last week (or things you should now understand) · (or things you should now understand) ... • Understand the principles of contract law and their influence on the legality and

D39PZ: Procurement and Contracts 1

...last weeks (or things you should now understand)

• construction project parties and their typical roles

• typical types of clients and their project requirements

• the need for construction projects to support the client’s

business

• Professional ethics

• the meaning of “procurement”

• the traditional procurement route: characteristics;

contractual relationships; advantages; disadvantages; and

variations

• Non-traditional procurement routes

2

Unit 5: Principles of Contract Law D39PZ: Procurement and Contracts


Contracts in construction

• Construction projects use contracts to structure the

relationships between collaborating organisations

• Contracts structure and implement the client’s chosen

procurement route

• Contracts dictate the roles of organisations in the project

by assigning rights, duties and liabilities.

• Standard contracts are used wherever possible for

simplicity


This unit reviews:

• What is a ‘Contract’?

• General principles of Contract Law

• What is a ‘standard form of a contract’?

• Key features of specialised construction industry contracts


Learning outcomes:

• Understand the principles of contract law and their

influence on the legality and use of a construction contract

• Be able to compare and contrast traditional forms of

construction contract with their more modern counterparts

and assess how the type of construction contract used

can affect project success


What is a contract?

A contract is:

• the result of a bargain

• an agreement formed between two parties to:

do something;

not do something; or

acquire rights.

• intended to have legal consequence

• intended to be legally enforceable


What is a contract?

A contract is:

“A legally binding agreement made between two

or more parties, by which rights are acquired by

one or more to acts or forbearances on the part

of the other.”

Beatson, J. (2002). Anson’s Law of Contract (28th Edition). Oxford: Oxford University Press.


Essential elements of a contract

The following must be present for a contract to be valid:

• Invitation to treat (Scots Law only)

• The offer

• The acceptance

• Consideration (English Law only)

• Capacity

• Execution

• Possibility

• Legality

• Intent

• Form


(1) The invitation to treat

• The process of forming a contract begins with an invitation

to treat

• The invitation to treat is not part of the contract

• One party invites another to make an offer

• Scots Law only

• The “invitation to tender” letter sent to competing

contractors (and enclosing the tender documents) acts as

the employer’s invitation to treat.


(2) The offer

• A party makes an offer that:

expresses their willingness to be bound by the proposed

contract terms; and (usually)

states a period of time in which the offer must be accepted

before the offer will lapse.

The tender price submitted by a contractor after pricing the

design and proposed contract terms contained in the tender

documents is it’s offer.

The employer will receive several offers from competing

tendering contractors (i.e. “tenderers”).


(3) The acceptance

• An offer made by one party must be accepted by the

other party for the contract to exist.

• Acceptance must be unconditional:

the terms of the acceptance must match the terms of the

offer.

• Negotiation (and a revised “counter offer” from the

employer to the contractor) will be required if any terms

added by the contractor to its tendered offer are

unacceptable.

Any qualifications added to a contractor’s offer usually

require negotiation with the employer to reach an

agreement.


(4) Consideration

• In Scotland, acceptance of an offer is enough to form the

contract

• In England, consideration is also required.

• Consideration is the price a party pays for the right to

enforce the other’s promise.

• The consideration is the tender price (which will become

the Contract Sum) requested by the Contractor from the

Employer in return for completing the Works.

• In some situations, the consideration is nominal (i.e. £1).


(5) Capacity

• The parties must be legally able to enter a contract.

Parties must not be insane, drunk, otherwise incapable.

Companies must comply with any limitations

of their legal incorporation.

(6) Intent

• Both parties must mean to create a contract.

Each party must understand what they are “agreeing” to

Each party must form the agreement of their own free will


(7) Form

• The contract is created by agreement alone (i.e. an offer and an acceptance).

• Other aspects provide clarity about what has been

agreed and how long the agreement will last for.

These are the “formalities” of the contract (do not confuse this with the many different standard “forms” of

construction contracts: e.g. JCT SBC/Q 2011, NEC3, FIDIC Red

Book...)

• The formalities of the contract are its terms.

• The contract terms are defined in its clauses.

• The contract clauses establish certainty about

what has been agreed.


(8) Execution

• The act of signing the Contract to bring it into effect is

called “execution”.

