Professional Documents
Culture Documents
Unit 1
Unit 1
Contracts
Aim
The aim of this chapter is to:
Objectives
The objectives of this chapter are to:
Learning outcome
At the end of this chapter, the students will be able to:
comprehend the terms "contract" and "agreement", along with their legal aspects
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1.1 Introduction
In general, contract is an agreement made between two or more parties, in which specific conditions are made and
agreed by both the parties. In legal terms, contract is a legally binding agreement between two or more parties,
which is enforceable by law.
According to Sec-2h of the Indian Contract Act, 1872, "an agreement enforceable by law is Contract".
As defined by Sir Federic Pollock, "every agreement and promise enforceable at law is Contract."
Salmond defines contact as "an agreement creating and defining obligations between the parties."
Thus, the above definitions of the term Contract essentially contain two elements, viz.,
agreement
1.3 Agreement
The term Agreement can be explained in two different ways:
According to Sec-2e of the Indian Contract act, 1872, "every promise and every set of promises, forming
consideration for each other is an Agreement."
Example:
Manish, who owns two houses named "Ashiyana" and "Shangrilla", is selling his house "Ashiyana" to Umesh.
Umesh thinks he is purchasing the house "Shangrilla". There is no consensus ad idem (agreement) and consequently,
no contract.
In order to determine whether in any given agreement, there is an existence of consensus ad idem, it is usual to
employ the language of offer and acceptance. Thus, if A says to B (A and B are people involved in the scenario),
"Will you purchase my red car for Rs. 1,00,000?" and B says "Yes" to it, there is a consensus ad idem and an
agreement comes into existence.
1.3.1 Types of Agreement
Agreements are basically divided into two major types as shown in the figure below.
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Valid Agreement
According to sec-2a, "An agreement enforceable by law is said to be Valid Agreement".
1.3.2 Difference between Agreement and Contract
Agreement
Every promise or set of promises, forming
consideration for each other is an agreement.
For constituting an agreement a promise or a set of
promises forming consideration for each other are
required.
An agreement is a wider concept than that of a
contract.
Every agreement does not necessarily create legal
obligation because all agreements do not go to
constitute contracts.
An agreement cannot be concluded or a binding
contract.
Contract
An agreement enforceable by law is a Contract.
An agreement becomes a contract only when such
agreement fulfills all legal conditions of a contract.
A contract is specie of an agreement and as such it is
narrower concept. Therefore, it is said that every contract
is an agreement but every agreement is not a contract.
Every contract necessarily creates a legal obligation
because every contract is basically an agreement.
A contract is always concluding and binding on
concerned parties.
validity
formation
performance
CONTRACT
Performance
Formation
Validity
Valid
Express
Executed
Void
Implied
Executor
Voidable
Quasi
Unilateral
Illegal
Bilateral
Unenforceable
Fig. 1.2 Classification of contracts
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Illegal means contrary to law, therefore, an agreement which is contrary to law and is enforceable by law is
Illegal contract.
Illegal agreement has wider import and conception than void agreement.
All illegal agreement is definitely void but all void agreements are not necessarily illegal.
Example: An agreement entered into with minor is void but not illegal, wagering agreement is not only void but
also illegal.
Unenforceable Contract
Certain contracts cannot be enforced in a court of law because of some technical defects such as lack of attestation,
registration or affixing or certain amount of stamps or absence of writing or where the remedy has been barred
by the lapse of time etc.
Example: In certain contracts, the time factor is an essential condition. If the contract does not follow time limits,
then it is said to be Unenforceable.
On the basis of Formation
Express Contract
If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of formation
of the contract, then it is said to be an express contract.
Where the offer or acceptance of any promise is made in words, the promise is said to be Express.(Sec.9).
Implied Contract
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An implied contract is one, which is inferred from the acts or conduct of the parties or course of dealings between
them. It is not the result of any express promise or promises by the parties but of their particular acts. It may
also result from a continuing course of conduct of the parties.
Where the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be
Implied (Sec. 9).
Example: A fire broke out in B's farm. He called upon the fire brigade to put out the fire which the latter did. P's
farm did not come under the free service zone although he believed to be so. Held, he was rendered on an implied
promise to pay.
Quasi Contract
A quasi-contract, on the other hand, is created by law. It resembles a contract in that a legal obligation is imposed
on a party who is required to perform it. It results on the ground of equity that "A person shall not be allowed to
enrich himself unjustly at the expense of another."
