1. Lecture 1 Introduction to contract administration in the construction context

2. 1 Introduction to contract administration 1.1 What is a contract? 1.2 Contracts in context 1.3 The elements of a contract 1.4 General comments on contract 1.5 Fundamentals of contract administration

3. 1.1 What is a contract? If A says to B, “I will repair your house” and B makes no promise in return, there is no agreement. If B says, “I will pay you $1000”, then there is still no agreement. Why? Because it takes two to make an agreement.

4. 1.1 What is a contract? An agreement involves an exchange of promises or goods. A has not yet agreed to accept $1000 for doing the work. If A says, “I will accept $1000” there is agreement on price, but is there a contract? Unless there is agreement on all the essential terms, the law does not recognize the existence of a contract.

5. 1.1 What is a contract? Is there agreement on the actual work to be done to repair the house? It may be that A and B know exactly what work is necessary, for example repair of a leak in the roof. In this event, the actual work to be performed is agreed and there may be a contract.

6. 1.1 What is a contract? The contract consists of the following express terms: A will repair B’s house B will pay A $1000 A will accept $1000 These terms are said to be ‘express’ because they are the actual words spoken.

7. 1.1 What is a contract? The contract also includes two types of ‘implied’ terms. An implied terms is one that “goes without saying”. The first type of implied term is implied from the circumstances – since A and B know exactly what repair work they are referring to, the implied term is: “The work is the repair of the leak in the roof”.

8. 1.1 What is a contract? The second category of implied term is implied by law. The law implies certain terms in any contract in which the express terms do not cover the matter. Some of the terms that the law would imply in this contract would be: The work will be completed within a reasonable time Payment will be made upon completion of the work The work will be done in a reasonably workmanlike manner B will give A reasonable access to the roof to enable A to carry out the work

9. 1.1 What is a contract? The contract is the sum of these express and implied terms. There will be other implied terms, but unless there is a dispute it will not be necessary to identify them. An agreement that is legally binding is a ‘contract’.

10. 1.1 What is a contract? Agreements may be unenforceable for a number of reasons: The agreement was not meant by the parties to create a legal relationship (e.g. An agreenment by a parent to buy a child an ice-cream if the child behaves properly – it was never envisaged by either party that breach would give rise to a right to sue for damages) One party did not have capacity to make a legally binding bargin (e.g. a minor, i.e. a person under 18, or someone mentally handicapped) The promise of one party was made under duress (e.g. at knif point) The performance of the agreement would involve a crime or a tort The terms of the agreement are not sufficiently certain

11. 1.1 What is a contract? If A offers to do certain work for $1000 and B says “I will pay you $500 for that work”, there is no acceptance of A’s offer and no agreement. B has merely made a counter-offer. But if A says “I accept your price”, then there is agreement. If A offers to do certain work for B and B makes no promise in return, there is said to be no ‘consideration’ and hence no contract.

12. 1.1 What is a contract? Writing is usually not necessary to create a contract. Many everyday contracts are made without words, for example when shopping at the supermarket or catching a bus. A contract made by spoken and not written words is an ‘oral contract’. A contract that is made without words is an ‘implied contract’. A contract may be partly oral, partly written and partly implied.

13. 1.1 What is a contract? In the example of a contract by A to repair B’s roof, B may decide to have a written description of the work incorporated in the contract. Such a description is called a ‘specification’. B may also decide to have conditions of contract covering such matters as insurance and other risks. A and B might sign a document (a ‘formal instrument of agreement’) to record their agreement on the specification and conditions of contract. This document is also called a contract.

14. 1.1 What is a contract? Sometimes contracts are named after the nature of the work, for example: Residential building Domestic building Civil engineering Architectural Air-conditioning Maintenance Management Design and construct (turnkey)

15. 1.1 What is a contract? Sometimes contracts are named after the nature of the remuneration, for example: Lump sum Schedule of rates Cost-plus fixed fee Cost-plus percentage

16. 1.1 What is a contract? Sometimes contracts are named after the nature of the contractual relationship, for example: Consultant agreement Supply contract Leasing contract Subcontract Head contract Nominated subcontract Concessional contract (e.g. BOOT)

17. 1.1 What is a contract? Sometimes contracts are given the name or acronym used by the publisher of the standard form of general conditions incorporated in the contract, for example: FIDIC (published by the International Federation of Consulting Engineers)

18. 1.1 What is a contract? Sometimes the name itself conveys nothing about the work, the remuneration, the contractual relationship or the general conditions, for example: Alliance contract Guaranteed maximum price contract Package contract Negotiated contract Managed contract Novated contract

19. 1.1 What is a contract? What is a contract? To find the answer to that, first ask: Have A and B actually reached consensus on something? If so, have they agreed on all the essential terms? If the answer to either is ‘No’ then there is almost certainly not a contract. If the answer to both questions is ‘Yes’ then there probably is a contract unless the answer to any of the following questions is ‘No’: Did A and B intend to create legal relations? Did both A and B have legal capacity? Was the agreement freely made (without duress)? Can the contract be performed without breaking the law? Are the terms of the agreement certain?

