May 2013 - Contract Administration II General guidelines on how to attempt questions related to pro lem type!

on contractual matters 1" Citation o# authorities $ %n o# the &most important requirements #or answering question on contract is that you must e a le to ac' up the points you ma'e with authority& usually a case or a statute" It is not good enough to state the current status is such and such& without stating case or statute which says that that is the law" (hat you need to do is to remem er the name o# the case& a rie# description o# the #acts& and the legal principle which the case esta lished" )ou need to 'now the #acts o# a case to *udge whether it applies to the situation in a pro lem question" +ong descriptions o# #acts waste time and earn #ew mar's" 2" ,here is no right answer $ ,here is not usually a right or wrong answer" (hat matters is that you show you 'now what type o# issues you are eing as'ed a out" -ssay questions are li'ely to as' you to discuss& criticise or e.aluate and you need to produce a good range o# #actual and critical material in order to do this" ,he answer you produce might loo' completely di##erent #rom your #riend!s ut oth answers could e worth the same mar's" 3" /reath and depth o# content $ (here a question seems to raise a num er o# issues& you will achie.e etter mar's y addressing all or most o# those issues than writing at great length on *ust one or two" Alternati.ely& 1" )ou need to identi#y which category this question elongs" 2" A good way to start is to pro.ide a de#inition and0or e1plain the general principle in.ol.ed" 3" )ou need to identi#y the issue2s3 raised y the questions" 4" )ou may ha.e to use rele.ant clause2s3& case laws or reputa le pro#essional and 0or legal writer!s opinion i# applica le to support your answer" 5" )ou may ha.e to pro.ide a conclusion ased upon your argument a o.e #or questions" Tutorial No. 1 Proposed answers Q1. Discuss whether a contract is made in the following situations: i) ii) iii) i!) !) XY ad!ertises in "The #tar$ newspaper that there is a !acanc% for the

position of &onstruction 'anager. ()& saw the ad!ertisement and mailed his application to XY compan% for the position *hen contractor YTY su+mit a tender document with complete details at the time and place as stated. *hen contractor YTY was in!ited to an inter!iew and was as,ed to re!ise and resu+mit the tender. *hen a letter of intent was gi!en to the contractor YTY. 1

!i) !ii)

*hen a letter of award was gi!en to the contractor YTY. *hen the final contract document was prepared +% the consultant for signing +% the -mplo%er and contractor YTY one .1) month later.

Proposed answers ,his question is under o##er and acceptance category and related issues" .i) (n offer or proposal is necessar% for the formation of an agreement. (n offer can +e unilateral to the world at large or +ilateral to designated person. (n ad!ertisement is usuall% +ilateral in nature +ut can +e unilateral as in the case of Carlill . Car olic 6mo'e all. ( similar situation in the construction industr% is where an ad!ertisement is placed for potential contractor to collect tender documents is definitel% an in!itation to treat or +ilateral offer and calling them to su+mit their offers. Therefore/ the current ad!ertisement +% XY is not an offer +ut merel% an attempt to induce offer. Case +aw - 7artridge . Crittenden 2189:3 Therefore/ there is no contract .ii) 0enerall%/ if ()& is responding to a unilateral offer +% XY / a contract is form the moment he1she mails it and compl%ing with all the terms of the unilateral offer as in the case of postal acceptance. 2nder the current situation/ +% mailing his application ()& can +e considered as ma,ing an en3uir% or ma,ing an offer. 6ection 2a& Contract Act& 1850/ which states that an offer ma% +e e4pressed or implied and mailing the application is in fact offer +% himself to the compan% to fill the position. (t this moment/ there is still no contract as no acceptance was in place. .iii) 5n the construction industr% when an ad!ertisement is placed for potential contractor to collect tender documents is definitel% an in!itation to treat or +ilateral offer and calling them to su+mit their offers. )% su+mitting his tender YTY can +e considered as ma,ing an offer. Therefore/ there is no contract" Case law Ma*umder . AG 6arawa' .i!) *hen YTY was as,ed to attend an inter!iew is not an acceptance of his offer +ut the commencement of a counter offer. There are clarifications or negotiations +etween +oth part% and the process of offer and counter offer are in progress during the inter!iew stage with the final outcome is where the potential emplo%er re3uested YTY to su+mit a re!ised offer. Therefore/ there is no contract at this stage. Case +aw - ;yde . (rench 21:403 .!) ( letter of intent is not an acceptance of his offer. 5t is a letter of comfort to YTY with no contractual implication. 5t is 6ust to inform YTY to get read% for further confirmation that a contract is to +e formali7ed. Therefore/ there is no contract. Depending on the content of the 895/ there ma% +e monetar% implication if the content contained additional terms for YTY to compl% and YTY did compl% and in the e!ent that contract is not formali7ed for whate!er reasons/ pa%ment for that special instruction must +e done +ut under 3uantum meruit +asis and not under the contract rates. Case +aw - /ritish 6teel Corporation ." Cle.eland /ridge -ngineering Co" +td 218:13 .!i) *hen a letter of award is gi!en/ a contract is formed e!en though the details %et to +e compiled. This is good for YTY to commit to others who ma% +e part of his team. The content of a letter of award will consists of the main terms of the future :