Example: A tradesman leaves goods at Cs house by mistake. C treats the goods as his own. C is bound to pay for
the goods.
Classification on the basis to performance
Executed Contract
"Executed" means something that is done.
An Executed Contract is one in which both the parties have performed their respective obligations.
Example: A agrees to paint a picture for B for Rs. 1,000. When A paints the picture and B pays the price, i.e., when
both the parties perform their obligations, the contract is said to be executed.
Executory Contract
"Executory" means something which remains to be carried into effect.
An Executory Contract is the one in which both the parties have yet to perform their obligations.
Unilateral or One-sided Contract
An unilateral or one-sided contract is the one in which only one party has to fulfill his obligation at the time of the
formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the
contract comes into existence.
Example: A permits a railway coolie to carry his luggage, and place it in a carriage. A contract comes into existence,
as soon as the luggage is placed in the carriage. But by that time the coolie has already performed his obligation,
i.e., an obligation of paying the reasonable charges to the coolie.
Bilateral Contract
A Bilateral Contract is one in which the obligations on the part of both the parties to the contract are outstanding at
the time of the formation of the contract. In this sense, bilateral contracts are similar to executory contracts and are
also known as contracts with executory consideration.
Agreement made under a bilateral mistake of fact material to the agreement [Sec(20)]
Agreement of which the consideration or object is unlawful in part and the illegal part can not be separated
from the legal part [Sec(24)]
Lawful Object:
The object of the agreement must be lawful. In other words, it means that the object must not be
Illegal
Immoral
Opposed to public policy [Sec (23)].
If an agreement suffers from any legal flaw, it would not be enforceable by law.
Legal Relationship:
Legal relationship is a legal binding between contractual parties, so between contracting-parties evidence is made by
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an offer, acceptance of the offer and a valid (legal and valuable) consideration. Existence of a contractual relationship,
however, does not necessarily mean the contract is enforceable, that it is not void, or not voidable.
Certainty:
The agreement must be certain and not vague or indefinite (sec. 29).
If it is vague and it is not possible to ascertain its meaning, it cannot be enforced.
Example
(a) A agrees to sell to B A hundred tons of oil. There is nothing whatever to show what kind of oil was intended.
The agreement is void for uncertainty.
Obligation:
It is defined as a legal tie, which imposes upon a definite act or acts on both the contracting parties. These acts may
be related to social or legal matters. An agreement which gives rise to a social obligation is not a contract. It must
give rise to a legal obligation in order to become a contract.
Example:
Let us assume that A and B are two different people. A agrees to sell his flat to B for Rs. 10,00,000. The agreement
gives rise to an obligation on the part of A to handover the possession of the flat to B and on the part of B, to pay
Rs.10 00,000 to A. This agreement is a Contract.
Possibility of Performance:
If, upon a reasonable construction of the contract, it appears to have been understood by the parties that it
was not to be performed within the year, it is within the statute.
In order that an agreement may fall within this clause of the statute, however, the parties must contemplate
that it shall not be performed within a year.
The mere fact that it may not be, or is not performed within the year, does not bring it within the statute. It
has been said, that "it is to be performed after the year." Further than this, the agreement must be impossible
of completion within a year.
If, by any possibility, it is capable of being completed within a year, it is not within the statute, though the
parties may intend, and though it is probable, that it will extend over a longer period, and though, it does
in fact so extend.
Enforceable by Law:
A right or obligation is enforceable, if the party obligated can be forced or ordered to comply through a legal
process.
Promise:
According to Sec -2b of the Indian contract act, 1872, A proposal when accepted becomes a Promise.
Proposal + Acceptance = Promise
1.5.2 Essentials of a Valid Offer
Terms of offer must be unambiguous, definite, certain and capable of being certain.
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The special terms, forming part of the offer, must be duly brought to the notice of the offeree at the time the
offer is made.
It must be communicated.
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Summary
Contract is the result of the combination of two important elements, i.e., Agreement and Obligation.
A contract creates rights and obligation between the parties entering into a contract. Basic requirements of a
contract are two parties, an agreement and legal obligation.
Agreements are of two types viz., Valid and Void. Difference between two is the enforceability.
Every promise and every set of promises, forming consideration for each other is an Agreement.
Agreements are basically divided into two major types as shown in the figure below.
On the basis of Validity, contract can be classified as Void, Valid, Voidable, Illegal and Unenforceable
contract.
