PART –V / CHAPTER III

RISK PURCHASE

3.1 Repurchase should be on identical terms of the original contract such as mode of tender, specification, terms of payment, inspection authority, conditions regarding liquidated darnages, arbitration etc. The intention is that the terms of new contract should not be more onerous or more liberal than those of the original contract except to the extent of the time of supply.

3.2 The risk purchase must be effected under the same or as nearly as practicable in the circumstances similar conditions of competition as the original purchase, so that it is made at lowest market rate. The defaulter should not be excluded where the contract is broken by delay in supply. If the defaulter submits a tender it must be considered. He is entitled to an opportunity to minimise his loss. When repurchase is effected by a limited tender enquiry, the defaulter must also be addressed. Where the quotation of the defaulter is the lowest, he should be called upon to furnish a security deposit to ensure against the second default. The amount of security also can be enhanced in suitable cases where the defaulter's quotation and the next best quotation indicates that the loss is more than 10 percent subject to the defaulter accepting these special terms. He has the first claim for consideration and if he is excluded, it would end in a risk of being denied the risk purchase extra expenditure exceeding his offer.

Authority: Board's letter No.58/777/RS (G) of 17th July 1958 – (Annex u re V/3-01 )

3.2.1 As per legal advise obtained from the Legal Directorate of Railway Board notice of risk tender irrespective of whether it was open or limited tender should be served on the defaulting contractor so that it be in his knowledge that is was a tender at his risk and cost against the contract rescinded earlier .It is also required to be ascertained that there should not any change in the scope of the work and the quantities of left over work and the conditions for risk tender should be identical with that of original tender.

Authority: Board's letter No. 88/CE-1/Ct/31 of 29.01.1996 (An ne x ure- V/3-05 )

3. 3 The Risk purchase should be effected within 6 months for common items (i.e. items easily available) and 9 months in respect of stores not easily of stores not easily available in the market and where procurement difficulties are experienced.

Authority: Board's letter No.64/RS (G) 779/49/App.VI/AB/EM of 18th November 1976 (Annex u reV/3-02 )

3.3.1 The non-completion of the risk purchase within the prescribed period of 6/9months may lead to extra expenditure. In order to avoid such instances provisional claims should be lodged on the defaulting firms in cases of risk purchase within the mandated period without waiting for execution of the order.

Authority: Board's letter No.86-BC-/7 dated 14.07.1988 – (Annex u re V/3-04 )

3.4 A copy of para 48(A) of the D.G.S. & D's Contract Manual is reproduced below for information -

3.4.1 Care should be taken to see that the re-purchase A/T is placed after normal conce11ation of the A/T in respect of which there has been a breach. Whole or part of the outstanding quantity should be cancelled from the AT (a contract can be cancelled in part only when it is an instalment contract in which case the instalments in default could be cancelled. Where the contract is not an. instalment contract a portion can be cancelled only in the sense that the entire outstanding is cancelled. If the whole quantity is out standing, the whole quantity must be cancelled and not a portion thereof). Normally re-purchase tenders should be issued after the breach of contract. An exception may be made where the stores were urgently required or were not readily available in the market. In such cases stand-by tenders may be invited previous to the date of the breach with a view to minimise the inconvenience caused due to delay in performance of the contract.

3.4.2 The defaulting contractor should also be given an opportunity to quote against the repurchase tender unless it is established that the breach of the original contract due to his inability to supply goods of the contract description or repurchase has to be effected on spot delivery in view of the urgency created, consequent on the default and it has been established that the defaulter cannot comply with this requirement. This is so even though it may not be incumbent on Government to do so under the conditions of contract. Where it becomes necessary to place a risk purchase contract on the defaulting contractor in order to safeguard against a second default, he may be called upon to furnish a security deposit up to 10 percent of the value of the contract. In case where the indentor desires to make local purchase at the risk and expense of the defaulting contractor, the procedure laid down for authorising him to make such local purchase should be carefully and scrupulously followed.

3.4.3 Risk purchase should be on identical terms as the original contract such as specifications, terms of payment, inspection authority, conditions regarding liquidated damages, arbitration etc. Where the original AT provides for submission of a sample by the firm for testing prior to bulk supply, a similar condition should also be incorporated in the repurchase contract. The intention is that the terms of the new contract should not be more onerous or more liberal than those of the original contract except to the extent of the time of supply, i.e. such shorter time for supply of the articles would be permissible under the law provided of course a reasonable time is given. It may be added here that even if the first purchase has been effected by negotiation or as a result of Limited tender enquiry, a repurchase contract should be as far as practicable be effected by advertised tender. This saves a lot of objection and is likely to help the Government in recovering damage and costs etc. There is however, no objection to the issue of a limited tender enquiry since according to the conditions of contract the manner and method of such purchase will be in the entire discretion of the Secretary.