• Together with attestation, it formalises the agreement

and puts the Contract into place.

• The method of executing the contract determines the

duration of liabilities arising from it.

In Scotland, 5 years for a “simple” contract

20 years for a “probative writ”

In England, 6 years for a “simple”

12 years for a deed


Communication of acceptance

• The party making an offer can state how its acceptance

must be communicated (e.g. fax, email, phone...)

• If such a condition is set, an acceptance that does not

comply with it is invalid.

• When an acceptance is to be communicated by post,

the “postal rule” applies.

The contract is created when the letter of acceptance is

posted, not when it is received

(it might never be received...)

Other issues


Activity

In your copy of JCT 2011 SBC/Q:

Where is the Contract executed?

Where are the terms of the Contract?


Activity feedback

In your copy of JCT 2011 SBC/Q:

Where is the Contract executed?

In the “Attestation” section (pp. 20-25).

Where are the terms of the Contract?

In the “Conditions” - Sections 1 to 9.


Contract terms

The effect of a standard form of contract

Examples from JCT SBC/Q 2011:

• Employer’s :

to refer a dispute to arbitration

to own materials not yet incorporated in the Works

• Employer’s :

to pay the Contract Sum to the Contractor

to give the Contractor possession of the site

• Employer’s :

arising from omissions in the information provided

arising from inadequate descriptions of requirements

rights

duties

liabilities


Examples from JCT SBC/Q 2011:

• Contractor’s rights:

to receive documentation describing the Employer’s

requirements

to claim loss and expense if a Relevant Matter occurs

• Contractor’s duties:

to complete the Works

to keep a set of the Contract Documents on site for

reference by other parties

• Contractor’s liabilities:

arising from non-completion of any part of the Works

Contract terms

The effect of a standard form of contract


Contract terms

Express and implied contract terms

• Contract terms impose obligations on parties, grant them

rights or duties of parties

• Contract terms can be express or implied

Express terms are written into the Contract or are made

verbally

Implied terms are not stated in the Contract but are

understood to be present by the parties

• Tort

Organisations still have obligations to each other irrespective

of contract

Each party has a duty of care towards the other


Breach of contract

• A breach of contract occurs when a party does not fulfil its

obligations under the Contract.

• Remedies for breach of contract are defined by the

Contract.

Plus, common law provides some options for remedies.

• Remedies depend on the “materiality” of the breach

how serious was the breach?

can the parties continue to work together?

• Material breach vs. Non-material breach

• Remedies cannot be penalties, as penalties are illegal


(1) Material breach

• A repudiatory (i.e. fundamental) breach:

goes to the root of the agreement between the parties

occurs when a party acts as if there is no agreement

• In the event of a material breach, the Contract gives:

the Employer the right to determine the Contractor’s

employment if the Contractor is in breach, thereby ending

the Contract; or

the Contractor the right to determine its own employment if

the Employer is in breach, thereby ending the Contract.


Determination

• A construction contract can be “determined”

• This means the contract is stopped before it is completed.

• Determination in construction is unusual

• Usually a result of one party not being able to continue

e.g. insolvency (of itself or the organisation above it in the

supply chain); corruption; not complying with the law.


Determination

• The Contractor may want to determine its contract with the

Employer if:

the Employer tries to stop the Contractor complying with a

Contract Administrator’s instruction

the Employer doesn’t pay the Contractor

• The Contract will define a strict process that must be

followed by a party wishing to determine the Contract

only allows determination in certain situations;

requires adequate notice to be given; etc.

• Issuing notice of Determination without due cause

is itself a breach


(2) Non-material breach

• A non-material breach is any failure to perform a minor

term of a contract (warranty)

• If the parties do not regard the term as essential, but

subsidiary or collateral, it is a warranty.


