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1

Who are the Parties to an Engineering Contract?

Most contracts in an engineering project are for the provision of construction. In legal parlance the party that requires the work to be done is known as the Principal and hence these notes on contract management will refer to the promoter as the Principal. The Principal is the party who wants the work done and is prepared to pay for it and the Contractor is the party who agrees to undertake the work in return for payment.

2

What are Negotiations?

Negotiations are the spoken and written transactions between the Principal and the Contractor leading to the contract agreement to undertake the work or to supply goods and/or services under the contract.

3

How is a Contract Negotiated?

The Principal, inviting an offer or a proposal to undertake the work under a contract from one or more suitably qualified individuals or corporations, begins negotiations for a contract. The formal offer made by a contractor in response to such an invitation is referred to as a tender. Where one party only is invited to submit a tender, the agreement may be reached by direct negotiation. Where two or more parties are invited the agreement is usually reached by a competitive tendering process, in which tenders are invited and evaluated in accordance with clearly defined provisions. Reaching the final agreement may be a lengthy procedure, during which the negotiating parties prepare and exchange documents setting out their respective requirements, offers and counter offers. These documents must be carefully and meticulously prepared so as to avoid misunderstandings and misinterpretations – which could lead to disputes during the contract stage.

4

How is the Existence of a Contract Demonstrated?

To ensure that the finally negotiated agreement is enforceable in law, the Contract should be clearly ‘evidenced’ by writing down the agreed terms and conditions under an Instrument of Agreement, to be signed by the parties to the Contract.

5

What is the definition of a contract?

A contract, in the simplest definition, is a promise enforceable by law. The promise may be to do something or to refrain from doing something. The making of a contract requires the mutual assent of two or more persons, one of them ordinarily making an offer and another accepting. If one of the parties fails to keep the promise, the other is entitled to legal recourse against him. The law of contracts considers such questions as
>whether a contract exists,
>what the meaning (i.e. intentions) of it is,
>whether a contract has been broken, and
>what compensation is due the injured party.

6

What are the two genres or formats of contracts?

Traditionally there are two main genres or formats of contracts, namely formal contracts and simple contracts.

7

What is a formal contract?

A formal contract, also referred to as a contract under seal, is a deed whose validity depends solely upon its form. In legal terms, form refers to the manner in which the agreement is expressed. A deed is an instrument in writing and must be signed ‘under seal’ by the party executing the deed and attested by a witness who is not a party to the contract. It is not necessary for a party executing the deed to actually place a seal on the document, provided that the deed states that it is signed ‘under seal’. However, since a corporation does not have a signature, it can only execute a deed by affixing its common seal in the manner prescribed in its articles of association. The party executing the deed must then hand or deliver the signed deed to the other party - ‘signed, sealed, and delivered as a deed’.

8

What is a simple contract?

A simple contract does not have to be in any particular form. It can be made verbally or in writing or partly in both.

9

What are the differences between formal and simple contracts?

>The first difference is that, to be enforceable, a simple contract must be supported by consideration. Consideration is an inducement to enter into a legally enforceable agreement. It can be either a detriment incurred by one party or a benefit received by the other party. Thus, the party seeking to enforce the agreement must have paid, or promised to pay, some money, parted with some goods, or forgone some benefit. >The second difference concerns the limitation period (the time following a breach of contract in which the innocent party may take action on the other). This period can vary, depending upon the jurisdiction under which the contract is established, but generally, it is longer for formal contracts than it is for simple contracts. In an engineering situation, a formal contract therefore gives the Principal greater protection.
>The third difference is that a contract under seal creates an estoppel (simply meaning stop). This estoppel is a rule of law which precludes 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.

10

Who is the Principal's representative?

On all projects there will be one person or body who will represent the Principal in all matters relating to the management of the contract, both before and after the contract award. It is rare for the Principal to undertake this task himself. On traditional civil engineering projects this role has been undertaken by the ‘Engineer’ (capital ‘E’) who is commonly a senior manager or partner in the firm of consulting engineers who designed the project. However, in other industries, such as electrical / mechanical or offshore this role is less clearly defined. It may be the project manager or indeed the Engineer in common with civil engineering. In addition, modern civil engineering projects may have someone with a different title coming from a different organisation than the Engineer. In the Engineering and Construction Contract, this role is provided by the Project Manager.

11

What are the four basic requirements of a contract?

1. the intention by both parties to form an enforceable contract must be demonstrable.
2. the consent of both parties must be genuine.
3. the legality of the agreement must be objective.
4. both parties must have the legal capacity to form an agreement.

12

What is meant by the contract element 'intention'?

It must be clear that the parties intended to create a legally binding agreement. There can be no contract unless the parties’ intention to enter into an agreement enforceable at law can be demonstrated. Where such an agreement can be shown, usually it will be accepted that the parties intended to create such an undertaking. In an engineering context, where one party has invited bids and another party has made an offer, the intention to enter into an agreement will be assumed.

13

What is meant by the contract element 'genuine consent'?

For a contract to be valid, the consent of the parties must be genuine. Consent obtained under duress or by undue influence can make a contract invalid at the application of the weaker or injured party.

14

What is meant by the contract element 'legality of purpose'?

A contract may be held to be illegal by common law or by statute. Contracts deemed illegal by common law (for example to commit a crime; or to hinder the administration of justice; or to injure public services; or to attempt corruption) rarely arise in engineering situations. However, illegality by statue commonly arises in engineering contracts: a contract may be legally entered into, yet its performance may be in breach of a statue or regulation – for example health & safety legislation. Such a contract will be void and unenforceable at law and neither party can claim relief under it.

