This article is written by Anurag Mawai, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

Business and commerce has been a vital part of human existence since the inception of the species on this planet, earlier we used to trade berries and fruits exchanging them for survival but soon as humans coalesced into groups and tribes, this activity grew by leaps and bounds in both volume and value thus becoming a vital source of livelihood and wealth creation. From the earliest Mahajanapadas of 4th century BC to the 21st century globalized regimes, the state has had a vital role to play in commercial activities. The state has always been either facilitator and regulator of commerce, even sometimes engaging in commercial activities itself and dealing with large chunks of capital to the tune of billions. State has to partake in activities like goods procurement, tenders and infrastructure contracts for the welfare and growth of the country and these contracts undergo various checks and regulations especially from designated agencies like the Ministry of Finance. Governments whether in Central or State levels have various nodal agencies which carry out the expenditure and finance allocation. These agencies are given power to carry out mandated procurement functions under Indian Law and carry them out as per department regulations and other regulatory framework notified by the State from time to time.

Indian Agencies for Public Procurement

All entities defined and covered under Article 12 of the Constitution can be defined as “state”, this definition is sometimes deemed too vague hence specific rules like Rule 133 of the General Financial Rules (GFR), are used to narrow this list and specify the agencies and entities who have the statutory permission for granting and executing government works. But usually the definition of “state” for the purpose of government procurement encapsulates the following entities:

• Ministries/Departments of Central and State Governments.
• Public Sector Undertakings/Organisations.
• Entities having significant ownership or share capital by Governments or public authorities.
• Entities receiving significant financial assistance from the government or having significant government control.

In some cases, even companies carrying out public private partnerships (PPP) projects may also fall within this ambit, but this cannot be a blanket rule and is usually determined on a case-by-case manner. For example, in 2019 the Bombay High Court deemed the Mumbai International Airport Ltd., a company which is a joint venture between private entities and Airport Authority of India for managing the Mumbai International Airport, as a “State” company covered under Article 12 definition as per the Constitution of India. Hence it can be concluded that although a general outline of state regarding commercial ventures is present, still the lens to view public private partnerships is still foggy.

As is evident from the above paragraph Indian procurement system still functions on executive discretion and ad-hoc structures, and there are no designated offices for procurement, which stifles accountability. In similar vein, the regulations which the executive agencies are supposed to implement are also dispersed and uncodified, this results in concentration of too much power in the State actors and renders grievance redressal practically impossible. To practically appreciate the benefits of consolidation of procurement laws, the legal and executive structures of two modern economies are hereby compared with the Indian scenario.  

Legal framework of India vs. Globe

There is no specific statute or law regarding public procurement in India. Most regulatory frameworks are created by executive regulations interpreted with Constitutional provisions by the respective courts. Article 299 of the Constitution of India forms the main bulwark of Indian Government’s procurement structure it stipulates that contracts legally binding on the government have to be executed by officers specifically authorised to do so, its validity is upheld in judgements of the Supreme Court like Bhikaraj Jaipuria vs Union of India [AIR 1962, SC 113]. The Constitution also enshrines Fundamental Rights like Article 14 which the Supreme Court applied in Erusian Equipment and Chemicals Vs. State of West Bengal [ AIR 1975, SC 266] for providing every offer of tender or quotation equality with other bids. Hence, the bidder has no clear legal remedies defined in Indian Legal System and has to depend on the court’s discretion to correct the wrongs. This leads to too much wastage of time and resources in litigation, and renders the process unattractive. For finding inspiration to frame a legal structure India can look to other modern economies like Singapore (for uniformity and international compliance) and Australia (for federal and state level flexibility). A comparative table is given below:

	Singapore	Australia	India
Legislative Outline	Singapore’s procurement legislative framework is in acceptance of WTO Agreement on Government Procurement, 1994, and effected by three subsidiary legislations namely Government Procurement Application Order 2014 Government Procurement Challenge Proceeding 2014 Government Proceeding Regulations, 2014 These provide uniformity and comprehensive coverage to procurement regulations	Australian System has a uniform federal regulation namely Public Governance, Performance Act, 2013 this statute allows the Australian Finance Minister to issue rules titled Commonwealth Procurement Rules (CPR) at state and territory level their own legislations for regulation also form part of the procurement structure. This gives Australian System a flexible yet enforceable set of rules and regulations .	Indian legal system is based on a mix and match of various statutes seen in the backdrop of Constitutional safeguards. Hence acts like Contract Act, 1872 Sales of Goods Act, 1930, Arbitration and Conciliation Act, 1996, Prevention of Corruption Act, 1988  Along with state level Acts in Rajasthan, Assam, Karnataka for ensuring transparency.  Along with it there are some administrative rules in General Financial Rules (GFR) latest modified in 2017, Manual for Procurement of Goods 2017 and Delegation of Financial Powers Rules, 1978
Remedies Available	There are special Tribunals formed for challenging Procurement regulations, and an applicant should challenge within 15 days from the date of violation, initiate the challenge with appropriate fees. The Regulator has to determine the issue within 45 days of the challenge notification, unless exceptional circumstances exist. Additionally no other court can be subject to Procurement challenges except designated Tribunals under the Regulations.	Earlier Australia had an ombudsman system which lacked enforcement powers, hence it lacked powers to bring accountability. Australia in 2019 in compliance with WTO agreement on procurement regulations provided for a separate review body for procurement complaints and allowed for complaints directly to the Secretary of Department and then to Federal Circuit Court. The main advantage here is the explicit regulations provided under CPR which can be enforced.	The procurer can approach the officials of the procuring entity but there are no designated officials except as per Right to Information Act (RTI). But this statute is also able to only get information without enforcement. The Procurer has to depend on the contract terms, and remedies if available under the contract like termination, arbitration rights etc. Courts can also be approached seeking enforcement of contractual terms under Specific Relief Act, 1963, Indian Contract Act, 1872.

