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All you need to know about rate contracts & agreements

May 03, 2021
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This article is written by Akash Lakra, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Introduction

A Rate contract is an agreement between the supplier and purchaser to supply items for a fixed unit price for a specified period of time i.e., till the validity of the rate contract. The actual supply of the items occurs when the purchaser requires the items and consequently issues separate purchase order for the quantity of items required.

Rate contracts are generally employed by governmental ministries and departments since they require items in bulk. Therefore, rate contracts are regulated under several rules to streamline the process and maintain accountability and uniformity. Rate contracts are administered under the administrative rules and directives on procedures for procurement by the government which are outlined in the General Financial Rules, 1947 which were recently modified in 2017.[1] All government purchases must be in consonance with the requirements enunciated in the GFR which include provisions on the procurement of goods and services by the government and contract management. In addition, the Directorate General of Supplies and Disposals (DGS&D) has also issued guidelines to supplement the existing GFR guidelines.[2]

Such contracts can be entered with single/multiple suppliers and the contract exists in the form of a standing offer on behalf of the supplier. Rate contracts do not guarantee a minimum withdrawal or quantity for the supplier and give the purchaser (usually the government) an upper hand. The purchaser has the right to enter into multiple rate contracts for a single item and can renegotiate the item price with the supplier party to the rate contract. Furthermore, the Manual for Procurement of Goods, 2017 which provides guidelines for the procurement of goods by government departments/ministries recommends that rate contracts for engineering and specialised goods should be entered only by the DGS&D through the Government e-Marketplace (GeM).

Significance and Rationale

Rate contracts are usually employed by the DGS&D for procurement of common user items ranging from stationery and furniture to cement for building purposes. These items/services are frequently required in bulk in government offices and must be readily available for the effective and diligent functioning of government departments. The current rules stipulate that if a government department or ministry directly procures or avails goods or services which have a mandated rate contract issues by the DGS&D in place, the price paid for such good/service should not exceed the base price regardless of any reason.

The rationale behind rate contracts is simple: government agencies execute such contracts in order to maintain efficiency, stability and transparency in the procurement process. Rate contracts ensure that re-tendering processes are avoided for a significant period of time which means that the procurement process is undertaken swiftly and, in a time, bound manner so that any delay in procurement does not affect the efficiency and working of the government department.

Furthermore, the certainty brought by rate contracts provides both the parties the added benefit of security against sudden increase in the prices of the items.

Procedure and things to keep in mind while Drafting

Rate contracts contain the usual clauses which are quintessential to drafting contracts, nevertheless rate variations do occur owing to the nature of the items/services being procured and certain essential clauses are omnipresent for all rate contracts. The usual procedure for forming a rate contract involves the issuing of tenders by the purchasing party. The inviting bids are evaluated by the purchaser and the best suited bid is given the tender consequently.

The essential premise for rate contracts is that the supplier is obligated to supply the goods/services to the government department (purchaser) at fixed rates which have been specified under the contract. Therefore, the first crucial element in such contracts is the list of items required by the department for their use.[3] This list of items needed for procurement is supplemented by specifications for every required item/service which the purchaser specifies in the contract. These specifications need to be fulfilled by the supplier, otherwise the purchaser can rescind the contract.[4]

Rate contracts primarily consist of the following:

  1. General Specifications: These include details which specify the type and class of work to be undertaken by the contractor along with prescribing the minimum standard quality of items to be supplied.
  2. Detailed specifications: These include complete descriptions of each of the supply items and also include the material and technical methods which need to be employed by the contractor.
  1. Rates of items to be procured inclusive of all costs such as labour, material, transport or any other arrangements necessary for the work.
  2. Completion time of the procurement- this becomes important because timely delivery of the good/service by the contractor is a crucial element of rate contract.
  3. Penalty on the contractor for sub-standard quality of goods/services which do not meet the standards laid down under the specifications provided under the tender notice.

Conclusion

All Contracts and agreements are based on the tenets of Contract Law. In India, provisions of the Indian Contract Act, 1872 forms its backbone. Agreements that are not according to the provisions of the Indian Contract Act will not be enforceable under the prevailing legal system.

Specifically speaking, apart from the Contract Act, for each type of agreement, its respective laws are applicable. For example, if the agreement is for the supply of materials, it will be governed also by the Sale of Goods Act, 1930. Particular laws that are applicable to the industry also are to be taken into account and it must be ensured that those laws are not violated and the contract is drafted in tandem with them. For instance, Real estate contracts are governed by Real Estate Regulation and Development Act, 2016.

For companies formed under a special act, which is the case with many government companies, it is important to take them into account and to make sure that the contract is in compliance with those laws as well. For example, the Railways Act, 1989 is the enactment under which the Indian Railways is established and regulated. Hence, in this example the Railways Act should also be kept in mind while drafting the rate contracts for supplying to the Indian Railways.

It is important to pay attention to formatting as well just as in any other legal document, in order to maintain a general level of uniformity and formality.

It is of course paramount to protect and further the interests of your client while at the same time keeping in mind the market conditions, but it is also necessary that the other party is also benefited from the agreement and to ensure that the agreement is not one- sided. This is especially important as there will be other parties who may be chosen by the purchasers to enter into the rate contract.

References

[1] Prashant Mara, Devina Deshpande, India: Public Procurement 2019, Mondaq, 8th May 202008 May 2020. Available at: https://www.mondaq.com/india/government-contracts-procurement-ppp/930884/public-procurement-2019

[2] Ibid

[3] CEL Rate contract: https://www.eqmagpro.com/wp-content/uploads/2017/04/Rate-Contract-F.pdf

[4] BNPM India Rate contract (for reference) https://www.bnpmindia.com/Admin/TenderDocument/e-tender%20document%20-%20Annual%20Item%20Rate%20Contract.pdf


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