This article has been written by Prateek Giri Goswami, by pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
Delegation and outsourcing are quite prevalent terms in the business world, a company engages in multifarious projects, tasks, operations, etc during its business endeavors and some of them require technical expertise and an acute understanding of how to execute such projects. This article will lay emphasis on what are operation and maintenance (O&M) contracts, their advantages, and what are the important clauses of such contracts.
What are O&M contracts?
O&M contracts stand for operation and maintenance contracts, as the name suggests it is a contract between a company with a devised plan/project in hand and an independent individual or an organisation with the expertise and ability to execute such a plan/project effectively in reality. It has a resemblance with event management operations between parties. O&M projects can be mostly seen in government projects which are allotted to an independent contractor based on the tender furnished, O&M agreements are usually related to projects such as road projects, electricity maintenance projects, water and sanitation projects.
Important clauses and other features O&M agreements
For the purpose of better understanding of the terms and conditions, let’s assume the agreement is related to the operation and maintenance of water supply facility, a Government authority (hereinafter the authority) has appointed XYZ company (hereinafter the operator) to operate and maintain the water facilities for a specified area, the important clauses that shall be present are the following: –
- Definitions: Providing definition at the outset provides clarity in every type of agreement, and especially in O&M agreements because it is related to a specific project, hence there can be a lot of technical terms specifically related to the task at hand, which is why it’s imperative to an exhaustive list (if possible) of definitions. For example, the term ‘Consumer’ will mean the people consuming water in the designated area.
2. Obligations of the operator: Some common obligations of an operator in an O&M agreement for a water supply facility are:-
- The operator must be competent, experienced, and have resources curated for operating and maintaining sanitation service works and water services works of a similar size, scope, and complexity to the works, and supplying water supply services and sanitation services of a similar size, scope and complexity to the water services.
- The operator shall render his services and obligations in compliance with the water services standards, the O&M manuals provided by the authority, the regulatory provisions to which the work is subject, and the consumer rules.
- To employ all safety measures and tactics to avoid any unreasonable risks.
- To accept and engage all the personnel provided by the authority to the operator for the operation and maintenance. (Remark: The government authority sends personnel of their own for providing assistance to the operator, Superintendence over the projects, and to maintain the synergy and coordination between both the parties).
- To maintain data and records of all the developments done by the operator and the utilisation of the resources provided by the authority to enable the operator to render the services.
- The operator shall be responsible for the supply, installation, operation, and maintenance of all hardware and software forming part of any geographical information technology system
3. Payment: This clause must contain the procedure for payment, whether it is one-time payment or payment in parts on basis of invoice raised by the Operator from time to time, usually the authority prefers the latter, some conditions under this clause are:-
- The operator to raise invoices along with other particulars;
- The authority will have a certain time for example 30 days to make payment;
- Any amount accidentally paid in access to the operator shall be returned;
- The details of the account of the operator to make payment.
4. Tax exemption: This clause is usually present in government clauses, the operator is usually exempted from paying tax for the following:-
- Any sort of payment/reimbursement/refund to the operator by the authority for the services rendered by the operator in accordance with the agreement.
- Any expenditure incurred upon the operator for the purchase of supplies, equipment, or any other sort of material for the purpose of performing duties effectively, provided, however, that the authority was duly conveyed about such purchases.
- Any sort of imports by the operator for the purpose of rendering services, provided, however, that such imported goods/machine/equipment will be owned by the authority.
5. Nature of legal relationship: It is advisable to explicitly define the relationship between the client and the consultant, for that a clause shall be drafted stating that the relationship between the parties is not akin to principal-agent relationship or master-servant (these relationships create liability on the former for the actions of the latter), or the parties are not in a legal partnership and therefore the consultant is an independent service provider and is solely liable for its actions.
6. Designated area: The area shall be explicitly and clearly defined in the area which will be covered by the operator, any sort of ambiguity on the territory can cause huge expenditure on the operator.
7. Legal compliances: The operator shall comply with all the regulatory provisions, labor laws, environmental laws, etc., and simultaneously it will be the duty of the authority to expedite the process of granting license permits, etc.
8. Ownership: O&M contracts have the essence of work for hire agreements, therefore, it is manifested that the ownership will belong to the authority, any kind of data stored, generated and records will be solely owned by the authority and the operator shall handover all such material to the authority upon the termination of the agreement.
9. Construction/development requirement: In order to properly operate and maintain, the operator may need some new constructions in the area, for example, installation of pipelines, water tanks in several places, etc, the operator shall from time to time intimate the authority regarding the need for construction. The authority then issues tender for such work and the operator and whoever is awarded such tender will be supervised by the operator.
10. Insurance: During the term of the agreement the authority shall be liable to keep several insurances the operator shall be listed as co-insured.
11. Liability and respective limitations:
- Indemnity clause :“The operator shall take all reasonable precautions for the protection of life and property on or about or in any way connected with the whole or any part of the works and the supply of water services and shall indemnify and hold the concessionaire harmless against all losses, claims, demands, proceedings, damages, costs, charges and expenses (including reasonable legal expenses on a full indemnity basis) of whatsoever nature arising out of its actions and/or omissions under this agreement in respect of injury to or death of any person or loss of or damage to any asset or any person or property accruing after the effective date but prior to the termination of this agreement unless such injury, death, loss or damage was caused by any act or omission of council, the concessionaire or any of their agents or representatives or other third parties for whom they are responsible in law, to the extent that the operator is able to recover any such amount from the insurance cover referred to in.”
- The operator shall at the earliest inform the authority about any claim raised against the operator by any third party.
- The liability of the operator to pay the authority in the event of any breach of agreement, or any claim raised shall be limited to the payment made to the operator in a year by the authority in accordance with the agreement.
12. Termination by authority:
- The operator breaches any term of the agreement and fails to rectify the said breach within XYZ days of receiving a notice from the authority to rectify the same.
- The operator becomes insolvent, and insolvency proceedings have been initiated under the IBC against the operator.
- Any amalgamation or acquisition of the operator company by some third party.
- The operator abruptly discontinued any discharge of essential service and failed to resume it immediately. For example, if the supply of water has been discontinued by the operator for more than 3 days.
- Concealment of any material information by the operator, which can adversely affect the authority.
- Termination by the operator: The authority breaches any term of the agreement and fails to rectify the said breach within XYZ days of receiving a notice from the operator to rectify the same.
13. Effect of termination:
- Any due payment to the operator shall be paid immediately.
- The operator and its personnel shall vacate the premises allotted to it by the authority.
- All the records, plans, specifications, engineering documents, operating procedures, utility location plans, record maps, licenses, permits, and contracts associated with or connected to the works and the supply of water services in the possession of the operator but belonging to the authority shall be handed over to the concessionaire.
O&M agreements are quite comprehensive and detailed, this article provides a summary of the clauses that are commonly found in an O&M contract, with the rapid expansion of civilization and quotidian occurrence of some O&M agreements, it is necessary for a corporate lawyer to be conversant with the basics of such agreements.
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