formal contract to +e compiled +% the emplo%er through the consultant under the traditional procurement approach. Please ta,e note of the important information and dates within the letter of award in relation to date of contract formed/ contract duration/ site possession date and mo+ili7ation duration/ .!ii) The contract documentation is a formal compilation of all the rele!ant letters/ agreements/ terms and conditions/ amendments if an%/ drawings/ specifications and others. This document is to +e presented for stamping if this is to +e admitted as e!idence in future if there are dispute on this contract. There is no new contract formed at this stage +ut 6ust a confirmation of all the pre!ious agreements to +e done formall%. Q:. ;ow are %ou going to deal with < parties in a construction contract to a!oid constructi!e claims from them= 9ne of the important elements of contract law is that which deals with what is called pri!it% of contract. 5t is defined as the connection or relationship which e4ists +etween two or more contracting persons. Pri!it% of contract means simpl% that there is a direct contractual relationship +etween two or more persons .companies) to a contract. There is no pri!it% for persons outside of the direct contractual relationship. This is an important matter to consider +ecause man% a constructi!e claim has arisen when an owner ultimatel% has to pa% the claim fails to understand that he1she cannot +ar, out orders to third parties without running the high ris,s of originating claims from those parties. 5t is a wonderful position to +e third parties on a pro6ect where the owner li,es to demonstrate that the% are in charge. The concept of Pri!it% of &ontract is illustrated in a diagram +elow. 5n this diagram there are three companies listed: &ompanies X/ Y/ and . &ompan% X has a contract with &ompan% Y. There is pri!it% +etween X and Y. 5n turn/ &ompan% Y has a separate contract with &ompan% . There is a separate pri!it% +etween &ompan% Y and . These two separate contracts ma% ha!e originated from a single pro6ect/ and funded +% the same ultimate source. ;owe!er/ there is no contractual pri!it% +etween &ompan% X and &ompan% . Thus/ if &ompan% X gi!es orders directl% to &ompan% / &ompan% has the opportunit% to pic, and choose what it wants to do/ and can su+mit a claim for its ser!ices to &ompan% X through &ompan% Y or directl%. Therefore/ if &ompan% X does not li,e what &ompan% is doing/ it must e4press its concerns directl% to &ompan% Y/ who in turn must deal with &ompan% . To do otherwise pro!ides opportunities for &ompan% to su+mit claims to &ompan% Y for the interferences caused +% &ompan% X or a constructi!e claim directl% to &ompan% X. 0oing +ac, to the diagram +elow/ the ultimate pa%ing customer would +e represented as &ompan% X/ this compan% ma% +e rel%ing on a single prime contractor to manage the pro6ect on their +ehalf/ as represented +% &ompan% Y. &ompan% Y ma% ha!e in turn issued multiple ne4t lower>tier su+contracts as could +e represented +% &ompanies l/ :/ </ etc. &ompan% X must e4ercise restraints on their conduct when gi!ing directions to &ompanies l/ :/ </ or the% in!ite <

constructi!e claims from these firms. ?or this reason man% companies in the position of &ompan% X will refuse to meet directl% with lower>tier parties without ha!ing &ompan% Y present in such meetings.

Q<.

*hat are the main differences +etween contract and tort= (n important emerging issue in this area is the interpla% +etween principles of contract law and tort law. *hile there is some o!erlap +etween them/ there are ,e% differences. ( contract is a !oluntar% agreement. The parties ma% agree upon a num+er of stringent o+ligations which each part% promises to o+ser!e. 5n the e!ent of a default/ the claimant will +e entitled to sue for the +reach of contract. 5n Tort/ o+ligations are not accepted +% !oluntar% agreement +ut are imposed upon the persons concerned +% the state. 5n an action for +reach of contract/ the plaintiff is entitled to damages for loss of e4pectation. 5n an action in tort/ the plaintiff is onl% entitled to damages to compensate them for their loss. 5t is easier to pro!e that damages flow from a tort/ than it is to pro!e that damages flow from +reach of a contract. The time limit for +ringing an action for +reach of contract is si4 %ears from the date of the contract and twel!e %ears if contract is under deed. 5n actions in tort/ the time is also generall% si4 %ears/ +ut the time does not start to run until the plaintiff might reasona+l% ha!e disco!ered their cause of action. This can +e some time after the +reach/ allowing plaintiffs in tort cases more time in man% e4amples to +ring proceedings in tort than contract. Tort law does not depend on concepts of consideration or pri!it%/ which ma% limit a plaintiff@s a+ilit% to +ring a case in contract. A

