... 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 D39PZ: Procurement and Contracts 1
Unit 5: Principles of Contract Law D39PZ: Procurement and Contracts 2
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 D39PZ: Procurement and Contracts 3
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 D39PZ: Procurement and Contracts 4
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 D39PZ: Procurement and Contracts 5
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 D39PZ: Procurement and Contracts 6
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. D39PZ: Procurement and Contracts 7
Essential elements of a contract The following must be present for a contract to be valid: • • Execution Invitation to treat • (Scots Law only) Possibility • The offer • Legality • The acceptance • Intent • Consideration • Form (English Law only) • Capacity D39PZ: Procurement and Contracts 8
(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. D39PZ: Procurement and Contracts 9
(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”). D39PZ: Procurement and Contracts 10
(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. D39PZ: Procurement and Contracts 11
(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). D39PZ: Procurement and Contracts 12
(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 D39PZ: Procurement and Contracts 13
(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. D39PZ: Procurement and Contracts 14
(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 D39PZ: Procurement and Contracts 15
Other issues 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...) D39PZ: Procurement and Contracts 16
Activity In your copy of JCT 2011 SBC/Q: Where is the Contract executed? Where are the terms of the Contract? D39PZ: Procurement and Contracts 17
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. D39PZ: Procurement and Contracts 18
Contract terms The effect of a standard form of contract Examples from JCT SBC/Q 2011: • Employer’s : rights to refer a dispute to arbitration to own materials not yet incorporated in the Works • Employer’s : duties to pay the Contract Sum to the Contractor to give the Contractor possession of the site • Employer’s : liabilities arising from omissions in the information provided arising from inadequate descriptions of requirements D39PZ: Procurement and Contracts 19
Contract terms The effect of a standard form of contract 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 D39PZ: Procurement and Contracts 20
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 D39PZ: Procurement and Contracts 21
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 D39PZ: Procurement and Contracts 22
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