15. Conditions of Contract Flashcards
Describe the role of the conditions of contract.
The conditions of contract contain all the clauses relating to the respective rights and obligations of the parties of the contract. These are mostly administrative provisions as distinct from technical requirements. Technical matters should be confined to the Specification and the Drawings, which should not contain any administrative requirements. It is important to keep separate these two groups of requirements because misplacement of clauses is a frequent cause of their being overlooked and can possibly lead to a dispute.
Describe the responsibilities for preparing the conditions of contract.
The dangers and possible adverse legal consequences arising from engineers attempting to work outside their areas of competence should not be underestimated. Preparing the conditions of contract is one of those situations where an engineer must exercise particular care and discretion in this regard.
Most standard general conditions have either been prepared by or have received close scrutiny and been approved by legally trained persons. For large projects and promoters it is common to have a team specialised in this area. In such cases, the Project Manager prepares the Specifications and the Drawings and the specialist team prepares the conditions of contract (and, frequently, the Requirements for Tendering) under instructions prepared by the Project Manager. This specialist team may also invite and receive tenders and be involved in the evaluation process.
The Project Manager must retain ultimate responsibility for all the enquiry documents and should closely examine the documents drafted by the specialist team to ensure that all the requirements have been met. While the documents as drafted or amended may be legally correct, they may not achieve the result desired by the Project Manager. Lawyers can sometimes get things wrong, particularly if they have not been adequately briefed.
What documentation allows unique projects to meet all requirements?
This is achieved in two ways - by completion of an Annexure attached to the general conditions and by the preparation of the supplementary conditions which amends and complements the general conditions.
Describe the fundamental requirements of the general conditions of contract.
Presentation - In the more recent editions of general conditions the layout and presentation has been improved and the documents are easier to follow. The language is simpler and more in keeping with modern legislative drafting practice. However, some conditions of contract still have sentences with over 100 words.
Equitability - Older editions of general conditions have had accusations of bias, generally in favour on the Principal. However, the conditions of contract should not necessarily be equitable to both parties - only fair and reasonable. After all, it is the purpose of the party offering the contract (the Principal) which is to be served, not the security of the other party (the Contractor). Nevertheless, most of the more obvious grounds for discontent on this subject have been addressed and Contractors now have little reason to claim the documents are biased.
The Project Manager - There are usually only two parties to an engineering contract - the Principal and the Contractor. However the Project Manager is also present and it is common for her to act as an administrator, who is not a party to the contract, as well as being the Principal’s representative. As referred to earlier (page 51) The Project Manager commonly has two functions:
• the Principal’s representative or agent;
• an administrator and impartial decision maker.
In his role as Principal’s representative, he must take care of the Principal’s interests; as impartial decision maker he must act fairly with due regard to the interests of both parties. This is a difficult situation and while both roles must be kept separate the Project Manager must ensure that he does not act negligently on behalf of the Principal. A third factor may be that the Project Manager on traditional contracts (when he is known as the Engineer) could also be the designer of the works and thus must be careful when assessing potential cases of poor design or re-design. In this situation the requirements for the Project Manager to act with the utmost integrity, partiality and professionalism may be difficult and can lead to Contractors to feel unfairly treated within the contract. Unfortunately, newer forms of contract do not recognise the situation: the Engineering and Construction Contract for example places the Project Manager in a similar dual role.
What are the 5 purposes to the supplementary conditions of contract?
: • to add a new clause to cover matters not dealt with in the general conditions;
• to add a new clause which supplements a clause in the general conditions;
• to delete unnecessary and inappropriate clauses within general conditions;
• to substitute an alternative clause in place of one deleted from the general conditions;
• to provide information normally included in the Annexure where the form and layout of the Annexure is inadequate.
Describe the issue with claims on an engineering contract and list the four areas of common contention.
Claims on engineering contracts are, due to modern contractual arrangements and conditions such as the Engineering & Construction contract are less common than they once were. In the very recent past it was a standard part of an engineering contract for contractor and principal to be constantly at loggerheads and formally arguing over contractual requirements. That this should happen is not too surprising – after all, a contract requires two parties to work towards a detriment to themselves and it is only natural that each should try to limit the impact of this detriment. The fundamental causes for this would be the contractual requirements of ensuring the work is complete and getting paid for it and the conditions of contract have clauses which cover these and the following are four areas of common contention:
- Commencement and completion
- Retention
- Defects liability
- Liquidated damages
What is meant by the contention of ‘commencement and completion’?
The contract must state the dates by which under the contract is to be commenced and is to be completed. Unfortunately, many general conditions do not precisely define the meaning of ‘completed’. Strictly speaking, the work under the contract is not ‘complete’ until after the expiry of the Defects Liability Period (see below) and all remedial work has been completed. This may be up to twelve months (or even more) after the Works are handed over to the Principal and is the reason why the term substantial completion is used. It is the stage when the Works can be handed over to and used by the Principal.
