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Contracts and Agreements In Construction Industry
10/17/08
1
Contents
Definitions of Contract Legality of Contract Key elements of Contract Contents of Contract Types of Contracts Standard forms of Contracts
10/17/08
2
Contracts and Agreements
A contract is a bargain agreed between two or more parties such as an employer and a contractor regarding the execution of certain works Experts who will prepare the contracts :Legal , Taxation , environment ,Engineering ….etc
10/17/08
3
To be legal The contract must fulfill certain requirements :1-An intention : both parties must be wise and intend their bargain to be enforceable at law. 2-A genuine consent : must not be procured by mistake , force ….undue influence , misrepresentation… 3-Legality of the object : the parties must not agree to something illegal or to break the law. 4-Legal capacity of the parties to act : according to the applicable law.
10/17/08
4
Contracts in Construction Industry
Key elements of contract :-
1- An offer and an acceptance. 2- An intention by both parties to the contract to create legal relations. 3- Considerations. 4- The parties must have the capacity to contract. Capacity is concerned with legality. Authority is concerned with permission. 5- The contract must be legal and possible.
10/17/08
5
Contents of the Contracts
An international contracts may contain the following : Dates ; Parties ; Preamble ; Definitions ; Interpretations ; Warranties ; Obligations ; Price or other considerations ; Payments terms ; Risks ; insurance ; Responsibilities ; Liquidated damages ; Disputes settlements and governing law ….etc
10/17/08
6
Different Names of Contracts
Supply Contracts.
1-Construction contracts 2-Commercial agency contracts. 3- Sale of goods contracts
10/17/08
7
Different Names of Contracts
Management Contracts.
1-Employment contracts 2-Insurance contracts. 3- Facility contracts
10/17/08
8
Different Names of Contracts
Service Contracts.
1-Works and material contracts 2-Transport contracts. 3- Arbitration contracts
10/17/08
9
Type of Contracts
A variety of contractual arrangements are available and the engineer will often need to carefully select the form of contract which is best suited for the particular project.
10/17/08
10
Type of Contracts Lump Sum Contract The simplest type of civil engineering contract . Without quantities , the the contractor will have to assess the amount of works , the employer has essentially assigned all risks to the contractor, then the contractor will give an offer with high Price to allow himself a sufficient margin to cover for any items that may have missed. Furthermore, there is no satisfactory method of assessing the cost of variations.
10/17/08
11
Type of Contracts Bill of quantities Contracts / Re-measured or unit Price contracts •
•
•
• •
The most commonly used form of contract for works of civil engineering. The quantities of the works can be computed with reasonable accuracy from the drawings and associated documents. The contractor is paid for the actual amount of worked done. There is facility for dealing with varied or additional works. Most of contractor are familiar with this type of contract.
10/17/08
12
Type of Contracts Cost Reimbursement Contracts •
The employer pays to the contractor actual costs of works plus a management fee which will include the overhead charges , supervision costs and profit.
10/17/08
13
Type of Contracts Cost Plus fixed percentage fee contract •
For certain type of construction or extremely pressing needs, the employer is sometimes forced to assume all risks overrun.
Actual costs + fixed percentage an little incentive to reduce job cost. 10/17/08
14
Type of Contracts Cost Plus fixed fee contract Actual costs + fixed fee and will have Some incentive to complete the job regardless the duration of the project and the employer will assume all risks overrun incentive to complete the job quickly since its fee is fixed
10/17/08
15
Type of Contracts Cost Plus variable percentage contracts
The contractor agrees to a penalty if the actual cost exceeds the estimated job cost or a reward if the actual cost below the estimated job cost. For taking the risks on its own estimate , the contractor is allowed a variable percentage of direct job cost for its fee. The project duration is specified . This type of contract allocates considerable risks for cost overrun to the owner . Provide incentives to contractor to reduce costs as much as possible
10/17/08
16
Type of Contracts Target Estimate contracts
Specifies penalty or reward to a contractor . The percentage of saving or overrun to be shared by the owner and contractor.
10/17/08
17
Type of Contracts Guaranteed maximum Cost contracts
As turnkey contract
10/17/08
18
Type of Contracts
Procurement Forms
Traditional Forms.
Responsibility for the design lie with the employer ( consultant) , thus the contractor is only responsible for construction only
10/17/08
19
Type of Contracts
Procurement Forms
Design - Build Forms.
