest.
21. Assignation / Assignment: If there is an option for one party to transfer their contractual rights and responsibilities to another party this should be set out in the contract along with the procedure to be followed. If there is no right to assign the contract this should also be noted.
22. Valid contract: A valid contract is a contract that the law will enforce and creates legal rights and obligations. A contract valid ab initio (from the beginning) contains all the three essential elements of formation,
    • agreement (offer and acceptance)
    • intention (to be bound by the agreement)
    • consideration (for example, the promise to pay for goods or services received)
23. Void contract: A void contract lacks legal validity and does not create legal rights or obligations. A contract that lacks one or more of the essential formation elements is void ab initio (from the beginning). In other words, the law says that it is not, or never was, a valid contract.
24. Voidable contract: A voidable contract is a valid contract that contains some defect in substance or in its manner of formation that allows one party (or sometimes both parties) to rescind it. A voidable contract remains valid and can create legal rights and obligations until it is rescinded. The party with the right to rescind may lose that right by affirmative conduct, or undue delay, or where the rights of an innocent third party may be harmed.
25. Unenforceable contract: An unenforceable contract is an otherwise valid contract that contains some substantive, technical or procedural defect. Most commonly, such a contract is illegal, either in its formation or its performance, as it offends either public policy (the common law) or some statute. As a general rule, the law will not allow the enforcement of such a contract Alternatively, the law may determine that such is a contract is void (rather than unenforceable) with the consequential loss of contractual rights.
26. Formal contract: A formal contract is wholly in writing, usually in the form of a deed, and does not require consideration. A promise (or term) of a contract made by deed is called a covenant. A deed can be unilateral (that is, made by only one party) and this is often called a deed poll. A deed made by two or more parties is called an indenture. Some types of contracts must be in writing and must be made by deed to be effective (for example, a conveyance of non-Torrens title land).
27. Simple contract: A simple contract may be oral or in writing (or a combination of both). Simple contracts are made between two or more parties and require consideration.

Indian Contract Act

The Indian Contract Act, came into effect on September 1, 1872 and extends to all India except the state of Jammu and Kashmir. The Indian contact Act governs entrance into contract, and effects of breach of contract. Indian Contract law is popularly known as mercantile law of India. Originally, the Indian Sales of Goods Act and Partnership Act were part of Indian Contract act, but due to some amendment these acts were separated from Contract Act. The Contract act is the most used act of legal agreements in India.

Every law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed        by British India and is based on the principles of English Common Law. The Indian Contract Act, 1872 determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. This legislation of Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.

The Act as enacted originally had 266 Sections, it had wide scope and broadly includes the following,

1. General Principles of Law of Contract- Sections 01 to 75
2. Contract relating to Sale of Goods- Sections 76 to 123
3. Special Contracts- Indemnity, Guarantee, Bailment & Pledge- Sections 124 to 238
4. Contracts relating to Partnership- Sections 239 to 266

The Indian Contract Act describes the simple and elementary rules relating to Sale of goods and Partnership. The progress of modern business world found the provisions contained in the Indian Contract Act inadequate to deal with the new regulations or give effect to the new principles. Subsequently the provisions relating to the Sale of Goods and Partnership contained in the Indian Contract Act were redone respectively in the year 1930 and 1932 and new enactments namely Sale of Goods and Movables Act 1930 and Indian Partnership act 1932 were re-enacted.

The Indian Contract Act at present may be divided into two parts  – Part 1 deals with the General Principles of Law of Contract Sections 1 to 75 and Part 2 deals with Special kinds of Contracts such as Contract of Indemnity and Guarantee, Contract of Bailment and Pledge and Contract of Agency.