Unit 5: Principles of Contract Law D39PZ: Procurement and Contracts - - PowerPoint PPT Presentation

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

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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

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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

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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

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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

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What is a contract?

A contract is: “A legally binding agreement made between two

• r more parties, by which rights are acquired by
• ne or more to acts or forbearances on the part
• f the other.”

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

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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

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(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.

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(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”).

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(3) The acceptance

• An offer made by one party must be accepted by the
• ther party for the contract to exist.
• Acceptance must be unconditional:
• the terms of the acceptance must match the terms of the
• ffer.
• 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.

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(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).

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(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
• f 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

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(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.

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(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

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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

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Activity

In your copy of JCT 2011 SBC/Q: Where is the Contract executed? Where are the terms of the Contract?

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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.

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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

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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

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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
• f contract
• Each party has a duty of care towards the other

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Breach of contract

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

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(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.

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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.

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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

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(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.

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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

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Remedies for breach: Equitable remedies

• Specific performance
• Court order obliging the party in breach to fulfil its
• bligations under the contract
• 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

• Prohibitory injunctions stop a party from doing something
• Mandatory injunctions require a party to do something

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• 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

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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

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• ‘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.

Collateral warranties and third party rights

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• 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.

Collateral warranties and third party rights

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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.

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!!

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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

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(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

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(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).

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(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

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(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

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(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

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Remember to read the full Unit notes and Appendices, and complete your independent study