Package deal Between the employer and the contractor whereby the contractor also undertake all of or a proportion of the design of the works
10/17/08
20
Type of Contracts
Procurement Forms Design - Build Forms. Develop contract ( employer led design) Design – Build ( 1- stage) ( employer led design) Design – Build ( 2- Stage ) ( contractor led design) Turnkey .
10/17/08
21
Type of Contracts
Standard Forms British Forms GC – Government contract. ICE- Conditions FIDIC - Conditions
10/17/08
22
Type of Contracts Standard Forms FIDIC Forms New Red Book (1999) Design works by employer New Orange Book (1999) Plant and Design – Build , Design works by contractor Conditions The Silver Book (1999) – EPC – Turnkey. The Green Book - Short form of contract. The White Book ( 3 rd 1998) for pre- investment , feasibility studies, design and administration of construction and project management 10/17/08
23
Type of Contracts
Standard Forms American Forms AIA – American Institution of Architect. AGC – Associated General Contractors.
10/17/08
24
Claims & Disputes In Construction Industry
10/17/08
25
Claims & Disputes
“ The means available to the parties to adjust the contractual and economic relationship between them to meet changing conditions”
10/17/08
26
Contents Introduction Definitions. Classification and legal basis of claims.
10/17/08
27
Contents Section 1 - Classification by subject. Existence of contract. Documentation. Execution of works. Payments. Prolongation. Default……etc. Notification. Presentation. Establishment. Examination. 10/17/08
28
Contents Section 2 – Claims concerning the existence of a contract. General. Recognition of a valid contract. Capacity. Agency. Intention to create legal relations. Consideration. Agreement.
10/17/08
29
Contents Section 2 – Claims concerning the existence of a contract. Offer and acceptance. Offers. Revocation. Acceptance. Counter-offers. Acceptance subject to conditions. Letter of intent.
10/17/08
30
Contents Section 3 – Claims arising from documentation. General. Contract / Policy. Errors and discrepancy. AD-HOC Conditions. Counter-offers.
10/17/08
31
Contents Section 4 – Claims in connection with execution of works. Contractor to satisfy himself. Work to be the satisfaction of engineer. Damages to the works. Issue of further drawings , Instructions. Nominated Subcontractor. Defects.
10/17/08
32
Contents Section 5 – Claims concerning payment Provisions. General. Valuation of contract works. Valuation of Varied works. Issue of further drawings , Instructions.
10/17/08
33
Contents Section 6 – Claims concerning Time. General. Evaluation of delay claim. Disruption.. Case : Claim in respect of acceleration of works.
10/17/08
34
Contents Section 7 – Claims arising from default, determination. Liquidated damages. Determination. Frustration. War Clauses
10/17/08
35
Contents Section 8 – Presentation and Payments Presentation of a claim. Format of a claim. Negotiations. War Clauses
10/17/08
36
Contents Section 9 – Alternative Dispute Resolutions ( ADR). Mediation. Conciliation. Disadvantages of ADR. Adjudication.
10/17/08
37
Details for the Course
10/17/08
38
Contents Introduction Definitions. Classification and legal basis of claims.
10/17/08
39
Introduction Impact of Claims 3) Cause budgetary difficulties to employer 5) Cause financial difficulties and restrictions of Cash flow , loss of liquidity to the contractor So , it would be to the benefit of the whole industry if the impact of claims was reduced”
10/17/08
40
Introduction “Claims
are a fact of life”
“ Claims are here to stay “ How we can reduce the impact of claims Coordination between the Engineer and contractor to mitigate the effects of claims
10/17/08
41
Definition A Claim •
A demand , a request , for something presumed entitlement to which.
•
A contractor consider ( Rightly or Wrongly) he is entitled to which.
•
Agreement has not yet been reached.
10/17/08
42
Classification and legal basis of claims Four legal and one non-legal concepts 3) 4)
5)
Under Contract – there is a remedy in particular conditions for that claim as issuing drawings in certain date and the employer fails to meet it in its time ( remedy designed in contract). Out of contract – a term of the contract had been breached But where the remedy is not designed in the contract. If the claim is valid then it may be settled by amicably or by applicable law stated in the contract. Where no contract exists then legal system called “ Quantum meruit” Actual Cost + Part of profit.