On the basis of formation, contract can be classified as Express, Implied and Quasi Contract.
On the basis of performance, contract can be classified as Executed, Executory, Unilateral and Bi-lateral
Contract.
References
Mishra, A., The Indian Contract Act, 1872, Contract Act, Upkar Prakashan, Series-5.
Dr. Sharma, A., 2006. Business Regulatory Framework, Contract Act, FK Publications.
Gulshan, S.S., Kapoor, G.K., 2006. Business Law including Company Law, New Age International Publishers
ltd, 12 ed.
Tulsian, P.C., Business and Corporate Law for CA PE-II, Law of Contract, Tata McGraw Hill Publication, 2
ed.
Recommended Reading
Tyagi, M., Kumar, A., 2003, Company Law, Contract Act, Atlantic Publishers and Distributors.
Agrawal, K.K., 2006. Direct Tax Planning and Management, Contract Act, Atlantic Publishers and
Distributors.
Pathak, A., 2007. Legal Aspects of Business, Contract Act, Tata McGraw Hill Publishers, 2 ed.
Jain, T.R., Trehan, M., Trehan, R., 2009-10. Business Environment, Contract Act, FK Publishers.
Kumar Naveen, R.N, 2004. Economic Environment Of Business, Contract Act, Anmol Publication Pvt. Ltd. 1
ed.
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Chapter II
Project Delivery Mechanism
Aim
The aim of this chapter is to:
Objectives
The objectives of this chapter are to:
Learning outcome
At the end of this chapter, the students will be able to:
identify the infrastructure project as per its models such as BOT, BOO, BOLT etc.
undertake the responsibilities which are essential for making blueprint project
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2.1 Introduction
Public-Private Partnership (PPP)
PPP broadly refers to long term contractual partnerships between public and private sector agencies, specially targeted
towards financing, designing, implementing, and operating infrastructure facilities services that were traditionally
provided by the public sector. Private Sector Company means a company in which 51% or more of the subscribed
and paid up equity is owned and controlled by a private entity.
"The Public-Private Partnership (PPP) Project means, a project based on contract or concession agreement
between a Government or statutory entity on the one side and a private sector company on the other side, for
delivering an infrastructure service on payment of user charges."
In a PPP, each partner, usually through legally binding contract(s) or some other mechanism, agrees to share
responsibilities related to implementation and/or operation and management of a project. This collaboration or
partnership is built on the expertise of each partner that meets clearly defined public needs through appropriate
allocation of:
Resources
Risks
Rewards
Responsibilities
The allocations of these elements and other aspects of PPP projects such as, details of implementation, termination,
obligations, dispute resolution and payment arrangements are negotiated between the parties involved and are
documented in written contract agreement(s) signed by them.
PPPs involve private management of public service through a long-term contract between an operator and a
public authority.
A typical PPP example would be a toll expressway project, financed and constructed by a private developer.
A PPP project is essentially based on a significant opportunity for the private sector to innovate in design,
construction, service delivery, or use of an asset.
The method of funding the project, in part from the private sector.
The important role of the economic operator, who participates at different stages in the project.
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The distribution of risks between the public partner and the private partner.
In general, PPP can best be viewed as a continuum between traditional public procurement at the one end and
privatization at the other.
Service contracts are legally binding agreements between a government authority and a private partner to
perform specific, usually non-core tasks.
These are usually short-term contracts and avail government of private sector expertise.
Management contracts transfer responsibility for the operation and maintenance of government-owned entities
to the private sector.
Asset ownership and commercial risk remains with the government, while management control and authority
are transferred to a private partner, which applies its expertise to improve management systems and practices.
The private sector builds an asset and leases it to the State for operation.
Alternatively, the private sector operates an asset owned by the State and pays the State rent, collecting fees
from end users.
While the latter is common in physical infrastructure PPP projects such as water and sanitation utility operations,
the former is most common and most appropriate for e-government initiatives.
Build-operate-transfer (BOT), build-own-operate (BOO), build-own-operate-transfer (BOOT), design-buildingfinance-operate (DBFO) and similar arrangements are contracts specifically designed for new projects or
investments in facilities that require extensive rehabilitation.
Under such arrangements, the private partner typically designs, constructs and operates facilities for a limited
period from 15 to 30 years, after which all rights or title to the assets are relinquished to the government.
Under a build-operate-own (BOO) contract, the assets remain indefinitely with the private partner.
The government will typically pay the BOT partner at a price calculated over the life of the contract to cover
its construction and operating costs, and provide a reasonable return.
The table below briefly summarises PPP models:
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Schemes
Service contract
Models
The private party procures, operates and maintains an asset for
a short period of time.
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Build-Operate-Transfer (BOT):
The private business builds and operates the public facility for a significant time period. At the end of the time
period, the facility ownership transfers to the public.
Build-Own-Operate-Transfer (BOOT):
The government grants a franchise to a private partner to finance, design, build and operate a facility for a specific
period of time. Ownership of the facility is transferred back to the public sector at the end of that period.
Buy-Build-Operate (BBO):
The government sells the facility to the private business. The private business refurbishes and operates the
facility.
Design-Build-Operate (DBO):
A single contract is awarded to a private business which designs, builds, and operates the public facility, but the
public retains legal ownership.
Design-Build-Maintain (DBM):
This model is similar to DB, except that the private sector also maintains the facility. The public sector retains
responsibility for operations.
Build-Develop-Operate (BDO):
The private business buys the public facility, refurbishes it with its own resources, and then operates it through a
government contract.
Build-Own-Lease-Transfer (BOLT):
The government grants the right to finance and build a project which is then leased back to the government for
an agreed term and fee. The facility is operated by the government. At the end of the agreed tenure the project is
transferred to the government.
Contract Add and Operate (CAO):
CAO is a contractual agreement whereby the project developer adds to an existing infrastructure facility which it
rents from the government and operates the expanded project over an agreed as a period franchise. There may or
may not be a transfer arrangement with regard to the added facility provided by the project developer.
Develop Operate and Transfer (DOT):
DOT can be said to be a contractual arrangement whereby favorable conditions external to the new infrastructure
project which is to be built by a private developer are integrated into the arrangement by giving that entity the
right to develop adjoining property, and thus, enjoy some of the benefits created by the investment such as higher
property or rent values.
Rehabilitate Operate and Transfer (ROT):
ROT is a contractual arrangement whereby an existing facility is turned over to a private entity to refurbish, operate
and maintain for a specific period as a franchisee, on the expiry of which, the legal title to the facility is turned over
to the government. The term is also used to describe the purchase of an existing facility from abroad, refurbishing,
erecting and consuming it within the host country.
Rehabilitate Own and Operate (ROO):
ROO is a contractual arrangement whereby an existing facility is turned over to the private sector for refurbishing
and operation with no time limit on ownership. As long as the operator has not violated the franchise, it can continue
to operate the facility in perpetuity.
Lease Renovate Operate and Transfer (LROT):
LROT is a contractual arrangement whereby an existing infrastructure facility is handed over to private, parties on
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lease, for a particular period of time for the specific purpose of renovating the facility and operating it for a specific
period of time; on such terms and conditions as may be agreed to with the government for recovering the costs with
an agreed return and thereafter, transferring the facility to the government. The Ministry of Power has adopted this
route for the renovation of existing power plants.
Build-Transfer-Operate (BTO):
Under this model, the private sector designs and builds a facility on the turn-key basis. Once the facility is completed,
the title for the new facility is transferred to the public sector, while the private sector operates the facility for a
specified period. This model is also referred to as Build-Transfer-Operate (BTO).
Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M):
Under this model, the private sector designs, builds, finances, operates and/or maintains a new facility under a longterm lease. At the end of the lease term, the facility is transferred to the public sector. In some countries, DBFO/M
covers both BOO and BOOT.
They are accessible to a wider range of users who can then further develop and exploit the technology into new
products, processes, applications, materials or services.
Technology brokers are people who discovered how to bridge the disparate worlds and apply scientific concepts
or processes to new situations or circumstances.
Related terms, used almost synonymously, include "technology valorization" and "technology
commercialisation".
While conceptually the practice has been utilised for many years (in ancient times, Archimedes was notable
for applying science to practical problems), the present-day volume of research, combined with high-profile
failures at Xerox PARC and elsewhere, has led to a focus on the process itself.
Technology transfer includes a range of formal and informal co-operations between technology developers and
technology seekers.
In addition, technology transfer involves the transfer of knowledge and technical-knowhow as well as physical
devices and equipment.
Under a joint venture, the public and private sector partners can either form a new company or assume joint
ownership of an existing company through a sale of shares to one or several private investors.
A key requirement of this structure is good corporate governance, in particular the ability of the company to
maintain independence from the government. This is important because the government is both part owner and
regulator, and officials may be tempted to meddle in the company's business to achieve political goals. From
its position as shareholder, however, the government has an interest in the profitability and sustainability of the
company and can work to smooth political hurdles.
The private partner assumes the operational role and a board of directors generally reflects the shareholding
composition or expert representation.
The joint venture structure is often accompanied by additional contracts (concessions or performance agreements)
that specify the expectations of the company.
Joint ventures also take some time to develop and allow the public and private partners considerable opportunity
for dialogue and cooperation before the project is implemented.
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Joint ventures are real partnerships of the public and private sectors that match the advantages of the private
sector with the social concerns and local knowledge of the public sector.
Under a joint venture, all partners have invested in the company and have an interest in the success of the
company and incentives for efficiency.
Governments dual roles as owner and regulator can lead to conflict of interest.
Joint ventures also have a tendency to be directly negotiated or to follow a less formal procurement path, which
can lead to concern for corruption.
Environmental factors include the role of the government, neighborhood concerns, environmental and
sustainability issues and the economic climate.
The governments extensive participation should be excluded; government agencies are invariably involved in
approving parts of the project or by developing other public facilities to support the specific BOT facility.
Getting permits and licenses, for example, is inevitably facilitated by the governments involvement. However,
it is not always beneficial to the project as opposition within the government can create major hurdles.
In the Dabhol Power Company case, the project was stalled at several intervals following government elections.
A major aspect to be considered in PPP projects is the environment and the environmental agencies.
We live in an era where preserving the environment holds great importance and so developments of facilities
which will endanger the environment face major opposition.
Opposition from a unified neighborhood group can be as disrupting as government or environmental agencies
in scrutinising and eventually delaying a PPP project.
The primary objective for choosing a BOT approach is to obtain private funding. If there are no private companies
interested, a project cannot be developed.
Investing money is always in proportion to the risks involved and the return on investment (ROI); the risks are
higher in a weak economy.
Under such circumstances, negotiations for an equity-debt arrangement with risk aversion can take a long time,
making a BOT project more expensive than the public option.
Thus, when the economy is weak, the government should consider a public option or at least a certain public
investment in the BOT project.
When international financing is considered, the government must carefully consider establishing the usage fees,
especially if the local economy is poor and devaluation of the local currency a possibility.
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Summary
PPP broadly refers to long term contractual partnerships between public and private sector agencies, specially
targeted towards financing, designing, implementing, and operating infrastructure facilities services that were
traditionally provided by the public sector.
As described below, there are certain roles and responsibilities that have to be carried out by the entities associated
with PPP contract.
The PPP projects have various forms, which are characterized by the increasing degree to which responsibilities
and risk are turned over from the public to the private sector.
The significance of risks in life cycle oriented projects arises from the long-term nature of the contractual
arrangement and from the scope of risks linked to the steps of the value chain.
Joint ventures are alternatives to full privatization in which the infrastructure is co-owned and operated by the
public sector and private operators.
Some of the environmental factors affecting BOT include the role of the government, neighborhood concerns,
environmental and sustainability issues and the economic climate.
References
Akintoye, A., Beck, M., Hardcastle, C., 2003. Public-private partnerships: managing risks and opportunities,
PPP models, Wiley-Blackwell.
Osborne, S.P., 2000. Public-private partnerships: Theory and Practice in International Perspective, PPP
projects, Routledge.
Geddes, M., 2005. Making Public Private Partnerships Work: Building Relationships and Understanding
Cultures, PPP projects mechanism, Gower Publishing, Ltd.
Yescombe, E.R., 2007. Public-Private Partnerships: Principles of Policy and Finance, PPP Projects,
Butterworth-Heinemann.
Delmon, J., 2009. Private sector investment in infrastructure: project finance, PPP projects and risks, Kluwer
Law International.
Recommended Reading
International Transport Forum, Organisation for Economic Co-operation and Development, Transport
Infrastructure Investment: options for efficiency, OECD/ITF, 2008.
Davis, H.A., 2008. Infrastructure finance: trends and techniques, PPP infrastructure projects, Euromoney
Books.
Nevitt, P.K., Fabozzi, F.J., 2000. Project financing, PPP projects risk, Euromoney Books.
Grimsey, D., Lewis, M., 2007. Public private partnerships: the worldwide revolution in infrastructure provision
and project finance, PPP projects, Edward Elgar Publishing.
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