?inall%/ contri+utor% negligence is a!aila+le to the defendant in an action for negligence/ +ut not in the case of +reach of contract. 6pecial 'nowledge #ince 1BCA/ the courts ha!e recogni7ed that the terms of a contract could in some cases impact on the tortious lia+ilit% +etween the parties. 5n the case of ;edley /yrne . ;eller and 7artners <1894= AC 495/ the court found that the defendant was prima facie lia+le to the plaintiff for gi!ing negligent in!estment ad!ice. ;owe!er/ the% then considered the terms of the contractual relationship +etween the parties. 9ne of the pro!isions contained an e4clusion clause a!oiding lia+ilit% of the defendant to the plaintiff for inaccurate ad!ice. The court applied this clause/ with the result that the defendants were not lia+le to the plaintiff in negligence. This is a classic e4ample of the court allowing the parties to allocate the ris,s themsel!es through the contract/ rather than appl%ing general standard principles of negligence to re>allocate the ris,s +etween the parties independentl% of the parties themsel!es. QA. *hat are the ,e% characteristics for fi4ed price and cost reim+ursement contracts=

Proposed answer ( fi4ed price contract can +e defined as a contract in which the contractor 3uotes a price for the whole of the wor,. 5n essence/ the contractor ta,es the ris, of 6udging how much wor, is in!ol!ed and its cost. 5n practice/ if the contract documents do not accuratel% reflect the wor, to +e done/ the contractor is entitled to !ariation in the contract sum. (lternati!el%/ fi4ed price contract ma% +e defined as items paid for on the +asis of a predetermined estimate of the cost of the wor,/ an allowance for the ris, in!ol!ed and the mar,et situation in relation to the contractor@s wor,load/ the estimated price +eing paid +% the client irrespecti!e of the cost incurred +% the contractor. 5n essence/ a fi4ed price t%pe of contract is a contract where: D The contractor contracts to do the wor, at a price he has estimated in ad!anceE D The contract price is not ad6usta+le +% reason of factors such as price increases/ currenc% fluctuations/ changes in ris,s/ etc. ;ence/ if the contractor is incorrect in his estimation/ he ta,es the ris, of +eing wrongE and D The price ma%/ howe!er/ +e su+se3uentl% ad6usted due to instances of !ariations ordered +% the client/ contract documents not accuratel% defining wor, to +e underta,en/ etc. &ost reim+ursement is a term used to descri+e one of the two principal methods of ma,ing pa%ment under a contract. 5n terms of definitions/ such contracts ha!e +een defined as a t%pe of contract +% which the contractor recei!es all his costs together with his fee or a contract in which the contractor is reim+ursed his actual cost plus a fee to co!er his o!erheads and profit The following pertinent matters need to +e ta,en notice on cost reim+ursement t%pe of contracts: D There is no finite sum tendered +% the contractor nor is one esta+lished at the time of contractingE F

D The contractor is paid +ased on the prime cost of the wor, .as defined in the contract documents) plus a fee to co!er matters such as his o!erheads and profit/ etc.E D Pa%ment of the contractor@s actual cost in!aria+l% ta,es into account an% attendant fluctuationsE D The +asis of the fee pa%a+le/ i.e. whether it is to +e a fi4ed fee/ percentage fee or fluctuating fee is esta+lished when the contract is signedE and D The actual contract sum will onl% +e determined on completion of the wor,s and the ascertainment of the final account figure. QF. *hat are the pros and cons for each of them for fi4ed price and cost reim+ursement contracts=

Proposed answer 7ros #or #i1ed price type o# contract D Pro!ides firm assurance of ultimate cost. D 5nsures prompt ad!ice to owner of dela%s and e4tra costs. D Ge3uires minimum owner follow>up on wor,. D Pro!ides ma4imum incenti!e for 3uic,est completion at lowest cost. D 5n!ol!es minimal auditing +% ownerHs staff. Cons #or #i1ed price type o# contract D Ge3uires e4act ,nowledge on what is wanted +efore contract award. D Ge3uires su+stantial time and cost to de!elop in3uir% specifications/ solicit/ and resulting from changes e!aluate +ids. Dela% completion +% months. D ;igh +idding costs and ris,s ma% reduce 3ualified +idders. D &ost ma% +e increased +% e4cessi!e contingencies in +ids to co!er high>ris, wor,. 7ros #or cost reim ursement type contract D Pro!ides ma4imum fle4i+ilit% to owner D 'inimi7es contractor profits D 'inimi7es negotiations and preliminar% specification costs D Permits 3uic,er start/ earlier completion D Permits choice of +est>3ualified/ not lowest>+idding/ contractor D Permits use of same contractor from consultation to completion/ usuall% increasing 3ualit% and efficienc% Cons #or cost reim ursement type contract D No assurance of actual final cost D No financial incenti!e to minimi7e time and cost D Permits specification of high>cost features +% ownerHs staff D Permits e4cessi!e design changes +% ownerHs staff increasing time and costs QC. The fi4ed price and cost reim+ursement contracts are two t%pes of contracts that are awarded +ased on pricing1pa%ment criteria. 5dentif% their su+>classifications and e4plain when the% are commonl% used. C