There are two dates which arise from this definition: The Date for Substantial Completion is the date nominated in the contract by which the Contractors to execute the work under the contract. This date will depend on when the contract is awarded and when the Contractor can or does start on work under the contract. The Date of Substantial Completion is the date certified by the Project Manager as the actual date when the Contractor has completed the works substantially.
The dates for commencement and completion can be specified in a number of ways. Tenderers can:
• nominate in their tenders a period or time for substantial completion;
• nominate in their tenders a date for substantial completion based on the contract being awarded on or before a specified date.
• confirm in their tenders that they can reach substantial completion by the date, or within the period specified, stated in the Tender Enquiry Documents (based on the contract being awarded on or before the date nominated).
What is meant by the contention of ‘retention’?
Retention is a portion of the payment that is held back by the Principal as a guarantee that the work will be completed. Its amount (not usually more than 5%) should be inserted into the contract documents and is deducted from each payment certificate. In addition it is usual for an upper limit on retention to be set, usually 3% of the tender total. Under most forms of contract, the Principal must repay to the Contractor, within a set period after the date of substantial completion, half of the retention monies. The final retention monies are paid after the end of a defects liability period.
What is meant by the contention of ‘defects liability’?
Most engineering contracts require the Contractor to rectify any omission or defect in the work which may be revealed within a specified period after substantial completion. It is important to recognise that such omissions or defects are technically breaches of contract and thus the Contractor will not be paid for works he carries out to correct these items. This period is usually referred to as the Defects Liability, Defects Correction or Maintenance Period. Maintenance is, strictly speaking, a more widespread activity and encompasses servicing works and replacing consumables and parts subject to normal wear and tear in operation, as well as making good defects. Consequently, it usually applies to mechanical and/or electrical equipment. Most general conditions provide for the Defects Liability Period to be nominated in the Annexure. There are two points to consider when determining the Defects Liability Period.
• The first is that Defects Liability, while time-related, does not necessarily have to be defined as an actual period of time. In mechanical installations, it can be defined as a throughput quantity. For example, in a bulk materials handling facility, the Period may terminate when a certain volume or mass of product has passed through the facility. Most general conditions assume that the Defects Liability will be for a specific time period; other situations the provision will required amendment by means of a supplementary condition.
• The second is to ensure that where separate sections of work are specified in the contract, the Defects Liability Period for each portion must be separately defined.
What is meant by the contention of ‘liquidated damages’?
Most, but not all, engineering contracts provide for the payment of Liquidated Damages by the Contractor in the event of failure to complete the work under the contract by the agreed date. The intention of the provision is to ensure the due performance of the contractual obligations undertaken by the Contractor and to agree in advance the amount of any damages in the event of a breach of the contract, rather than leaving it to a court or arbitrator to make the assessment.
What are the points to note for liquid damages?
• The imposition of liquidated damages is not a penalty and should not be treated as such. The basis for liquidated damages must be a genuine agreed pre-estimate of the cost to the Principal as a result of late completion.
• Most general conditions require the liquidated damages to be nominated in the Annexure as a monetary amount for every day (or other nominated period) for the interval between the Date for Substantial Completion and the Date of Substantial Completion.
• At any stage, the Contractor may apply for an Extension of Time if he feels he has been reasonably delayed. If such time is awarded to the Contractor, the Date of Substantial Completion is adjusted to a later date accordingly and liquidated damages for this period are not due.
• If the Principal does not wish to nominate an amount for liquidated damages, but wishes to retain the right to general damages without a limit being imposed on those general damages, the clause(s) relating to liquidated damages should be deleted. In such instances, the imposition of damages may be considered as a penalty by the courts.
• In determining the amount of liquidated damages the Project Manager must make a fair estimate of the amount by which the Principal would lose as a result of late completion. It could be based on a number of calculations such as:
i. interest payments on funds borrowed to finance the project;
ii. cost income as a result of non-operation of the project;
iii. consequential damages or costs as a result of the Principal being unable to honour commitments.
• One way to establish the validity of an amount nominated for liquidated damages is for the Principal, before the contract is signed, to disclose to and obtain the acknowledgement of the Contractor of the basis for the calculation of the damages. In the event of a dispute over damages, the basis for their assessment has at least been agreed.
• A corollary to liquidated damages is the inclusion into the contract of a bonus that is paid if the Date of Substantial Completion is earlier than the Date for Substantial Completion. The sum per unit time for a bonus need not be the same as that for liquidated damages although the principle for its calculation is similar.
