Week 6 Flashcards
What is a contract and why are contracts needed?
The promoter rarely is in a position to undertake the execution of the engineering works required in a project. External party, exerienced in the type of work required is brought in.
- The relationship between the promoter and the external party is a contract. An engineering contract is a mutual agreement with two parties.
- The external party is the contractor and agrees to undertake the work required in return for payment.
- The promoter becomes the principal of the contract and will make the payments.
- The process is called contracting.
How does the contract negotiations look like?
The principal commences negotiations (an invitation to tender is proposed).
Contractors, if they decide to tender, will respond to the invitation. Their tender is their final offer, and usually there are offers from more than one contractor.
On receipt and evaluation the Principal will accept, reject or make a counter offer.
On receipt of the counteroffer the contractor either accepts or submits another offer.
This continues until the two parties reach an agreement.
What is an “Instrument of Agreement”?
The contract must be evidenced to ensure the negotiated agreement is enforceable in law. This evidence and terms and conditions of the contract are usually set down in an instrument of Agreement.
There are two different formats of engineering contracts. What are these?
Formal contract:
- A deed which must be signed and witnessed and passed to the other party.
- Creates an estoppel.
Simple Contract:
- Not in any particular form.
- Requires consideration.
- Has a shorter limitation period.
Simple contracts requires consideration, what does this mean?
Consideration:
- An inducement to enter into a legally enforceable agreement and is the essential reason for a party entering into a contract.
- It can be either a detriment incurred by one party or a benefit received by the other party: it is the thing that is exchanged, no matter how minuscule.
- Thus, the party seeking to enforce the agreement must have paid, or promise to pay, some money, parted with some goods, or forgone some benefit.
A formal contract creates something called an estoppel. What is this?
A rule of law which prevents a party from later claiming that a statement expressed in the contract is incorrect, especially if others may have been led to rely or act upon that statement. Since simple contracts don’t have this it makes enforcement difficult.
What is a limitation period?
It is the time following a breach of contract in which the innocent party may take action on the other. (Longer for formal contracts).
There are four basic requirements to form a valid contract to demonstrate an “Intention to create legal relations”.
- Intention of the parties.
- Genuine consent of the parties.
- The purpose must be legal.
- Both parties must be legally capable.
Other than the four basic requirements to form a valid contract, simple contracts requires two further requirements. What are these?
Offer and acceptance:
- An unconditional acceptance by one party of an offer by an other forms a contract.
- Can be in writing, oral or implied by conduct.
Consideration:
- The money paid by the principal to the contractor and
- The work supplied by the contractor to the principal.
What is the biggest legal challenge for contracts of any type?
Establishing that a contract has been formed. (Look at Case Study 1)
What is an “instrument of agreement”.
- Signed by both parties without witnesses, the IofA is written evidence of a simple contract.
- If signed, sealed and delivered as a deed in the presence of witnesses, the IofA becomes formal.
- Parties to a simple contract may merge it to a formal contract by executing a formal IofA.
- Many Engineering Promoters require the parties to execute a formal IofA to ensure a formal contract exists.
What are the different types of contracts?
Main contracts are classified by:
- Method of selecting the Contractor. (Competitive tendering or Negotitated Contract).
- Method of payment for the work. (Price based or Cost based)
- Technical and Administrative Responsibility. (Seperate design and construction or Design and construct contract or Construction supply/ installation contract or Management contract (and variations) or Turnkey Contract.
What is Competitive Tendering?
- The principal formally invites a number of contractors to submit bids.
- Bids estimated using common tender documents.
- Principal assesses bids and either accepts a contractor’s bid or further negotiates an agreement.
- Usual method.
What is Negotiated Contract?
- Principal negotiates directly with contractor(s).
- No formal tendering process.
- Contract formed when mutual agreement reached.
- Used commonly when: Work of highly specialized nature, very few capable contractors and principal has good previous relationship with contractor.
However, a combination of competitive and negotiation can be used.
Method of payment for work can be divided into price based and cost based. These can further be divided into to categories. What are these?
Price based: Lump sum & Measure and Value
Cost based: Cost reimbursable & Target cost