Proposed answer The common su+>classification of fi4ed price contracts encountered in the engineering1construction industr% are: 8ump sum contractsE 'easure and !alue contractsE and Turn,e% contracts. 8ump sum contracts are of the two principal t%pes. *ith +ills of 3uantitiesE or *ith drawings and specifications. +ump sum ased on ills o# quantities contract is used predominantl% in traditional general contracts where the emplo%er causes the complete design to +e underta,en and a detailed )ill of Quantities .)Q) to +e prepared on his +ehalfE which )Q is then gi!en to the contractor for pricing. The )Q full% descri+es the materials and wor,manship and actuall% represents the wor,s to +e e4ecutedE wor, which +% its nature cannot +e accuratel% measured are descri+ed as pro!isional. The )Q is e!entuall% used as a +asis of effecting pa%ment to the contractor. +ump sum contracts ased on drawings and speci#ications are used mainl% where: Detailed design wor, is not underta,en +% the emplo%erE The emplo%er is not confident of achie!ing a comprehensi!e co!erage of the complete design re3uirements/ e.g. for a proprietar% s%stemE The si7e and nature of wor, does not 6ustif% the preparation of )Q/ e.g. minor reno!ation or maintenance wor,s/ etcE and The emplo%er wishes to transfer the ris, of assessment of the wor, to contractor as far as possi+le. 'easure and !alue contracts come in the two +asic forms +ased on either: ( +ill of appro4imate 3uantitiesE or ( schedule of prices. Applications o# a ill o# appro1imate quantities contracts include the following situations: *here the site conditions are not sufficientl% ,nown or defined until the wor,s are actuall% carried out/ e.g. wor, +elow ground le!el in!ol!ing roc, e4ca!ationE *here the accurac% of the actual 3uantities cannot +e guaranteed or esta+lished with reasona+le accurac% at the time of tendering/ e.g. pile lengths/ etcE and ?or a fast trac, pro6ect/ where earl% appointment of a contractor and commencement of wor, on site is en!isaged +efore detailed design is finali7ed and accurate )ills of Quantities esta+lished. A schedule o# prices contract is applica+le where time is !er% short or is not practica+le for some reasons to prepare e!en +ills of appro4imate 3uantities. ( schedule ma% +e produced gi!ing descriptions onl% of the wor, to +e carried out and the materials to +e used. The emplo%er ma% put prices against each item and re3uire tenderers to state the percentage a+o!e or +elow the gi!en prices for which the% would +e prepared to carr% out the wor,. I

,urn'ey contracts can +e descri+ed as pac,age deal t%pe of contracts/ Design and )uild1 Design and &onstruct contracts/ -P&& t%pe of contracts/ etc the defining characteristic is the com+ining of all the fundamental tas,s of the pro6ect/ i.e. design/ production .construction or +uilding) and management in a single pac,age. The contractor ta,es full responsi+ilit% and carries sole lia+ilit% for design and construction. 5n such a t%pical contract/ the emplo%er approaches a contractor with a set of re3uirements defining the emplo%er@s wants termed the -mplo%er@s Ge3uirements co!ering +asicall% the following: #pecifications of wor, related to the performance re3uired called Performance #pecificationsE and ( proposed formula on how the wor, is to +e paid for. The t%pes of cost reim+ursement contracts are dictated +% the formula adopted for reim+ursing the fee due to the contractor. ;ence/ such t%pes of contracts include: &ost plus fi4ed fee contractsE or &ost plus percentage fee contractsE &ost plus fluctuating fee contractsE or Target cost contract. #uch contracts are still utili7ed in the following limited situations: 5n emergenc% situations where under the pre!ailing constraints/ such contracts afford the +est alternati!es a!aila+le to the emplo%er to not onl% commence wor, fast +ut also with minimum in!estigati!e wor,E *here through a pre!ious course of dealings/ an element of trust and relia+ilit% has +een esta+lished +etween the parties ensuring that the formula adopted per the contract is mutuall% ad!antageous and offers a @win>win@ solutionE and 5n ongoing contracts where the contractor encounters se!ere cash flow pro+lems and is una+le to further finance his acti!ities on site/ to a!oid determination with its attendant cost and time implications/ the most practical option would +e to con!ert the contract into a @&ost Plus@ t%pe and finish off the wor,s on time/ discounting an% e4tra costs incurred.