Remedies for breach: Damages

• Every breach of contract gives rise to a claim for damages. A party

affected by the other party’s breach of contract is entitled to

damages

• Damages will be paid by the party in breach to return the affected

party to their original position (according to the Law of Tort)

• Damages seek to return the harmed party to the a financial

position they would have been had the contract been properly

performed (according to the Law of Contract)

• If a contract defines when damages are due and what their extent

will be, such damages are called liquidated damages

Construction contracts usually do this

• There is another type of damages called unliquidated damages:

Their amount will have to be determined by an adjudicator, arbitrator or

judge

Their amount was not defined beforehand as part of the agreement


Remedies for breach: Equitable remedies

• Specific performance

Court order obliging the party in breach to fulfil its

obligations under the contract

o Only available if damages are not a suitable remedy

(e.g. delectus personae in the case of a signature Architect)

• Injunction

Court orders requiring a party to do something it does

not want to do

o Prohibitory injunctions stop a party from doing something

o Mandatory injunctions require a party to do something


• Irrespective of what is said in the contract, tort (delict in

civil law) still applies

• Both parties owe a duty of care to each other

• If one party’s negligence causes the other “injury,” the

negligent party will owe the other damages

• Tort applies to parties linked by a contract and those

without a contractual relationship

It has nothing to do with the contract

If a contract exists and has provisions for damages, a party

may still pursue damages through tort

Remedies outwith the contract


Collateral warranties and third party rights

• The Employer will often require the Contractor to grant

rights to “third” parties.

These are organisations that are not party to the main

contract, but are still affected by it.

• The Employer may require the Contractor to acquire

warranties to guarantee:

completion of the Works

quality of workmanship

performance of any Contractor Designed Portions

• ‘Collateral’ refers to the fact that these concurrent

contracts are related to and dependent upon another

contract


• ‘Warranty’ refers to the fact that their main purpose is to

capture a promise made from one party to another

• As these warranties are another form of specialised

contract, they require the same agreement, offer and

acceptance as all contracts to be binding

• Collateral warranties overcome “privity of contract” and

have been used in construction for many years.

• If these warranties were not agreed in the main contract, a

third party suffering loss as a consequence of the action or

inaction of a party to the main contract would be unable to

seek damages as the main contract does not pass any

rights to them.



• The Contracts (Right of Third Parties) Act 1999:

Empowers third parties that are granted rights by the

Contract between two other parties (e.g. Employer and

Contractor) to enforce those rights.

• Construction example:

The main contract may oblige the Contractor to protect

adjoining properties from damage.

If damages do occur, the third parties (i.e. owners of the

adjoining properties) will be able to claim damages from the

Contractor through the Contract.



Letters of intent

• State the intention of the parties

to enter into a contract “later.”

They may be eager to

commence the Works while

some parts of their agreement

are yet to be resolved.

• Letters of intent are bad practice.

The organisations often “forget”

to execute the contract; or

they never reach the agreement

needed to execute the contract.


!!


Families of standard forms of contract

• Standard forms of construction contract, capable of

structuring a variety of procurement routes, are produced

by:

JCT (and SBCC)

NEC3

FIDIC

GC/Works

ICE

others


(1) JCT (and SBCC) contracts

• JCT = “Joint Contracts Tribunal”

• Comprehensive family of standard contracts

• JCT contracts:

provide a standard contract to cover every procurement

route relationship

are the most widely used contracts in the construction

industry

• SBCC rewrites JCT contracts for Scots Law


(2) NEC3 contracts

• The “New Engineering Contract, third revision”

• Endorsed by the Office of Government Commerce.

• A modern contract, based on “modern management

practice.”

• A customised NEC3 contract is compiled for each project

from:

Core clauses (define the procurement route); plus

Main options (allocate cost risk); plus

Secondary options (introduce specific desired features).


(3) FIDIC contracts

• FIDIC = Fédération Internationale des Ingénieurs-Conseils

(International Federation of Consulting Engineers)

• Used internationally and well regarded

• Used predominantly for infrastructure projects

• Provides four standard forms of contract for some

procurement routes and organisation relationships


(4) GC/Works contracts

• Used by central government

• Becoming less common

• Nine standard forms of contract cover a variety of

procurement routes

(5) ICE

• Ten standard forms of contract for civil engineering

projects

• Jointly sponsored by ICE, CECA and ACE


(6) Partnering contracts

• ACA PPC 2000 (2004 revision)

Embodies Latham report recommendations.

• NEC3 X12 Option

Adds partnering principles to NEC3 main clauses.

• JCT/Be Constructing Excellence contract

The most advanced partnering contract

Published March 2007; yet to be tested by the courts


Remember to read the full Unit notes and Appendices, and

complete your independent study