last week (or things you should now understand) · (or things you should now understand) ... •...
TRANSCRIPT
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
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.
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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
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.
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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
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
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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
of 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
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
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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
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
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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