10/17/08
43
Classification and legal basis of claims Four legal and one non-legal concepts 4) Claims under the law of tort of the applicable law. 5) Ex-gratia Claims – no legal basis but rather some commercial sense in making a settlement The scope of study is concerning with :• •
Claims under contract have remedy. Claims under contract have no remedy then applicable law will be applied.
10/17/08
44
Classification and legal basis of claims We can divide the claims into three types :•
Contractual claims : which have a basis in the contract it self.
•
Extra – contractual claims : which have no basis in the contract but where entitlement Stems from the law then will be settlement in arbitration or in litigation.
•
Ex-gratia claims : which the contractor has no contractual provision to rely on and No breach or tort by the employer.
10/17/08
45
Contents Section 1 - Classification of Claims by subject. Existence of contract. Documentation. Execution of works. Payments. Prolongation. Default……etc. Notification. Presentation. Establishment. Examination. 10/17/08
46
Section 1 : Classification of claims by subject Existence of Contract “ the contract must be binding ( offer , acceptance, consideration) “ If not the contract will be void by a court. Economic duress make the new rates imposed by any parties during execution of the contract are void the dispute is which is right the contract is binding or void
10/17/08
47
Section 1 : Classification of claims by subject Documentation Shortcomings of documents as important information may not have been referred in tender. Correspondences passing between tender and acceptance may not have included in the contract. Ambiguity and discrepancies between documents This may lead to Claims
10/17/08
48
Section 1 : Classification of claims by subject Execution of Works
Supply of information / delay in giving Variation Risks / responsibility for . Defects
This may lead to Claims
10/17/08
49
Section 1 : Classification of claims by subject Payments Valuation of contract works ( Progress of works) Valuation of varied works( under which item it is executed. This may lead to Claims
10/17/08
50
Section 1 : Classification of claims by subject Prolongation Delay for which the employer is responsible Delays in giving drawings and information in consequence the contractor incurs extra cost, the works will be slowed down as if it was stopped, this reduce the productivity of contractor. This may lead to Claims
10/17/08
51
Section 1 : Classification of claims by subject Prolongation Delay for which the employer is not responsible Exceptionally inclement weather , Strikes …. Then according to FIDIC the contractor is entitlement to an extension of time but not to Compensation. This may lead to Claims
10/17/08
52
Section 1 : Classification of claims by subject Default Failure to complete within the stipulated time for which provision is made for liquidated damages This may lead to Claims
10/17/08
53
Section 1 : Classification of claims by subject General Terms Presentation The contractor must clear the “ merit of the claim”
10/17/08
54
Section 1 : Classification of claims by subject General Terms Establishment For the contractor to state the reasons why he considers himself entitled
10/17/08
55
Section 1 : Classification of claims by subject General Terms Examination The technique to be employed in examining claims , check the facts ( documents which constitute the contract)
The end of section 10/17/08
56
Contents Section 2 – Claims concerning the existence of a contract. General. Recognition of a valid contract. Capacity. Agency. Intention to create legal relations. Consideration. Agreement.
10/17/08
57
Contents Section 2 – Claims concerning the existence of a contract. Offer and acceptance. Offers. Revocation. Acceptance. Counter-offers. Acceptance subject to conditions. Letter of intent.
10/17/08
58
Section 2 – Claims concerning the existence of a contract. General Claims are mostly concerned with “ entitlements and liabilities “ , for such claims the contract must be come into existence and legally valid, but the existence of a valid contract may be disputed as : An employer issues a letter of intent and denies that a binding contract exists. A contractor denies that a variation or a supplementary contract is binding.
10/17/08
59
Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge Cleveland bridge were contractors for building with space frames roof in Dammam. They contacted BSC Company to supply Steel nodes required and issued a letter of intent. As the work is urgent , BSC started immediately and in the fact completed all 137 nodes. The negotiations on the terms of a contact were still continuing , agreement on terms was never reached.
10/17/08
60
Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge BSC Sued for 200,000 Pounds as value of nodes. Cleveland Bridges Claimed 800,000 Pounds for damages due to late of delivery nodes. What is held ?
10/17/08
61
Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge It was held there was no contract .BSC were entitled to 200,000 Pounds as value of nodes. The above case on the basis of quasi- contract and is called “ Inchoate contract”
“ Inchoate contract “ is one where the process leading to agreement has been started but not completed . And it is accordingly not binding in law
10/17/08
62
Section 2 – Claims concerning the existence of a contract. Recognition of a valid contract For binding contract there are three essential requirements : Intention to Create legal relations Consideration ( terms of payments). Agreement.
