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Standard Contract Document Needs a Relook

 

Number of problems and disputes that arise from the terms of the contracts signed on the lines of the prescribed Standard Contract Document (SCD) given in DPP can be prevented if MoD can come up with a more effective pre-arbitration dispute resolution mechanism. The Author deliberates on related issues.

The Standard Contract Document (SCD) contained in Chapter VI of the Defence Procurement Procedure (DPP) 2016 is the default template used for signing capital acquisition contracts in the normal course. The said chapter starts abruptly without any reference to para 91 of Chapter II of DPP 2016 which states that the SCD comprises general conditions of contract 'that would be the guideline for all acquisitions' and that the 'draft contract would be prepared as per these guidelines'. This has arguably introduced an element of inflexibility in drafting of the terms of the contracts, other than the terms related to the description and nature of store being procured, delivery schedule and price etc.

The origins of this inflexibility can be traced back to the first ever Defence Procurement Procedure (DPP) promulgated in 2002 which did not contain any SCD but stated in para 45 thereof that the 'Acquisition Wing would evolve a standard contract/supply order document, which will be used as a guideline for contract/supply orders for all acquisitions'. Accordingly, an SCD was included in the next version of DPP promulgated in 2005 with the notation (para 49) that the SCD given in Schedule IV 'indicates the general conditions of contract that would be the guideline for all acquisitions'. It was not specifically stated that, if required, the procurement personnel may deviate from the template.

While the title and numbering of the articles (clauses) of the SCD have largely remained unchanged since 2005 (except for addition of a new clause on 'Access to Books of Account' in 2006), some substantive changes have been made  mostly in 2018 and 2019 -  in the text of various articles, prompted more by the need to synchronise the SCD with the policy changes (as in the case of clause related to liquidated damages) than to remove various ambiguities, make the terms more equitable for the vendors, or to introduce an element of flexibility in drafting of the contract. Consequently, the SCD continues to be what is generally referred to as a 'Standard Form Contract' (SFC) in contract law.

An SFC is a contract in which the terms and conditions are more or less dictated by one party with the other party not being in a strong position to negotiate equitable terms. Such contracts are not illegal, but typically favour the party which is in the stronger bargaining position. In contract law, this is referred to as the doctrine of unconscionability and the disputes arising from such contracts are resolved contra proferentem, i.e. against the party which provides the draft of the contract. In the context of defence contracts, however, this legal doctrine plays out slightly differently.

It is axiomatic that defence is a monopsony. The Indian defence market, despite resource crunch, offers greater long-term opportunities to the defence companies than other markets in the world. Consequently, while the vendors may be able to dictate the price, mostly because of the limited competition, they often find themselves in a weaker bargaining position when it comes to negotiating the terms of the contract. As it is, it takes a fairly long time for a procurement proposal to reach the contract negotiation stage. After reaching that stage, the defence companies perhaps do not consider it worthwhile to insist on favourable terms for fear of the negotiations falling through and the procurement proposal going back to square one. Consequently, they end up signing the contracts despite reservations about some of the terms and conditions. This is a typical take-it or leave-it situation in which most vendors would choose the first option.

There is also a marked reluctance on the part of the vendors to take legal recourse even if a valid dispute arises from the terms of the contract during its execution because of the apprehension that it might impact their business in future. This seems to have induced some kind of complacency in the official circles that the existing SCD template does not require any major modification, which is why none of the amendments made in the SCD in the past have focussed on ensuring that its clauses facilitate, and in no way hinder, timely performance and completion of the contract by the vendor. This situation has persisted for a long time.

In an encouraging development, the Ministry of Defence (MoD) has set up a committee in August 2019 under the chairmanship of the Director General (Acquisition) to review not only DPP 2016 but also the Defence Procurement Manual (DPM) 2009, which regulates revenue procurement for the Armed Forces and the Coast Guard. Apart from other aspects of the procurement procedure, the committee would do well to review the SCD (including the terms and conditions applicable to revenue procurement) based on certain principles.

First, a certain amount of flexibility needs to be built into the SCD so that each signed contract caters to the contract-specific requirements that facilitate unhindered performance of the contract by the vendor. Towards this end, the SCD can be divided into two parts: the standard clauses and the contract-specific special terms and conditions. The distinguishing feature of the standard clauses would be the uniformity of the concise legal language used in the text  sometimes referred to as the boilerplate language in contract law across different types of contracts. Normally, it should be mandatory to include all such standard clauses in every contract without any change in the text. But a provision can also be made that wherever required the procurement personnel may resort to exclusion, or modification in the language, of any such clause based on legal advice and with the permission of the specified authority at the tendering stage.

Typically, this category would include clauses related to Law, Arbitration, Force Majeure, Agents, Penalty for Use of Undue Influence, Access to Books of Account, Non-disclosure of Contract Documents, Notices, Transfer and Sub-letting, Patents and Other Industrial Property Rights, Taxes and Duties, and Termination of Contract. But some other clauses, such as the Effective Date of Contract, Notices, Amendments, etc. could also be considered for inclusion in this category.

