Forming a Contract

Question 1

What is a contract?

Answer 1

A contract is a legal binding agreement which gives rights and obligations to the parties in the contract.
A construction contract lays out the terms of a construction project. it is a legal document that defines the works to be done, which all parties involved must agree too.

Question 2

What constitutes a construction contract?

Answer 2

The Construction Act provides that a construction contract means an agreement for the carrying out, arranging or providing labour for Construction Operations.
Construction Operation are:
• Construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings or structures
• Installation in any building or structure (including services systems for heating, lighting ect.)
• external or internal cleaning of buildings and structures
• Operations which form an integral part of the construction project (site clearance, excavation, scaffolding ect.)
• Painting or decorating of the internal or external surfaces

Question 3

What factors influence the choice of construction contract?

Answer 3

• Tender Strategy; Single Stage, Two Stage, Negotiated or Open.
• Procurement Route; Traditional, Design & Build, Management Contracting, Construction Management, Partnering.
• Pricing Mechanisms (lump-sum, re-measured, cost reimbursement, target cost)
• Nature of Project; Size/scale of project, complexity, location, risk allocation.
• Type of works required and sector
• Type of Client; Public, Private, how is it funded. Level of experience with construction
• Cost; is cost certainty required or are other elements (time, quality, risk) of more importance?
• Time; programme led project.
• Quality; bespoke/one off project with emphasis on design? Design Responsibility. Control over sub-contractors
• Risk; risk adverse client? Factors that dictate their risk allocation?

Question 4

What are the elements of a contract? How can a contract be valid? What are the key elements to form a contract?

Answer 4

A contract is formed when the following elements are in place:

1. Offer
2. Acceptance
3. Considerations
4. Certain terms
5. Intention to create legal relations.

Question 5

What is an Offer? An Example?

Answer 5

An offer is a proposal or promise from one party to enter into a contact, on a particular set of term, within the intention of being bound as soon as the offer is accepted.
Example: Contractors tender return.

Question 6

How can an offer be terminated?

Answer 6

An offer can be both revoked and terminated. It can be terminated by:

• A lapse of period of time
• After a reasonable period has passed
• Withdrawn by the offeror

Question 7

What is Acceptance? An Example?

Answer 7

Acceptance is made in response to an offer. For the contract to be enforceable, the acceptance MUST correspond exactly with the terms of the offer with no variation.
Example: Client Accepting the Contractors tender return or signature.

Question 8

Are there other forms of acceptance other than written acceptance?

Answer 8

Conduct.
Example: Contractor does not communicate acceptance of the works, but procures the materials, undertakes the works and requests payment). It must be clear that the party did the act in question with the intention of accepting the offer.

Question 9

What is a counter offer?

Answer 9

A counter offer is an offer which introduces new terms, or varies existing terms in the original offer.
Counter offer can NOT be accepted. New offer will have to be submitted by the offeror.
Example: Contractor submits an alternative tender

Question 10

What is Battle of the Forms?

Answer 10

Battle of the Forms occurs during the negotiation of the contract between the parties, when each of whom want their own standard terms to be incorporated in the contract. The parties must come to a decision.
Example: Party A offers to buy good from Party B on A’s standard terms and B fails to accept the offer on the basis of its own standard terms.
First come first serve basis

Question 11

What is Consideration? An Example?

Answer 11

Consideration is giving something of value (consideration) in return for the promise (offer) or it is made in the form of a deed.
Example: The contractor agrees to carry out a particular scope of work and in return the employer agrees to pay the contractor

Question 12

What is Certainty of Terms?

Answer 12

Terms must be clear and certain for a contract to be binding and enforceable. Contract must contain all essential terms. These are considered to be the:
• Who (employer and contractor)
• What (scope of works)
• When (Time, Duration, start and completion)
• How Much (Contract Sum)

Question 13

How can you prove that there is an Intention to create legal relationships?

Answer 13

Need to prove mutual intention to create a legally binding arrangement.
The construction sector is seen as a commercial setting – presumed that all parties intend to make legal relations
Words ‘subject to contract’ are typically used to evidence an intention to not enter into legal relations at a particular point in time.

Question 14

What is the difference between expressed terms, implied terms and defined terms in the contract?

Answer 14

1. Express Terms:
   a. Terms that are stated and defined. Written down in a contract between parties or terms verbally discussed and agreed.
   b. Example: Clause stating the contractor must notify the Employer of a delay, the effect of the completion date and if it is a Relevant Event.
2. Implied Terms
   a. Terms that are NOT stated or defined but IMPLIED. They are NOT expressly set out in the contract.
   b. Terms can be implied:
   i. Under Statue
   ii. Under Common Law
   iii. Because of Custom or Usage
   iv. Due to previous dealings
   v. In fact or to reflect the parties intentions
   c. Example: Case Law where a verdict has been given
3. Defined Terms:
   a. Words and Phrases that are used to make the interpretation of the contract easier. They are terms that are capitalised in the contract and have a specific meaning. Defined terms are usually listed at the beginning of the contract.
   b. Example: Contract Sum, Relevant Event

Question 15

Does a contract have to be in writing?