10/17/08
63
Section 2 – Claims concerning the existence of a contract. Capacity For a contract to be binding , the parties must each have the capacity to contract.
“ The capacity “ is fundamental and is concerned with legality. “ The Authority “ is concerned with permission. In business an individual may have the legal capacity to contract but not the authority of his employer
10/17/08
64
Section 2 – Claims concerning the existence of a contract. Agency An agent is a person with the power to change the legal position of another person known as his “ Principle”. in short an agent has the authority to change Types of agency Actual agency or authority He has written permission to act. Apparent agency or authority He has the authority by conduct to act . 10/17/08
65
Section 2 – Claims concerning the existence of a contract. Intention to create legal relations An intention by parties to contract to create legal relations, and to be legally bound by the contents of the contract. Contents of a contract must be clearly apparent. A contract can be enforced be a court. If the parties intended their promises to be binding as a natural of consequence of this , the court will provide remedies for the breaking of binding known as breach of contract.
10/17/08
66
Section 2 – Claims concerning the existence of a contract. Consideration The legal word for the money that is paid for the supply of the goods or services which is called :-
“Terms of payments”
10/17/08
67
Section 2 – Claims concerning the existence of a contract.
Agreement The final essential requirement for a valid contract is agreement. The agreement must be on all material points.
10/17/08
68
Section 2 – Claims concerning the existence of a contract. Offer and Acceptance Agreement is normally analyzed in terms of “offer and acceptance” , due to the communication between parties it called legally “ Bilateral Contract”. The other is called “ Unilateral Contract” does not need communication ,or negotiations for acceptance.
10/17/08
69
Section 2 – Claims concerning the existence of a contract. Offer An offer , in order to be capable of acceptance must indicate an intention to be bound. Invitation to treat does not necessary constitute an offer.
10/17/08
70
Section 2 – Claims concerning the existence of a contract. Revocation An offer may generally be revoked at any time before it is accepted. Example , “ Tender Bond ” will be loss in case of withdrawal the offer
10/17/08
71
Section 2 – Claims concerning the existence of a contract. Acceptance For acceptance of an offer to lead to a binding contract , the acceptance must state which offer is accepted. The acceptance of an offer must be unconditional.
10/17/08
72
Section 2 – Claims concerning the existence of a contract. Counter -offer Counter offer Kills off the original offer. Example : The contractor sent an offer to the employer. The employer reply and change the terms of payments for the offer, then the last is called counter offer and kills the first. The contractor sent another offer in replying , then it is called “ counter –counter offer” an kills the “counter – offer”
10/17/08
73
Section 2 – Claims concerning the existence of a contract. Acceptance Subject to Conditions If an acceptance is made “ Subject to conditions “ as receiving certain information being received. Then the contract would arise on the receipt of such information
10/17/08
74
Section 2 – Claims concerning the existence of a contract. Letter of intent It is important to emphasize that the effect of a letter of intent depends on the wording of the letter rather than its heading. It may lead to “ mini contract “
The End of Section
10/17/08
75
Contents Section 3 – Claims arising from documentation. General. Contract / Policy. Errors and discrepancy. AD-HOC Conditions. Counter-offers.
10/17/08
76
Section 3 – Claims arising from documentation General In preparing and examining claims it is essential to bear in mind that one is concerned with what the documents say and what provide, not with what on thinks they should have said or what must been intended.
10/17/08
77
Section 3 – Claims arising from documentation Contract / Policy For employer and according to his policy to provide for “ Price fluctuation “ in contract .
10/17/08
78
Section 3 – Claims arising from documentation Errors and discrepancies
Discrepancies between different documents “ Drawings and Specifications …. ) , generally Drawings should be regarded as stating what is required. The Specifications stating the quality of workmanships and materials. The Conditions of Contract stating the obligations of the parties and the allocation of risks between them . The Bill of Quantities determining the amount to be paid.
10/17/08
79
Section 3 – Claims arising from documentation AD-HOC Conditions Conditions of Contract are usually one of the “ Standard Forms” as “ FIDIC, ICE, JCT….. ” In most cases some ad-hoc conditions are needed to drafted to the particular requirements of a given job. Great care is needed in drafting such ad-hoc conditions and must ensure that they are contractually do not conflict with the Standard Clauses. The End Of Section
10/17/08
80
Contents Section 4 – Claims in connection with execution of works. Contractor to satisfy himself. Work to be the satisfaction of engineer. Damages to the works. Issue of further drawings , Instructions. Nominated Subcontractor. Defects.