3.4.4 Even though according to legal requirements, the recovery of risk purchase loss could be effected only after materialisation of supplies against the risk purchase contract, as soon as the risk purchase agreement is entered into, a demand notice should be served on the defaulting contractor asking him to deposit the extra expenditure -involved. Simultaneously action should also be taken to withhold payment if any, due to the contractor against other

contracts. In cases where we are able to withhold payments and defaulting contractor challenges the recovery we may leave it to him to refer the matter to arbitration or initiate legal proceedings. In cases where we are unable to recover the amounts due by withholding payments or other wise arbitration/legal proceedings should be initiated irrespective of the fact whether the supplies against the risk purchase contract have materialised or not. Since the arbitration/legal proceedings are protracted, it may be that in most of the cases, by the time we have to produce evidence, supplies against risk purchase contract might materialise and we would be able to comply with the legal requirements. In cases, where the risk purchase contract is not completed we have to endeavour to produce evidence in regard to the market value of the stores on the date of breach since the difference between the contract rate and the market rate on the date of breach (i.e. general damages) is the measure of damages for breach of contract.

3. 4. 5 Cases are not uncommon where the second contractor i.e. the contractor on whom a risk purchase is placed also fails to supply the stores and where risk purchase has to be arranged at the risk and cost of the second contractor. To illustrate it more clearly, suppose the Government have entered into a contract with a contractor 'A' for supply of certain stores. 'A' fails to deliver the stores and the contract is cancelled and a risk purchase agreement is entered into with a second contractor 'B' at a higher rate, 'B' also fails to supply and fresh risk purchase agreement is entered into with a third contractor 'C' still at a higher rate than that at which the contract on 'B' was placed. 'C' supplies the stores and obtains payment as per the terms of the contract entered into with him. Now the question arises as to what should be the quantum of damages recoverable from 'A' and 'B' respectively.

3.4.6 Suppose the stores to be supplied against the contract in the illustration given above are of an ordinary commercial nature i.e. stores which are readily available in the market in that case, we can legally recover from the Contractor 'A' only the difference between the rate at which the original contract was placed on him and the market rate on the date on which he committed the breach. So far as 'B' is concerned, the actual extra expenditure incurred (i.e. the difference between the contract prices in the contracts placed on 'C' and ‘B’) in risk purchase can be recovered.

3.4.7 In cases the stores to be purchased are not of ordinary commercial nature i.e. stores to be fabricated according to the D.G.S. & D specifications etc. which have not got a ready market the purchaser is entitled to recover from 'A' the difference between the contract price on him and that of 'B' and from ‘B’ the different between the contract price of on B and that of C.

3.4.8 In rate contracts, the time for delivery is not fixed by mutual agreement and is not the essence of the contract. That being so, under section 46 of the contract act, the goods have to be delivered within reasonable time. What is reasonable time is question of fact depending on the circumstances of the case. But where there has been unreasonable delay in delivery, the direct demanding officer has undoubtedly the right to give the contractor notice fixing reasonable time for delivery of the goods and making time in the essence of the contract. The notice should state that delivery within the time fixed shall be the essence of the contract and if the goods are not delivered within the period fixed (by the notice) the supply order shall be cancelled under clause 14 of the D.G..S. & D. General conditions of contract and the undelivered goods shall be purchased at the risk and cost of the contractor as provided in that clause.

3.4.9 As the right of the cancellation rests in the Secretary under the said clause14,the Direct Demanding Officer should not himself proceed to cancel the supply order in the event of default and proceed to make risk purchase. He should report the default to the D.G.S. & D. who should then take further action to cancel the supply order and effect or authorise a risk purchase.

3.5 Running Contracts:- The Running Contracts are entered into for supply of definite quantities within a specified period. The procedure applicable in cases wherein acceptable of tender are placed by the D.G.S. & D. but supplies do not materialise within the delivery dates will therefore apply in such cases. D.G.S. & D. will have to take suitable action on receipt of intimation, about non-supply/delay in supply.

3.5.1 If after intimating the D.G.S. & D. about the failure of supply in respect of a supply order placed against a rate contract/running contract or an acceptance of tender, the indentors make direct purchase without waiting for an authorisation from the D.G.S. & D. it may not be possible to recover from the defaulting contractor any extra expenditure incurred in such purchases.