Answer 15

No, following the amendment of the HGCRA96 by the Local Democracy, Economic Development and Construction Act 2009, construction contracts can be created in any form. However it is advised to execute a contract in writing.

Question 16

How can a contract exist?

Answer 16

As long as the key elements of the contract are formed, a contract can exist:

1. In writing
2. Orally

Question 17

How can a contract be executed?

Answer 17

A contract can be executed:

1. Under hand – a simple contract this is signed by all parties
2. Under seal – signed by all parties, witnessed and executed as a deed

Question 18

What does Under Seal (deed) and Under Hand (Simple Contract) Mean? What is the difference between the two?

Answer 18

1. Under hand and under seal have different limitation periods.
   a. An under hand (simple contract) - the parties within the contract will have a 6 year limitation period
   b. A under seal (deed contract) - the parties within the contract will have a 12 year limitation period (i.e. liable for 12 years for breach of contract)
2. Unlike a contract under hand, contract under seal DOES NOT have to be supported by valuable consideration.
   a. Example: Collateral warranty consists of unilateral undertakings by one party, the contract must be a contract under seal if it is to be enforceable

Question 19

What is the limitation period?

Answer 19

A limitation period is the period of time within which a party to a contract must bring a claim. In construction contracts, limitation periods are often relevant in relation to latent defects claims brought against contractors.

Question 20

How long should PM’s keep electronic signed copies of documents related to contract?

Answer 20

For as long as the limitation period (under hand – 6 years, under seal – 12 years).

Question 21

What Act establishes the requirement for contracts to be under hand or under seal?

Answer 21

The Limitation Act 1980

Question 22

On what section of the JCT SBC is it confirmed for the contract to be signed under hand or under seal?

Answer 22

In the Articles of Agreement - Attestation Section

Question 23

On what section of the NEC ECC is it confirmed for the contract to be signed under hand or under seal?

Answer 23

All NEC3 contracts deliberately do not specify how they can come into existence. Clients decision.

Question 24

What problems may occur if there is no contract?

Answer 24

Employer’s perspective:
•	Don’t know what you will be getting
•	There will be no guarantees as to standard of work or quality of materials
Contractor’s perspective:
•	Don’t know what is required of you
•	Don’t know when you’ll get paid
•	May not get paid

Question 25

What are the benefits and risks of forming a contract?

Answer 25

Benefits of a contract
- Provides evidence of what was agreed between parties
- Helps to prevent future misunderstandings or disputes by making the agreement clear from the beginning
- Gives you security and peace of mind by having the terms of the agreement down on paper which the terms do not change
- Reduce the risk of a dispute regarding payments, responsibilities, and timeframes that the service to be performed under the contract
- Sets how disputes will be resolved
- Specifies how either party can end the contract before the work is completed
Risks of not having a contract
- Difficult to enforce if there is no clear scope
- Weak terms could result in dispute or works not done right

Question 26

What is the difference between statutory provisions and contractual provisions?

Answer 26

Statutory provisions are set out by law and must be complied with regardless
Contractual provisions relate to the contract in question and therefore only apply to a specific project.

Question 27

What is Tort?

Answer 27

Tort is a civil wrong. Part of the civil law. A claim in tort is concerned will loss. The main remedy of tort is compensation.

Question 28

What is Tort Law?

Answer 28

Tort law allows individuals who have had a civil wrong committed against them to claim damages against the person who has committed the wrong.
In tort, the rights and obligations are created by the courts applying common law, which has, on the basis of previous authority fallen into three distinct categories:
• Negligence.
• Nuisance.
• Trespass.

Question 29

What is the difference between common law and tort law?

Answer 29

Common or case law is law developed by judges, courts, and similar tribunals. Stated in decisions that nominally decide individual cases. Can have precedential effect on future cases.

A tort, in common law jurisdictions, is a civil wrong. It unfairly causes someone else to suffer loss or harm. Results in legal liability for the person who commits the tortious act.

Question 30

What is the Woolf Reform?

Answer 30

Occurring in the late 1990’s, Lord Woolf’s reforms were initially intended to help reduce the cost and time courts spent on civil proceedings. He identified in his report that the three critical issues facing the civil justice system at the time were costs, delays, and complexity.
The reform streamline processes and reduce number of cases. It:
• Encouraging party cooperation
• Identifying issues at an early stage
• Deciding the order in which the case will proceed
• Aiding parties in the settling of affairs

Question 31

What does indemnity mean?