20. 1.2 Contracts in context Nature of the construction industry The terms ‘construction’ can include the erection, repair and demolition of things as diverse as houses, offices, shops, dams, bridges, motorways, home extensions, chimneys, factories and airports. A deep understanding can be gained by considering how the industry provides a service to clients and to society at large.

21. 1.2 Contracts in context Separating people into five groups: builders, designers, regulators, purchasers and users of buildings. The way they combine is specific to each project. The law recognizes various obligations owed by people (including corporations) to others, and the law will allow those obligation to be enforced by way of a claim for recompense for breach. Certain wrongs, which are in no way based on promises, can create a liability to another. Under common law, most of these are classified as ‘torts’ ( 侵权 ). Lastly, there is the law of restitution. Restitution is the restoring to someone of something, or its value in money, where the defendant (the person sued) has been unjustly enriched.

24. 1.2 Contracts in context The nature of projects The nature of risk in construction Different types of building contract will allocate risks in different quarters. In allocating risk, we are concerned with the eventual payment and responsibility for the cost of the event, should it eventuate. 2.Risk and price As Wallace (1986) points out, any discussion about whether or not a particular risk should be so included in the price is a discussion of policy, and not of ‘fairness’, ‘morality’ or ‘justice’.

26. 1.3 The elements of a contract Seven elements are generally regarded as essential to the validity of a contract: 1.There must be an intention to create a legal relationship. 2.There must be offer and acceptance. 3.There must be valuable consideration. 4.The parties must have legal capacity to contract. 5.There must be a genuine consent by the parties. 6.The legality of the object of the agreement must be ensured. 7.The terms of the contract must be sufficiently certain.

27. 1.3.1 Intention The first important factor in the formation of a contract is the necessity for an intention by the parties to create legally binding obligations. For example, a promise by a parent to take a child to the circus if the child mows the lawn would not create a contract in law beacuse it was not the intention of the parties that the promises would create an obligation on which either could sue the other for damages for breach.

28. 1.3.1 Intention The intention may be expressed or implied. Generally, a distinction is made between commercial agreements, which are presumed to be legally binding, and domestic or social agreements, which are not so intended. If parties A and B enter into a contract whereby A agrees to build a fence for B, then B would expect to be able to recover damagers if A refused to pay B when B had finished the work. Both would expect the agreement to give rise to legally enforceable obligations.

29. 1.3.1 Intention In the context of construction contracts, a problem commonly arises when one party intends that a statement will be legally binding and the other does not. For example, one party asks the other for a ‘quotation’ for a variation. On the one hand it can be an estimate; on the other it may be an offer to perform the variation for the amount quoted. The contractor giving a quotation may intend it only as an estimate; the person requesting the quotation may consider it an offer. It is important to use language that leaves no doubt about the intention to create a legal relationship. Instead of asking for a quotation, it would be better to ask for an estimate or a price.

30. 1.3.2 Offer and acceptance In the making of a construction contract, there are so many matters to be agreed, so many queries from one party to the other, so many changes in drawings and so many individual promises that it is not possible to say just when the contract came into existence. For example, it may be open tender or it may be an invitation to a few selected contractors. The offer is accepted separately by each contractor who lodges a tender. The principal inviting tenders may impose conditions on acceptance, by way of a written tender lodged in a tender box at a certain place by a certain date. An invitation that imposes conditions on acceptance can only be accepted by complying with the conditions.

31. 1.3.2 Offer and acceptance An acceptance is a final and unqualified expression of assent to the terms of an offer. A qualified acceptance is a rejection of the offer and the making of a counter-offer. For example, if a contractor offers to carry out a variation for $1000 and the principal responds: “Your offer is acceptable provided that no extension of time is applicable”, the principal has rejected the contractor’s offer and made a counter-offer. The original offer has ceased to be avaiable for acceptance the moment the contractor receives the principle’s qualified ‘acceptance’.

32. 1.3.2 Offer and acceptance Assume that a tenderer has lodged a tender for $100,000 to carry out contract work and then discovers that the contractor has made a mistake in pricing. The contractor writes to the principal, “I made an error in my tender. My price is now $110,000, not $100,000”. That represents a withdrawal of the tender of $100,000 and the proposing of a new tender of $110,000. Assuming that the letter is received by the principal after the closing date of tenders, it is then an informal tender and must not be considered by the principal.

33. 1.3.2 Offer and acceptance If the principal has posted a written acceptance of the tender of $100,000 before the principal received the contractor’s letter varying the price, then there would be a contract for $100,000, but if the contractor’s letter varying the price was received by the principal before the principal posted the letter of acceptance, there would be no contract.