3.6 There are occasions where firms registered with Railways are removed from the approved list for a certain period due to repeated failures and such reasons. At the time of their removal of the approved list there may be outstanding orders with the firms. After the expiry of the delivery period such orders should be cancelled waiving the risk purchases. Such cases of waiver should be personally sanctioned by C.O.S. before the issue of risk purchase tenders to ensure that the removal of the firm from the approved list has been done for good and sufficient reasons. Restoration of such firms in the list of approved suppliers should also be sanctioned by COS. The particulars of waivers if any of the risk purchase should be indicated when such cases are put up to him.

Authority: Board's letter No.77/RS (G) 779/29/ptI-dated 24.07.1987 – (Annex u re - V/3-03 )

ANNEXURE V/3-01 (Confidential)

Copy of D. O. Letter No. 58/777/RS (G) dated 17th July 1958 from 'Shri Sudershan Lall, Deputy Director, Railway Stores, Railway Board, New Delhi, addressed to Shri. D. V. Phaterpekar, Controller of Stores, Western Railway, Bombay--copy to Sri R. K. Tandan, Deputy C. O. S. /I. C. F. /Madras.

Sub: Placing of Risk Purchase Orders with the defaulting firms.

Ref: (1) Shri Robinson's D. O. No. Con. S. 438/19/'2527(P3-56) dated 10th April 1958 : and

(2). Your D. O. No. Con/S. 438/19/2527/'(P3-56) dated 5th July 1958.

The Board have examined the question, as raised in Shri Robinson's above quoted D. O. as to whether Risk purchase, " order for any stores can be placed on the same firm against whom this action is being taken for their failure to fulfil the contract. In this connection a copy of the Ministry of Law's Note dated 9th December 1956 is enclosed for your information. The Board agree with the views of the Ministry of Law and desire that this should be kept in view while initiating cases of risk purchase in future.

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Copy of D. S. Ministry of Law Note dated 9th December 1956.

There is no reported case in my knowledge on the question whether defaulting seller must be given an opportunity to offer against a risk purchase enquiry, but I understand arbitrators have taken an adverse view of his exclusion. The principles governing a risk purchase is that it must be effected under the same, or as practicable in the circumstances, similar conditions of competition as the original purchase, so that it is made at the lowest market rate. While exclusion of a defaulting, contractor from the competition could be justified where the breach consisted in the inability to supply goods of the contracted scription, this would not be possible when the contract was cancelled on account of default in completing supplies within the delivery period stipulated in the contract since the defaulter might have quoted lower and been in a position to supply.

Such a question would also not arise where re-purchase is effected of ready goods in the market for the defaulter did not have the goods and therefore he cannot complain. But our risk purchases are usually effected like the original purchases on a forward delivery basis the reason being that ready goods are not ordinarily available in the market. In such cases, exclusion of the defaulter from competition may be made the ground of an adverse decision on our claim to recover the extra expense and this appears to have actually happened. Hence it has been consistently advised by us that the, defaulter should not excluded where the contract was broken by delay in supply. When the re-purchase is effected by advertised tender nothing special is necessary. The defaulter can submit a tender. If he does so, it must be considered. He is entitled to an opportunity to minimise his loss. His readiness to sell at lower price will be taken as evidence of a lower market price. When, repurchase is effected by a limited tender enquiry, the defaulter must also be addressed. Likewise, in the case of local purchase by the indentor or a negotiated re-purchase (which is rarely permissible in an extraordinary situation he, should not be denied an opportunity to offer. We are, however, entitled in all such cases, where the defaulter's quotation is the lowest, to call upon him to furnish a Security deposit so that we ensure against a second default. The amount of security also can be enhanced in suitable cases where the difference between the defaulter's quotation, and the next best quotation indicates that our loss is more than 10- per cent subject, to the defaulter accepting these special terms, he has a just claim for consideration and if we exclude him, would run the risk of being denied the risk purchase extra expense exceeding his offer.

Dated 9th December 1956.

Sd/- (M. C. DAGA)

Copy of D.O. letter no. Cons. 438/19/2527(P3-56) dated 10th April 1958, from D. R. Robinson, Controller of stores, Western Railway addressed to Shri Sudershan Lal, Deputy Director, Railway Stores, Railway Board.

Sub: Procurement-Direct Purchase--Gb. 1 Class Stores No. 2527(56)

The following case, which has some interesting aspects, has been placed before me for a decision. Candidly this is the first of its kind I have come across and I shall be obliged if, after discussion, your considered views are passed on to me. Sundaresan and Chowdiah will probably assist you in this matter.