Answer 31

Security or protection against loss or financial burden

Question 32

What is Case Law? Give me an Example of case Law

Answer 32

British Steel Corp (claimant) v Cleveland Bridge & Engineering (defendant) – Enforceability of letters of intent Letter of Intent, Reliance upon letters of intent can lead to dispute Essential Terms, Quantum Meruit
• 1984
• Cleveland Bridge & Engineering successfully tendered for the fabrication of steel work in the construction of a building. Cleveland Bridge & Engineering sent a letter of intent to British Steel Corp which:
1. Recorded the Cleveland Bridge & Engineering’s intention to enter into a contract with British Steel Corp;
2. Proposed that the contract be on Cleveland Bridge & Engineering’s standard form; and
3. Requested the plaintiffs to commence work immediately ‘pending the preparation and issuing to you of the official form of sub-contract’.
• British Steel Corp went ahead with the manufacture and delivery of the products.
• When all but one of the nodes had been delivered, delivery of the remaining elements was held up due to an industrial dispute.
• Cleveland Bridge & Engineering refused to make any interim or final payment and instead claimed for late delivery, or delivery of the nodes out of sequence.
• British Steel Corp sued for the value of the steelwork on a quantum meruit, contending that no binding contract had been entered into.
• Court held that no contract was formed by conduct (British Steel Corp beginning to manufacture the nodes following receipt of the letter of intent) because the essential terms had not been agrees. STILL IN NEGOTIATION.
• Given those negotiations, it was impossible to determine the extent of the liability. Because the parties had not been able to reach agreement on the price or other essential terms, the contract was not entered into.
• Cleveland Bridge & Engineering were therefore obliged to pay a reasonable sum for the work done pursuant to British Steel Corp request (quantum merit in restitution)
• Cleveland Bridge & Engineering could not counter claim because there was no contract.

Question 33

What is the difficulty with Oral Contracts?

Answer 33

Whilst oral contracts are legally binding, it is difficult to prove specific terms and conditions of the agreement. Having a written contract is always the preferred option.

Question 34

How is a consultant appointed?

Answer 34

1. Open or selective design competition is chosen
2. A request for proposal is a document sent to prospective consultants including project information and employers requirements.
3. Consultants respond by submitting ‘consultant’s proposals’ to the client. This document allows the consultant to prepare a scope of services and fee for the appointment.
4. Once assessed and selected, the consultant is bought on board through a professional services agreement or consultants appointment

Question 35

What is included in a Request for Proposal?

Answer 35

An request for proposal typically includes:
•	Strategic brief – client’s requirements, assumptions, aspirations, budget, programme
•	A management structure – internal governance 
•	Preferred procurement route 
•	Scope of service required 
•	How fees will be quoted 
•	Terms and conditions 
•	Collateral warranties 
•	Hourly rates 
•	CV’s, references 
•	Subcontractors 
•	Design proposal

Question 36

What are the different types of pricing mechanisms?

Answer 36

1. Lump sum:
   a. A Fixed price for all the works is agreed before the works begin
2. Re-Measurement:
   a. The actual contract sum cannot be determined when the contract is entered into, but is calculated on completion based on re-measurement of the actual works carried out and the rates tendered
3. Cost Reimbursable or Prime Cost:
   a. Contractor is reimbursed on actual costs they incur in carrying out the works and an additional fee
4. Target Cost:
   a. Introduce a pain-gain mechanism (sharing the benefits and sharing the additional costs)
5. Guaranteed Maximum Price:
   a. A form of agreement with the contractor in which it is agreed that the contract sum will not exceed a specific maximum

Question 37

When are each of the pricing mechanisms appropriate vs no appropriate?

Answer 37

Lump Sum Appropriate
1. Well Defined Project: Project is well defined when tenders are sought and changes to requirements are unlikely – so contractor can accurately price the works
Lump Sum Not Appropriate:
1. Time: If speed is important
2. Not Well Defined Project
Re-Measurement Appropriate
1. Type of Works Defined but Quantity cannot: E.G. excavation works – typically used in civil engineering projects
2. Time: Early Start is required
Re-Measurement Not Appropriate:
1. Risk: Client takes on unknown risk
2. Cost: Less cost certainty than Lump sum, more than Cost Reimbursable (as the costs are reviewed against the tendered rates)
Cost Reimbursable/ Prime Cost Appropriate
1. Type of Works Cannot be Defined
2. Time: Early Start is required
3. E.G. Urgent works – emergency projects – if there is a building failure
4. Contractor could be incentivized to operate effectively using Target Cost
Cost Reimbursable/ Prime Cost Not Appropriate:
1. Risk: Client takes on unknown risk
2. Cost: Final Cost is not known – no contract sum
3. Cost: Cost for which the contractor is entitled to reimburse must be clearly set out in the contract – difficult procedure as direct costs are straightforward but shared costs aren’t:
a. Direct Costs: Labour, materials, hired plan, sub-contractors
b. Shared Costs: Staff costs, owned plant, head office costs
Target Cost Appropriate
5. Collaboration
6. Experience: Client has knowledge and experience to be able to accurately estimate the likely costs of the works to negotiate effectively with the contractor/ consultant
Guaranteed Maximum Price Appropriate
1. D&B: typically used on D&B projects – where the contractor (doing the design and construction) is in a good position to control the costs
2. Risks Transferred to the contractor
3. Cost: price certainty – as long as the scope of works is defined
Guaranteed Maximum Price Not Appropriate:
1. Cost: Contractor likely to tender at a higher price – risk premium
2. Cost: Price certainty depends on scope of works