34. 1.3.2 Offer and acceptance Acceptance of the tender of $100,000 after it has been withdrawn by the contractor’s letter correcting the error would be no acceptance at all. The moment the principal receives the contractor’s letter correcting the contractor’s error, the original tender of $100,000 is no longer open for acceptance. An exception would be where the contractor was contractually bound to keep open the tender of $100,000 for a particular period.

35. 1.3.2 Offer and acceptance The general rule is that an offer that can be accepted by posting an acceptance is accepted at the moment the letter of acceptance (duly stamped) is placed in a post box. The fact that delivery of the letter is delayed or even that the letter is never delivered does not terminate the contract which was made at the moment of posting. The general rule is that acceptance sent otherwise than by post is effective at the time it is received by the offeror. For example, an acceptance by fax is effective when the offeror’s fax machine prints it out. Acceptance appears to have been made when the email first appears on offeror’s screen or when the offeror first listens to the voice message. The person accepting the offer must know of its existence, otherwise there is no contract.

36. 1.3.3 Consideration Consideration is something of value (it need only be a promise), which is given by each party to the other at the time of making the contract. Consideration is referred to as the price paid for the promise. A contract can only be binding on the parties if there has been consideration given by each party to the other. The law will not enforce a promise by a party who has not received something of value or the promise of something of value in return. The law will not investigate the fairness of a bargain or adequacy of consideration, provided that it is of some value. A contract for the sale of a valuable diamond ring for $1 could be enforceable.

37. 1.3.3 Consideration A contractor says that certain work is not part of the contract and the contractor will not carry out the work unless the principal agrees to pay extra. Assume that the principal does agree to pay extra but the particular work is in fact not a variation but work that the contractor was required to perform for the original contract price. In this instance, the contractor has provided nothing to the principal which the contractor was not already bound to provide. The contractor has provided no consideration to the principal in return for the principal’s promise to pay extra. The principal should be able to avoid the ‘contract’ to pay extra. The principal’s gounds would be that the ‘contract’ to pay extra was void for want of consideration.

38. 1.3.4 Capacity of parties In law, a company formed and registered pursuant to an Act of Parliament is regarded as a ‘person’. The contract must be made with the company or persons carrying on business under the name. For example, Mr. John Smith and Mrs Mary Smith may decide to carry on business using the business name ‘Smith Constructions’. They should contract in the name ‘John Smith and Mary Smith trading as Smith Constructions’. If a contract has as the name of the contractor ‘Smith Constructions’, it will probably be a contract with Mr and Mrs Smith. Anyone using a business name must register it in the Register of Business Names.

39. 1.3.4 Capacity of parties An unincorporated association exists where two or more persons form an association with common aims, for example a tennis club, but do not have the club registered as a corporation. The association consists of those persons who form it and is not a separate entity from the persons making it up. A contract can be made by the members of the club or by several members acting as trustees, but the club is not a legal person, it is merely the name given to the relationship between the members.

40. 1.3.4 Capacity of parties A building contract should never be made with someone who is bankrupt. Once a company becomes insolvent, an order for winding up is usually made by a court. After that the directors are replaced by a liquidator and only the liquidator can make contracts on behalf of the company.

41. 1.3.5 Consent of parties The plaintiff, a carrier, agreed with the defendant to deliver baskets to Woolworths at $1.10 per basket. The carrier discovered that the price was uneconomic. When the carrier arrived at the defendant’s premises to collect the baskets, the carrier brought a revised form of contract, which had written on it a charge of $4.40 per basket. The carrier said to the defendant that if the defendant did not sign the new contract, the carrier would not deliver the baskets. The defendant could have refused to sign but it would have been difficult if not impossible to get another carrier in time to deliver the baskets to the defendant’s customer, Woolworths, to meet the delivery dates, which the defendant had agreed with Woolworths. Had the defendant defaulted under the contract with Woolworths, the defendant would have been in serious financial difficulties. The carrier had the defendant ‘over a barrel’. The defendant signed the new ‘contract’, but after the baskets had been delivered, refused to pay more than the originally agreed $1.10 per basket. The carried sued for the difference between that amount and the amount in the second ‘contract’.

42. 1.3.5 Consent of parties The court found that the defendant’s apparent consent to the second contract was induced by economic duress, which, in the circumstances, negated the defendant’s apparent consent. Hence there was no second contract. It is not a requirement of the common law that the contract price should be reasonable. Consequently, the carrier was bound to the price agreed of $1.10 per basket even though that price may have been uneconomic.