2. In April last year a limited Tender was issued for 7 cwts. of 6" X 318" mild steel black hexagonal head bolts and M/s. P. K. Mookerjee & Co. Ltd. Calcutta quoted Rs. 82 per cwt. for delivery in three months. Their offer was the lowest and was accordingly accepted. The opening date of the Tender was 4th May 1957. Since the firm made no mention whatsoever in regard to the issue of either a quota certificate or a Recoupment Quota Certificate, their rate was taken as " firm " and the order was placed with them on 6th June 1957 after they had been notified by letter on 20th May 1957 that their offer had been accepted. In reply to this intimation. they pointed out that " with effect from 16th May prices of all categories of Iron and Steel have been increased by Rs. 70.00 per ton by order of the Iron and Steel Controller " and they accordingly asked for a corresponding increase in their price and raised their price to Rs. 86 per cwt. This was not accepted as they had quoted a firm " price without any qualifying remark.

3. As you are aware, we have the Bulletin system of issuing Limited Tenders and after we advised the firm of our intention to go out to " Risk Purchase ", they quoted Rs. 84 per cwt. against the Risk Purchase Tenders. Incidentally this rate was the lowest. This was in October last year. The next lowest offer of Rs. 100 per cwt. was however, accepted and the firm was sent the claim bill for the difference in price.

4. The case was referred to the Law Officer who has raised an important issue by stating that it is not understood why the officer of M/s. P. K. Mookerjee & Co., Calcutta at Rs. 84 per cwt. was not accepted, as we could have still submitted a claim bill on them for the difference between their original quotation of Rs. 82 per cwt. and their subsequent of Rs. 84 per cwt. Para 772-S states, inter alia, that " C. O. S. has the authority to purchase any quantity of the Stores ELSEWHERE............... " and it has been the practice to ignore the defaulter's offer against Risk Purchase Tenders, as this could lead to malpractice. With this, our F. A. & C. A.O. agrees.

.5. In regard to manufactured items, we have always taken a " firm "quotation to mean that the raw material is actually available for taking the work in hand and, therefore, any statutory increase in the price of steel cannot affect the " firm " price quoted. This view has also been upheld by our F. A. & C. A. O. Our Law Officer, however, has stated that although the suppliers did not stipulate that they would have to procure raw material for the manufacture of the bolts, he considers that it was not necessary for them to make this stipulation if Clause 4 of the I. R. S. Conditions of Contract applied and the increase in prices is permitted by the Board. In this connection, please refer to Board's letter No. 55/615/4/FR(C) dated 29th March 1957.

6. I would like to mention that I have a case on hand where the D. 0. S./Calcutta, after placing ,an A/T on a firm, cancelled the same and on fresh tenders being invited, placed a fresh A/T on the same defaulting firm and recovered the difference from the. Was D. 0. S. correct in taking this action ? If your agreed opinion is in the affirmative, I take it that the same procedure can be adopted by me, in the future cases of a similar nature.

7. An early reply will be appreciated.

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ANNEXURE V/3-02

Copy of letter No. 64/RS (G)/779/49/Appendix VI-AB/CR. dated 18th November 1976 from Dy. Director, Railway Stores (G), Railway Board, New Delhi addressed to General Managers. All Indian Railway and I. C. F.

Sub: I. R. S. conditions of Contract Revision/Addition of Clause 0300(a) and 0702(b)

In terms of clause 0702 of I. R. S. conditions of contract the time limit for the Placement of risk purchase order is 6 months. Ministry of Railways have in the past received a number of requests from the Railways for enhancing this time limit of 6 months. The matter has therefore been re-examined in consultation with the Legal Adviser Ministry of Railways in the light of the procedure obtaining on the D. G. S. & D. side. As per the legal advice there is no objection to enhance the time limit of 6'mdnths to 9 months in respect of Stores, which are not easily available in the market and where procurement difficulties are experienced. The Ministry of Railways have therefore decided that in respect of such Stores the period for making risk purchase will be 9 months instead of 6 months. In order to implement this decision the Controller of Stores should identify these Stores in consultation with their F. A. & C. A. O. and incorporate a clause as under in the Tender enquiry for purchase of these Stores.

"In respect of the Stores mentioned in the Annexere to this Tender the period for making risk purchase be nine months instead of six months as provided in clause 0702(b) of I. R. S. conditions of contract.

The clause which is to be inserted in the Tender enquiry as above should also be incorporated in the resultant contract the only change being that instead of the word " Tender " the words " Purchase Order " should be used.

Ministry of Railways have also decided to insert a note below clause 0702(b) of I. R. S. conditions of contract to give effect to the above decision.

It has also been decided to amend clause 0300(a) of I. R. S. conditions of contract in the light of corresponding clause of D. G. S. & D. conditions of contract.