15

What is meant by the contract element 'legal capacity'?

capacity Not all persons can enter into a legally binding agreement. Infants and persons deemed incapable of rational action such as those who are insane or under the influence of alcohol or narcotics cannot legally enter into a valid contract. The law also takes into account the general incapacity of bankrupts and persons in legal custody.

16

What is a formal instrument of agreement?

Sometimes the parties to a simple contract later execute and substitute a formal Instrument of Agreement. This written agreement identifies the parties by name and registered address, states the date of the agreement and sets out the terms and conditions of the contract, frequently by reference to annotated, annexed documents. It is the form of the agreement primarily established by the manner of signing that determines whether it is a simple or formal contract (i.e. no witness = simple).

17

What is meant by the term 'offer and acceptance'

acceptance A simple contract is formed when an offer is made by one party to another party and is unconditionally accepted by the second party. The keyword is unconditional. An acceptance with conditions does not form a contract but constitutes a counter-offer. This in turn requires an unconditional acceptance of the counter-offer by the first party before a contract exists. Offers and counteroffers may continue to be exchanged until an unconditional acceptance is made and then, and only then, will a contract be constituted. An offer and an acceptance do not have to be made in writing, but can be made orally or implied by conduct. For example, a hand raised at an auction is a case of implied acceptance by conduct. In an engineering situation if, with the knowledge of the Principle, the Contractor who has made an offer starts work on a job, it would be held that the offer had been accepted if the Owner was in a position to object and did not do so.

18

What is meant by the term 'valuable consideration'?

Consideration is a peculiar entity in contract law. It simply means that which is exchanged. In an engineering contract, the money paid by the Principal to the Contractor is the consideration given by the Principal to the Contractor. In return, the work performed or the equipment supplied by the Contractor for the Principal is the consideration given by the Contractor to the principal. In earlier times, a nominal consideration, such as a single coin or a peppercorn, was held to be sufficient but today the courts require that the consideration be significant, although not necessarily equal in value to what is received.

19

What are the two principle rights and liabilities under a contract?

Privity and Assignment

20

What is meant by the term 'privity'

Privity of contract means the legal relationship and mutual interest that exists between the parties to a contract. The word privity itself implies that the relationship is private and concerns only the parties to the contract. Only the parties to a contract can acquire rights or incur liabilities under it. Two parties to a contract cannot make a third party liable under the contract unless the third party is also a party to the contract.

21

What is meant by the term 'assignment'?

An assignment occurs when one of the parties to a contract substitutes another party in its place as a party to the contract for all or some of the purposes of the contract. Many engineering contracts include a clause specifically denying either party the right to assign unilaterally all or part of the contract. However, since a contract is an agreement, the parties can mutually agree to an assignment.

22

List the five ways a contract may be discharged.

A contract may be discharged by:
1. performance of its provisions;
2. agreement between the parties;
3. operation of the law;
4. frustration; or
5. fundamental breach.

23

What is meant when a contract is 'discharged by performance'?

When the parties to a contract fulfil all their obligations in strict accordance with the provision of the contract, the contract is said to be discharged by performance.

24

What is meant when a contract is 'discharged by agreement'?

Since a contract is an agreement between two or more parties, it may be discharged by a further agreement between the parties. Such a further agreement may cancel the original contract by mutual consent, or it may vary the terms of the original agreement by a substituted agreement.

25

What is meant when a contract is 'discharged by operation of law'?

A contract may be discharged by operation of the law independently of the wishes of the parties to the agreement. A contract may be discharged if it is held to be illegal by common law or by statue or if one of the parties becomes bankrupt.

26

What is meant when a contract is 'discharged by frustration'?

The term frustration is used to describe the situation that arises when, without default of either party to an agreement, a contractual obligation has become incapable of performance. It can occur when the circumstances under which the performance required become radically different from those that were envisaged by the contract. Frustration must have the effect of frustrating the performance of the whole of the contract and not merely some of its terms. Frustration cannot be claimed because some or all of the work under the contract has become more difficult or more costly. Frustration is sometimes referred to as force majeure.

27

What is meant when a contract is 'discharged by fundamental breach'?

Every breach of contract will entitle the injured party to sue for damages but not every such breach will have the effect of discharging the contract. Whether or not a particular breach is a fundamental breach giving grounds for the injured party to terminate the contract is a matter of determining whether the breach amounts to a ‘repudiation’ or whether it merely amounts to a breach of certain provisions of the contract.
A ‘repudiation’ usually arises when one party to the contract creates an impossible situation either before the contract is due for performance or during the performance of the contract. A party to a contract cannot terminate the contract by unilaterally repudiating the obligations under the contract. If a party attempts to repudiate its obligations under the contract, there are two courses open to the injured party - either accept the repudiation and sue for damages or ignore the repudiation, reaffirm the contract and then sue for damages.
It is rare for a party to breach the contract by a complete repudiation of the whole of the work under the contract. A breach in performance usually involves a breach of certain obligations under the contract.

28

What are the remedies for a breach of contract?

Any breach of a contract will entitle the injured party to sue for damages, whether or not the particular breach is considered to be grounds for treating the contract as discharged. In assessing a claim for damages, it is first necessary to determine the grounds upon which the claim is made and then to assess the amount of compensation. The injured party usually will be awarded such damages naturally arising from the breach. In assessing the amount of the damages, the courts usually place the injured party, in a financial sense, in the same position as they would have been had the contract been discharged by performance, provided that the injured party had taken all reasonable steps to mitigate the loss occurred by the breach.