As can be understood from the above comparison in absence of a proper statutory framework detailing the rights and liabilities of parties in government procurements and collaborations, the form and type of contract entered into by the parties forms the keystone to all rights and liabilities of the parties. Hence the parties need to understand and appreciate the fine points of various contracts and clauses usually incorporated under Indian procurement system.

Types of Contracts based on Value for Money and Procurement Consideration

Government Agencies undertake procurement and PPP projects under various forms of contracts. Each of these contracts have their own risks and adoption of an inappropriate type of contract could lead to a situation of lack of competition, contractual disputes and performance failures hence choice of a suitable contract is a sine qua non for successful execution of public works. Some of the contracts along with the common risks and methods of mitigations of such risks are highlighted as follows:

• Lump Sum (Fixed Price) Contract

These forms of contracts are used in projects which require huge capital infusion in the beginning of the project itself.

Used mainly for assignments where the quality, scope and the timing of the work can be clearly defined, where works can be clearly laid out in full physical and qualitative aspects and risk for change in the quality and specifications is minimal (repetitive residential building projects, bridge construction, overhead tanks).

Disputes may also arise in cases where the quality cannot be clearly gauged from the guidelines. Hence the contract usually includes a provision for evaluation of quality and certification of its acceptability.

A Schedule of Rates may be attached to specify and clarify any further compensation in case of any addition or alteration in the design, specifications not covered initially by the contract.

“Activity Schedules” may be used for clearly allocating the stages of completion of work and also help in the billing schedule and create a transparent compensation mechanism.

• Item Rate (Unit Rate) Contract

In Item Rate Contracts quotation is given for each individual item of work. Instead of Lump Sum where a large amount of capital is provided in these contracts every individual item has its own allocation creating a much more flexible mechanism of funding. This type of contract is most common in civil construction.

The Procuring Entity lists out a Bill of Quantities (BOQ) in the Bill of Documents. As the contract is entered into for each item, it provides sufficient avenues for variations from design to even the execution stage of the project.

The payment is made at the rate set out in the contract with an industrial average of 15% margin over the BOQ.

As every item gets a separate process unlike Lump Sum where payment is made in the initial stages itself, in an Item Rate Contract specifications, contract conditions (like land acquisitions, forest clearance, social and environmental impact assessment) can be critically appraised before the procurement process begins. This reduces disputes and contract failures to a larger extent.

• Percentage Rate Contract

In Percentage Rate Contract, the contractors themselves quote the rate as overall percentage over and below the total estimated cost.

This type of contracts is used in works which do not use major design processes, and simple drawings are sufficient for execution like small and routine construction works levelling and development works of storm water drainage, water supply, sewer lines etc.

For the work or items not included in the initial contract Schedule of Rates (SOR) can be prepared.

• Piece Work Contract

Piece work Contracts are used for mainly ad hoc work projects or for projects where the detailed clearances are still not available and a need to create a base is urgent.

In these contracts a rough draft of the work is drawn and a timeline within which the work should be completed is finalized. After the expiry of the said timeline the procurement agency will cancel the contract.

Usually quotations for a piecemeal contract are for a year. Examples of piecemeal projects are laying of water pipelines, sewage network construction.

• Engineering, Procurement and Construction (EPC) Contracts

The EPC Contracts have a more liberal approach to contract evaluation as they rely on the contractor to conduct investigation, design and construction for a lump sum amount decided through competitive bidding. The objective of these contracts is to transfer construction risks to the contractor along with a fair degree of certainty in costs and delivery timeline.

Unlike normal practice of construction specification, EPC Agreements are based on output specifications which only specify the core requirement of designs bearing the standards of durability, maintainability and safety of assets with enough room for the contractor to add value with his own design ideas.

The contractor has full freedom to design and plan the whole construction schedule. Project risks like weather, soil conditions, technical risks relating to construction are transferred to the contractor. The Government entity normally bears risk of approval from local authorities, environmental clearances, approvals from departments regarding engineering plans.