Advance correction slip No. 141-S to the Appendix III to the Indian Railway code for the Stores department is accordingly appended for information and guidance.

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ANNEXURE V/3-03

Copy of Railways Board’s letter No. 77/ RS (G)/779/29/ Pt. I dated 24th July 1987 addressed to General Managers, All Indian Railways and others.

Sub: Risk purchase action against firms removed from approved list

One of the Zonal Railway Administrations, have pointed out that there are occasions where firms registered with the Railways are removed from the approved list for a certain period due to their repeated failures and such other reasons. At the time when the firm is removed from the approved list there may be outstanding orders with the firm. Delivery period might have expired in certain cases and delivery period may still be available in the balance cases. Wherever, D. P. is available, although the firm has been banned, whatever supplies are made by the firm within the delivery period have to be accepted, being a contract. If the firm fails to deliver within the delivery period, no extension is to be granted. Similarly, in cases where delivery period has expired, no extension is granted. All such orders are cancelled and fresh purchase action is taken. The Railway has sought clarification if in case a firm has been removed from the approved list whether the Administration should make the risk purchase on expiry of delivery period.

Board has decided that in such cases of default the Railway should waive the risk purchase. However, such cases of waiver of risk purchase should be seen personally by C. O. S. before issue of risk purchase tenders to ensure that the removal from the list of approved suppliers has been done for good and sufficient reasons.

Restoration of such firms to the list of approved suppliers should also be seen by C. O. S. and when such cases are put-up to him particulars of waivers, if any, of risk purchase action in respect of the firm should he indicated.

This issues with the concurrence of the Finance Directorate of this Ministry.

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ANNEXURE V/3-04

Copy of Railway Board’s letter No. 86-BC-C/7 dated 14th July 1988 addressed to General Managers, All Indian Railways and others.

Sub: Draft Audit paragraph for the Report of C. & A. G. of India, Union Government (Railways) for the year 1987 loss due to Ineffective risk purchase action

In the above noted Para, Audit has pointed, out that the risk purchase action was not completed by the Railways within the prescribed period of 6 months and as a result the Railway had to incur extra expenditure resulting in loss to the Railways.

The Ministry of Railways desire that in order to avoid recurrence of such lapses, Railways/ Production Units should lodge provisional claim on the defaulting firms in cases of risk purchase immediately on finalisation of risk purchase within the mandatory period without waiting for execution of the order. These instructions should be brought to the notice of all concerned for compliance.

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ANNEXURE V/3-05

GOVERNMENT OF INDIA (BHARAT SARKAR)MINISTRY OF RAILWAYS (RAIL MANTRALAYA)

(RAILWAY BOARD)

No. 88/CE-I/CT/31 New Delhi Dated 29th January 1996

The General Managers, The Officer on Special Duty,All Indian Railways, including R. C. F, Kapurthala.CLW, DLW, ICF andMTP/Railways, Calcutta. The Chief Admn. Officers, DCW/Patiala, and The Chief Admn. Officers, COFMOW/New Delhi. MTP/Railways at Bombay and Madras. The General Manager, CORE/Allahabad.The G. M.(Constn.) The Principal,N. F. Railway, IRISET/Secunderabad, and18, Millers Road, IRMEE/Jamaipur.Bangalore.

The Director, The Chief Admn. Officers, (Con). IRICEN/Pune, and S. E. Railway, Garden Reach, RSC/Vadodara. Calcutta.

Sub : Loss on account of failure to observe the provisions for enforcement of risk action.

Ref: Board's letter No. 88/CE-I/CT/31 dated 1st July 1988.

* * *Instructions were issued by the Board vide above referred letter for observing the

provisions for enforcement of risk action.

A case has come to the notice of the Board where a risk and cost tender was floated and awarded to other contractor. The tenders were called by adopting open tender sys and the tender notice was not sent to the original contractor at whose risk and cost tenders were invited.

As per legal advice obtained from the Legal Directorate of Railway Board, notic of risk tender irrespective of whether it was open or limited tender should have been served on the defaulting contractor so that it would have been in his knowledge that it was a tender at his risk and cost against the contract rescinded earlier. It is also required to be ascertained that there should not be any change in the scope of the work and the quanties of left-over work and the conditions for risk tender should be identical with that of orginal tender.

Board desires that there should not be any recurrence of such cases due to procedural lapses as highlighted above. In such cases, legal opinion, if necessary, may be taken before deciding the risk contract.

Please acknowledge receipt.

Sd/- (Ved Prakash)

Executive Director Civil Engg. (Railway Board.)