43. 1.3.5 Consent of parties Sometimes there will not be consent by one party because that party is mistaken as to the terms of the agreement. For example, the principal to a construction contract may ask the contractor for a price for a variation. The contractor may nominate a price, which the contractor mistakenly believes is for labour and materials but not forr the costs of the delay to the time of completion of the project consequent on the the delay that the variation will cause. The principal may believe that the price includes delay costs. In that event, there would not be an actual meeting of minds. Generally speaking, however, the mistake of one party will not suffice to render the contract void, and in this instance the contractor’s mistake would not entitle the contractor to avoid the contract.

44. 1.3.5 Consent of parties Where that mistake has not been caused by any misleading or deceptive conduct of the other party, the mistaken party will usually have no remedy. Where the mistake has been caused by misleading or deceptive conduct of the other party, the mistaken party may have a remedy in law even if the contract is binding.

45. 1.3.6 Legality of object In the performance of a contruction contract, a contractor may breach a condition of the development consent or a provision of some act governing safety, protection of the environment or other matter. The contractor may be prosecuted and may also be in breach of contract, but the contract is not illegal or unenforceable.

46. 1.3.7 Certainty A contract to build an office building for $1 million, without any agreement on the size, location or anything else to identify better what is to be built for $1 million, would be void. A contract to do an unlimited quantity of work for a fixed price would be void for the same reason, uncertainty. A contract to do a fixed quantity of work without agreement on the price might be saved from being void by an implication of a reasonable price.

47. 1.3.7 Certainty There is an apparent power in a contract for one party or the principal’s representative to order unlimited contract variations. If there was no limit on variations which could be ordered, the contract would be void because of uncertainty. The fact that a contract is void does not necessarily mean that the contractor has no right to payment for work done. The award of a quentum meruit (a legal term for a reasonable price for work done) by way of restitution for unjust enrichment (discussed in lecture of contract disputes )

48. 1.4 General comments on contracts The significance of a written contract For example, if both parties have agreed on a price of $100,000 and, in error, a nought is left out of the written contract (so the price appears as $10,000), the court may, on the application of either party, order that the contract be rectified by adding the missing nought. However, where only one party has made a mistake, the courts will not order rectification. For example, if a tenderer leaves a nought off the tender price so that it is $10,000 instead of $100,000 (as intended by the tenderer) and, in ignorance of the mistake, the principal accepts the tender, a court will not order rectification.

49. 1.4 General comments on contracts When entering into a contract the best way of assessing the adequacy of the document is to assume that there will be disputes between the contracting parties during and at the end of the contract. Contracting parties should examine how each party would stand in those disputes under the terms of the contract. When a document is ambiguous, the courts apply a rule of interpretation known as the ‘contra proferentem’ rule. The rule is that the ambiguous term will be given that meaning which favours the party who was not responsible for the drafting or selection of the ambiguous document.

50. 1.4 General comments on contracts In residential building work, the form of contract is usually drafted or selected by the contractor, hence the owner gets the benefit of the ambiguity. In commerical building work, it is usually the owner who drafts or selects the form of contract, hence the contractor gets the benefit of the ambiguity. Tha ambiguity will be constructed as contrary to the interests of the party responsible for the ambiguity.

51. 1.4 General comments on contracts General conditions of contract usually adopt the formula ‘if event A occurs then B will apply’. Rarely do they say what will happen if A does not occur – B may apply or it may not.

52. 1.5 Fundamentals of contract administration For principals To appoint suitable consultants To define project scope To set the key project objectives of cost, time and quality To assist in formulating a project brief To select the most appropriate method of project delivery To ensure accuracy and completeness of tender documentation To award a contract to the contractos on fair and equitable conditions of contract To appoint an experienced superintendent for adminstering the contract during the construction stage To avoid making changes to the design unless knowing the cost and time impact of such changes To pay the contractor strictly in accordance with the contract To monitor progress and the use of a contingency To resolve issues as early as possible before they develop into major problems To document actual progress in terms of cost, time and the use of resources to be able to defend against a potential claim from the contractor To advise the contractor in writing of any deviation from contract conditions and to request compliance with same within a specified period

53. 1.5 Fundamentals of contract administration For contractors To execute the project strictly in accordance with the contract conditions To award subcontracts on fair and equitable subcontract conditions To monitor and control progress of subcontractors To pay subcontractors on time To minimise overall project time, thus reducing site overheads To balance increased direct costs of additional resources on critical activities, against possible saving in site overheads To advise the principal early in the project that the program is arranged to maximise use of resources and any additional work required To allow sufficient time to rearrange activities, acquire additional resources, perform additional planning, fabrication, etc To manage extensions of time and a prolongation of overhead costs To recommend to the principal not to make any changes to the design To document the actual progress compared with a program to identify areas of progress loss To take immediate action on contractor-caused problems and immediately advise the principal of other problems To instruct all internal staff to carry out work as specified in the contract documents, unless written instructions have been given by the principal’s representative