The contract is a legal agreement between the parties. It is divided into clauses that cover the different aspects of the agreement. The standard contract clauses can be sub-divided into two parts-
- General Contract Conditions
- Special Contract Conditions
The general contract conditions apply to all the contracts. It includes the definitions, scope of work, contract value, jurisdiction, dispute resolution, termination of contract etc.
The special contract conditions are specific to the contract and include special provisions. These clauses may not be applicable for other contracts. For example, if the client has to find a financing option for the contractor, it is a special contract condition.
This article will discuss the twenty standard contract clauses that will enable you to draft an effective contract. The terms mentioned below are in general order of their position in the contract.
Let us move ahead.
The definition section is often the first part of the contract. It contains the glossary for the terms used in the contract. The definition for each term is defined in the context of the contract. It also sets the nature of the contract i.e., work execution, supply or consultancy.
The common terms defined in the definitions are buyer, seller, advisor, agreement, country, business days, representatives, local taxes, local laws, the scope of work, project, site, site representatives etc.
This head also defines the notices to be issued and the consent required for various actions.
2. Scope of Work
The contracts are primarily for execution, supply or consultancy. The agreed work scope for the contract is defined in this head. The scope has inclusions and exclusions for the work. A schedule for executing the work is also attached herewith.
For execution contracts, the scope may be civil/mechanical/electrical construction works, delivering a product, providing a service, operation, maintenance, transportation, etc.
The supply contracts include the procurement and supply of goods. The consultancy services contracts have advisory roles for work execution, implementation of a product/service, engineering, project management, product management, quality management etc.
3. Effective Date of Contract
It is the date from which the contract is pushed into action. From the effective date of the contract, the buyer and seller are bound by the law to fulfil their obligations mentioned in the contract.
It is generally the agreement signing date, document transfer date, LC establishment date, or advance payment date.
The buyer’s and seller’s obligations are mentioned in the contract. Both the parties are liable for their actions and bound by the law.
The general examples of buyer’s obligations are providing cleared land for construction, obtaining statutory approvals, payment to the contractor against certified RA bills.
The contractor’s general obligations are executing work with specified quality and within time, following contract conditions, delivering goods in safe and secure conditions, submission of reports, conducting review meetings etc.
5. Cost of Contract
The cost of the contract is the total value that the client has to pay to the contractor/supplier/advisor on successful completion of the contract period.
6. Payment Terms
This clause defines the mode of payment for the cost of the contract. The payment terms include the advance payment, deduction of advance payment, payment against RA bills, retention amount, payment against supply of goods, payment against milestones etc.
The payment term clause also specifies the document required for the payment. For example, establishing LC by the buyer, ABG establishment by seller, tax documents, certified bill invoice etc.
The warranty/guarantee is provided by the seller for the goods supplied by it. Firstly, the material supplied by the seller must conform to the quality requirement of the buyer. Secondly, the seller should also ensure the replacement/repair if any defect is identified within a specified period called the warranty/guarantee period.
This clause also covers the conditions only under which the warranty/guarantee shall be applicable. The documentation required for replacement/repair request are also mentioned in this clause.
The insurances are done to mitigate the financial risks. There are several types of insurances done by the buyer as well as the seller. Some of the insurances done are for transportation of goods, workers’ accident, fire and flood etc.
The transportation of goods is an important part of the supply contract. The transportation of goods can either be in buyer or seller scope.
It is noteworthy to clearly mention the transportation requirement of various goods. Contracts having a longer execution period should be detailed with the considered cost of transportation. As the fuel prices fluctuate, the transportation cost also various. Hence, a clear mention of the considered costs would help in mitigating the financial risk for both parties.
10. Contract Execution Period
The contract execution period is the duration for which the agreement is made. It starts from the effective date of the contract and completes with the closure of the contract.
For construction works, a detailed work schedule is prepared and agreed upon by both parties. This schedule is called a baseline schedule and the performance is measured against it. Similarly, for supply contracts, the material supply period is defined with milestones.
The consultancy contracts also have a predetermined period for which the consultant provides the services.
11. Contract Amendment Procedure
Sometimes the contract needs to be amended for various reasons. The reasons may be attributable to either buyer or seller or both. Hence, a formal and standard procedure is incorporated into the contract to introduce the changes.
The contract amendment may add, delete or modify one or more than one clause. Sometimes, the change can be incorporated by an addendum to the contract rather than amending the contract.
12. Statutory Requirements
The statutory requirements required to execute the contract are stated in this clause. The clause also states the responsibility of each party related to obtaining the necessary approvals and clearances.
13. Defect Liability Period
The defect liability period is essential for execution contracts. By the end of this period, the contractor or service provider is liable to repair/reconstruct the defects in the work. The retention amount deducted from the RA bills of the contractor/service provider is returned after completion of the defect liability period.
The defect liability period in execution contracts is similar to the warranty/guarantee in supply contracts.
14. Liquidated Damages
It is the monetary compensation given by the contract breaching party to the non-breaching party. The damage can be either failure to perform, sub-standard quality, delayed work execution or delayed material delivery.
This clause is important to shift the risk from contract abiding party. It also helps in putting both parties under the radar to perform their obligations.
15. Limitation of Liability
This clause enunciates the conditions under which the claims cannot be made by one party on another. The limitation of liability includes exclusive remedies, indirect and or consequential damages and total maximum liability.
16. Force Majeure
The force majeure clause mentions the conditions under which the contract cannot be executed. For the force majeure period, both parties are not liable to follow their contractual obligations. Also, neither party can file a claim on the other party for the force majeure period.
The general force majeure conditions are earthquake, flood, riots, pandemic spread, the act of God, war, rebellion, revolution, civil war, strike, lockout. The party imposing force majeure informs the other party in writing and as per the contractual terms. Also, the same procedure is adopted to cease the force majeure clause.
17. Area of Jurisdiction
The area of jurisdiction is the locality where the legal aspects are to be dealt with.
This clause contains the confidentiality terms for the agreement, documents, processes, technology, reports etc. Each party is obligated to not use any information related to the other party for uses other than the prevailing contract.
19. Dispute Resolution
A dispute can arise between parties due to many reasons. A dispute resolution mechanism is defined in the contract that both parties are bound to follow. The dispute mechanism can be a mutual agreement to a common ground, mediation or arbitration.
The conditions, procedure, documentation, mediation parties, arbitral tribune are mentioned in this clause. Generally, both parties are required to follow the arbitral award.
20. Termination of Contract
Either party can terminate the contract upon fulfilment of one or more than one condition as mentioned in the contract. The general conditions for terminating a contract are-
- Continuation of force majeure beyond a certain period.
- Insolvency/bankruptcy of either party.
- Written information on inability to perform contractual obligations.
- Contract breach.
The procedure to terminate the contract is well-stated.
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Interested in reading further? Check out the article on basics contract management here.