01 October 2015

Consortium contracts with Government – Legal status

I. Introduction

It is basic economics - when it comes to consumption, government has the largest appetite. Government purchases include goods and services obtained from domestic and international suppliers and deployed in myriad projects ranging from defence and railways to infrastructure and oil. Of late, these public projects have grown in size and the project requirements often exceed the capacity (and more importantly, the risk tolerance) of an individual company. The consortium model has now gained popularity, whereby companies usually collaborate and jointly bid for government projects.

The arrangement that results, as everyone negotiates, is worthy of an analysis into its true nature. Largely, such an arrangement would comprise of two agreements – first, among the companies jointly bidding for the project (‘consortium agreement’ or ‘CA’), and second, between the consortium and the government (‘project agreement’ or ‘PA’). Does such an arrangement amount to this consortium being called an ‘association of persons’ (‘AOP’)? – is a question we’ll try to answer in this write-up.

It is noteworthy that in such projects, the government sticks to contracts it has formulated and refined over time. Such contracts may also be inspired by similar contracts in practice across various nations. For example, the Ministry of Petroleum & Natural Gas engages itself into oil production through contracts based on the Model Production Sharing Contract (‘PSC’). Similarly, the Railways has its own model contracts for various projects it undertakes. We shall be using various provisions of the model oil PSC as illustrations.

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