All other clauses, which generally require to be customised to cater to the specific requirement of a contract, can be clubbed under the category of special terms and conditions. While the template for such clauses may also be prescribed, it should be permissible for the procurement personnel to modify it, both in relation to the language and the contents thereof. This category would typically include terms like the Scope of the Contract, Guarantees, Payment Terms, Specifications, Inspections, Transportation, Packaging, Delivery Schedule, Product Support, Training, Option/Repeat Order purchase, etc.

Second, the SCD must conform to the concept of 'a complete contract' which would require the gaps in the existing template to be minimised, if not completely plugged. To illustrate, the vendors, especially the foreign companies, have been asking for inclusion of certain clauses, such as Limitation of Liability (LoL), 'Entire Agreement' and 'Severability' in the SCD template. While the LoL clause puts a cap on the liability of the parties arising from the contract, and the Entire Agreement clause conveys that the contract at hand represents the final agreement between the parties, superseding or invaliding all previous agreements, verbal understanding and correspondence the Severability clause ensures that the rest of the contract remains in force in the event of one or more provisions thereof being held to be unenforceable.

Third, there must be both textual and contextual clarity in various clauses of the contract. A typical example of ambiguity on both these counts is the provision related to transportation of stores. Article 11 in the SCD has two templates: one covering transportation by sea (Free on Board) and the other by air (Free Carrier or FCA). The first template (transportation by ship) prohibits transhipment, but also provides that the stores shall be delivered to the buyer by Indian ships and the necessary arrangements will be made by the Shipping Officer of the Ministry of Transport (sic). There is no corresponding prohibition in the second template, which also provides that the goods will be forwarded by the freight forwarder nominated by the buyer. And then there is Article 5A (Payment terms for foreign vendors), which says in clause 5A.9 that no transhipment of goods is allowed, without linking it with the mode of transport (sea or Air). As if this was not enough, SCD also contains another provision in Article 12 for airlift of stores by the buyer.

Several issues arise from this jumble. One, why is transhipment prohibited in the case of transportation by sea and not when it is by air? Two, if the shipping arrangements are to be made by the buyer (MoD), what is intended to be achieved by stipulating that transhipment is not permitted. Three, what purpose is served by the second template in Article 11 that covers transportation by air and Article 12 that deals with airlift of stores? Four, is the absence of prohibition on transhipment in the case of transportation by air not nullified by blanket prohibition on transhipment in Article 5A.9? Above all, would it not be more apt to define what would constitute transhipment rather than leaving it to subjective interpretation of the parties to the contract? Such ambiguities need to be removed from the SCD.

Fourth, the contract clauses must be tested on the principle of reasonability of obligation. To illustrate, Article 7 (Quality) of the SCD provides, “….. The SELLER confirms that the stores to be supplied under this contract shall be new i.e. not manufactured before (year of contract) and shall incorporate all the latest improvements and modifications thereto and spares of improved and modified equipment are backward integrated and interchangeable with same equipment supplied by the SELLER in the past if any. …..”This clause is inherently problematic not only because of the way it is worded but also because of the difficulty in abiding by it.

There is usually a long gap  at times running into years  between submission of bids and award of the contract, during which production of the item to be supplied as per the specifications indicated in the tender may give way to production of a technologically more advanced version of the same item. The above-mentioned clause would prevent the vendor from supplying the item for which the contract was signed ex-stock for it may have been made before the year of the contract. Instead, the said clause would require him to supply the improved version of the item. Apart from the loss he may incur by doing so (if the newer version is costlier), the vendor may also face the risk of the item being rejected on account of its not being in conformity with the specifications given in the contract. Moreover, the newer version may not be interchangeable with the same item supplied in the past, which is also what the aforesaid clause requires. Most importantly, the text of the clause does not make it clear as to who and how will it be ascertained that the changes do not 'adversely affect the end specifications'. Such clauses can cause serious disputes.

Fifth, the SCD must follow the principle of equitability. The objective should be to minimise, if not eliminate, the possibility of disputes arising from various clauses, whether on account of their text, intent, content, or implication. The fact that the vendors do not generally invoke arbitration or seek any other legal remedy does not necessarily mean that they have no grounds for raising a dispute. This is best illustrated by the clause related to Liquidated Damages (LD). The way it is presently worded is quite one-sided in that it does not take into account the possibility of there being contributory delay on the part of the buyer. It is not only necessary to spell out the obligations of the buyer that would constitute the sine qua non for discharge of corresponding obligation by the vendor but the SCD must also contain a provision spelling out the manner for determination of responsibility for delay, including contributory delay on the part of the buyer, before imposition of liquidated damages. As a matter of fact, many of the actual problems and disputes that arise from the terms of the contracts signed on the lines of the prescribed SCD can be prevented if MoD can come up with a more effective pre-arbitration dispute resolution mechanism and make it a part of the SCD.

 

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