All project parameters such as contract period, price adjustment and technical parameters are to be cleared upfront, and only shortlisted bidders are required to bid a lump sum amount for consideration.  The contract should be adjustable on account of price variations during the contract period. 

The Contractor is liable for payment of damages for each day of delay beyond a specified date of completion. However, the contractor is entitled to time extension arising out of delays on account of change of scope and force majeure or delays caused by or attributable to factors outside the control of the Contractor.

Key Clauses of a Government Contract

Following are some clauses which should be looked out for in a government contract as they end up having a huge role in disputes and litigation:

1. Eligibility Criteria/Methodology – Government Contracts like Bids, EOI should have an objective criterion for evaluating bidders GFR, 2017 as well as CVC forms prescribe an objective and transparent criteria for deciding the award of bid. Scores should be allocated on merit of past experience, performance of past projects of similar kind, technical capacities etc. Each bidder should be given marks on these metrics and the method of calculating the marks should be in public domain. The evaluating criteria should be well publicized and the short list of such eligible firms should be composed of at least four firms. (Manual for Procurement of Works 2019).
2. Bid Security/Earnest Money– To safeguard against the bidder withdrawing or altering its bid during bid validity, bid security is obtained. Any bid not accompanied by requisite bid security is rejected. The amount of bid security is generally five percent of the estimated amount of the goods to be procured. A bidder’s bid security is normally forfeited where the contractor withdraws, amends his bid, impairs the tender in any form within the period of validity of the tender, or in case a successful bidder fails to sign the contract or furnish the required performance security in the specified period.
3. Performance Guarantee– To ensure due performance of the contract, performance security is to be obtained from the successful bidder awarded the contract. It can be in the form of account payee demand draft, fixed receipt from a commercial bank, or even a bank guarantee. Performance guarantee is usually furnished within twenty-one days after notification of the award and is valid till sixty days after the date of completion of the contractual obligation, including the Defect Liability Period. The Performance Security will be forfeited in the event of breach of the contract. It should be refunded without interest in the event the contractor duly performs all obligations under the contract but not later than a year after the completion of Defect Liability Period.
4. Bidder’s Right to question the award-  GFR, 2017 as well as other executive guidelines provide tenderer shall have the right to be heard in case he feels a proper procurement process is not being followed. The tenderer should send his representation in writing to the procuring agency. The Bidding documents should specify the details of officers nominated for representations in this regard. But only directly affected bidders can represent in this regard.
5. Warranty Clause/Defect Liability clause– Usually in contracts of a high threshold value and for plant and machinery maintenance there are provisions which require the contractor to without charge maintain/replace/repair or rectify defective goods and service. Sometimes procurement agencies reserve the right to reject the goods which do not conform to the quality subject to payment of damages by the contractor. 
6. Force Majeure Clause– Force majeure clause usually covers events beyond the control of both the parties to a contract. Events like war, hostility, acts of public enemy, events of serious loss like floods, fire, epidemics, lockouts, strikes. These cause unwarranted delay in contractual obligations and if under the influence of these conditions, any delay or breach is condonable without the party having right to terminate or claim to damages, provided adequate notice on the suffered party is served within a reasonable period of time from occurrence. 
7. Price Variation–  A clause specifying adjustment of amount payable commensurate to the rise and fall in prices of construction material, labour and other key inputs is a sine qua non in government contracts. The amount should be adjustable in respect of factors like labour, petroleum, construction material and other inputs to the work in appropriate criteria in proportion to the rise in completion cost.
8. Dispute Resolution Mechanism– Normally a dispute between the contractor and the procurement agency should be settled amicably by the representative agency and the contractor amicably. However, due to various unforeseen circumstances disagreements may arise between the parties and in those cases a specific dispute resolution mechanism should be provided for in the contract itself. It may be through a Dispute Resolution Board, or through appointment of a sole arbitrator under the provisions of Arbitration and Conciliation Act.

Conclusion

Public procurement and government contracting comprises 30% of GDP in India still it is being carried out by executive agencies through notifications and executive orders. No Ministry or Department is the nodal authority and almost all from the Central Government to the State Government tend to frame their own guidelines regarding this aspect of Governance. 

The Supreme Court itself observed that in regard to government procurement there should be a well drafted statute which lists out the steps and procedures to be followed and the authorities which one should approach in case they seek to file any grievance. The Central Government has on two occasions in 2012 and in 2015 tried to pass a Public Procurement Bill but in both times it could not pass through the legislature. While some states like Tamil Nadu, Andhra Pradesh, Rajasthan and Assam have a State Policy on public procurement they are enforced poorly and leave no scope for transparent functioning and grievance redressal. The Tribunals are not free and the litigant feels as if he has taken an appeal “from Caesar to Caesar”. The sentiment of lethargy with the ad hoc system is felt throughout the industry, and a need for a transparent and detailed law in the field of public procurement is required urgently especially considering the importance of governments’ commercial activities. Because in order to Make in India we first have to frame laws on How to Make in India.

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: