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Home > What is a Contract? > Methods of entering into a Contract

Methods of entering into a Contract

Contracts could be Oral or Written.

Oral Contracts: are verbal agreements between parties and are generally prone to withdrawal of a promise of performance of an obligation by one or the other parties and hence is not commonly practiced or used. Moreover, Oral Contracts lead to misunderstandings and are more open to interpretation due to the intent not conveyed in its true sense or intent not commonly understood by the contracting parties.

Written Contracts: due to its immense clarity, written Contracts have become a norm the world over. A written Contract is an expressly stated Contract.

Contracts can either be expressed or implied.

Implied Contracts: imagine yourself sitting in a restaurant and having a cup of tea and note the following sequence of events:

  • You order a tea by just telling the waiter “a tea please”.
  • In a while comes your tea.
  • The waiter hands the bill over to you for the tea.

In the above situation there is an implied Contract between you and the Restaurant. You are obliged to pay for the tea that you ordered (whether you drank it or not, does not matter). You cannot refuse to pay on the pretext of the price or quality or the time it took for getting the tea served was not known or not understood. Any reason for non payment would simply not be accepted unless of course the Product (Tea) took unreasonably long time, Price was unreasonable or Quality was unreasonably poor.

There exists a Contract between you and the Restaurant and, you are deemed to have understood all the terms and conditions such as price for a cup of tea, the quality of the tea (order) served and the duration that took for the service, among others.

In implied Contracts, normal custom, tradition or rules of that particular industry become applicable automatically meaning, it is expected that the order shall be executed within a reasonable time. For example the tea cannot be served the next day or the person that ordered tea cannot seek paying his bill the next day or the week after!!

Implied Contracts are binding on parties but are not expressly stated and implied in the transaction between the parties.

These types of Contracts are called “Implied Contracts”.

Other examples of Implied Contracts

  • In a stock exchange large value of stocks are bought or sold (“Contracts” are concluded) thru waving of hands! This could be an example of an Implied Contract though however there could be formal Contracts executed later after the deals are done, but they are concluded much before they are formally signed.
  • Hiring a Taxi, Purchasing a Train ticket for travel, Ordering Pizza from a restaurant over phone, etc are some of the other examples of implied Contracts.

Expressed Contracts: no introduction needed, used widely, Contracts where all obligations of the Client and the Contractor have been clearly expressed i.e. written out, understood and formally signed by both parties.

An expressly stated written document provides all contracting parties with a common understanding of their respective obligations for its fulfillment and provides:-

  • Confirmation and clarification of the identity of the contracting parties and the exact intent of the parties at the outset of the Contract reducing the risk of any misunderstanding;
  • The basis for continuity and consistency in the administration of the Contract notwithstanding changes in personnel from either party;
  • A framework for the settlement of disputes or resolution of differences that may possibly occur during the Contract execution period;
  • Agreed procedures for the approval and acceptance of Work or Services performed;
  • An administrative framework for internal interfaces with the Contractor such as payments, material deliveries, audits, etc.

Purchase Order

Generally, the term “Purchase Order” (more commonly referred to by its acronym “PO”), is widely used to refer to an order from a Client to a Vendor (Contractor) for purchase, in most cases, of a standard product. It is not uncommon to find a PO being used for Services as well.

PO’s operate under the same principle as that of a Contract. In fact PO’s are a Contract for purchase of a piece of material or equipment (generally that has been produced, or the product can be produced based on almost standard specifications of the Vendor or Client requirements). Clients could have a mechanism of ensuring the end result is what was envisaged thru inspections at various stages of the manufacture.

Most often Purchase Order’s are issued for purchase of a product that:

1.Is more or less a Vendor’s standard product (with standard specifications and features).
2.Or has a slight variation to its standard product.
3.In layman terms, is a product that one is generally familiar with, either has seen it physically or used such a product in the past or there are catalogues available defining specifications of the product exactly the way it would perform.
4.In large project situations, there could be very non standard products

General difference between a PO and Contract

Purchase Order
Contract

Product is normally physically produced first and sold later (sold not to be confused with the legal definition as sold as in “Sale of Goods Act”, etc.)

Is first sold and then physically produced (constructed or fabricated)

 

Normally used for Goods

Normally used for Services that could include supply of Goods and Services

Product  generally has standard specifications with limited variations

Specifications could be tailor made often and, product / Service is non standard

Generally has shorter gestation period

Generally has a longer gestation period

Products are developed in Vendors factory

Works/Services are performed at Clients location and can be developed anywhere irrespective of a geographical location

Precautions to be taken while handling a PO

  • Clear scope of supply and terms and conditions including spare part requirement
  • Absolute clarity in the applicable Technical Specifications, codes, standards, service for which required, etc
  • Clarity in the stage inspection requirements, hold points, witness, review points, etc, if any
  • Specifying the Delivery obligations point clearly (Ex Works, CIF, FOB, FAS, other INCOTERMS). Knowledge of INCOTERMS particularly is important in a PO.
  • Price clarity – all items of other costs such as inspection, preservation, packing, loading, freight/ transportation upto the point of delivery, customs clearance, insurances, as per codes if any, unloading, etc should be clearly specified

PO’s are normally used for standard and repetitive purchases with standard conditions and may contain a few special conditions to suit specific situations.

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