10/17/08
81
Section 4 – Claims in connection with Execution of the Works Contractor to satisfy himself It is requirement that the contractor satisfies himself about what he is undertaking . ICE Clause 11 stated “ he is deemed to have inspected and examined the site and its surroundings and to have satisfied himself before submitting his tender as to the nature of the ground and subsoil. If the Contractor requires more information and considers there is insufficient time in the period allowed for tendering he must ask for an extension of the tendering period . The contractor must make his own enquiries consult, geological survey , ask Soils experts, and if he does not , he carries the risk according to FIDIC , ICE 10/17/08
82
Section 4 – Claims in connection with Execution of the Works Work to be the satisfaction of engineer The work has to be the satisfaction of the engineer and must be according to . iv. Specification . v. Drawings vi. Employer requirements
10/17/08
83
Section 4 – Claims in connection with Execution of the Works Damages to the works
During construction the Contractor is responsible for making good any damage to the works and will will depend on the actual Contract.
Issue of Further drawings and instructions
The Engineer is required to issue Further drawings and instructions from time to time during the course of the work. In any event an Engineer who delays issuing further drawings and instructions then he is putting his Employer at risk.
10/17/08
84
Section 4 – Claims in connection with Execution of the Works
Nominated Subcontractor
Nominated Subcontractor Pose very considerable problems, the machinery for their operation in both JCT and ICE. The alternative of separate direct Contract may overcome some problems , but substitute others ( difficulty of coordination and control, and the effect of delay)
Defects
“Defects” in the sense used in maintenance clause , means materials and / or workmanship. The Contractor Is therefore technically in “ Breach” and is entitlement to remedy such breach until the end of maintenance period or “ defects liability Period”
The End of Section
10/17/08
85
Contents Section 5 – Claims concerning payment Provisions. General. Valuation of contract works. Valuation of Varied works. Issue of further drawings , Instructions.
10/17/08
86
Section 5 – Claims concerning payments Provisions Valuation of Contract works Two schools in respect of valuation of Contract Works. One considers that the rates in the B.O.Q are applying whatever the quantities. Second considers that some adjustment of the rates up or down in case of changing the quantities. Standard Forms of Contracts ( ICE) dealt with these matters
10/17/08
87
Section 5 – Claims concerning payments Provisions Valuation of Varied Works Standard Forms of Contracts ( FIDIC) make some reference to the applicability of B.O.Q Prices to Similar Conditions
The End of Section
10/17/08
88
10/17/08
1
Contents
Definitions of Contract Legality of Contract Key elements of Contract Contents of Contract Types of Contracts Standard forms of Contracts
10/17/08
2
Contracts and Agreements
A contract is a bargain agreed between two or more parties such as an employer and a contractor regarding the execution of certain works Experts who will prepare the contracts :Legal , Taxation , environment ,Engineering ….etc
10/17/08
3
To be legal The contract must fulfill certain requirements :1-An intention : both parties must be wise and intend their bargain to be enforceable at law. 2-A genuine consent : must not be procured by mistake , force ….undue influence , misrepresentation… 3-Legality of the object : the parties must not agree to something illegal or to break the law. 4-Legal capacity of the parties to act : according to the applicable law.
10/17/08
4
Contracts in Construction Industry
Key elements of contract :-
1- An offer and an acceptance. 2- An intention by both parties to the contract to create legal relations. 3- Considerations. 4- The parties must have the capacity to contract. Capacity is concerned with legality. Authority is concerned with permission. 5- The contract must be legal and possible.
10/17/08
5
Contents of the Contracts
An international contracts may contain the following : Dates ; Parties ; Preamble ; Definitions ; Interpretations ; Warranties ; Obligations ; Price or other considerations ; Payments terms ; Risks ; insurance ; Responsibilities ; Liquidated damages ; Disputes settlements and governing law ….etc
10/17/08
6
Different Names of Contracts
Supply Contracts.
1-Construction contracts 2-Commercial agency contracts. 3- Sale of goods contracts
10/17/08
7
Different Names of Contracts
Management Contracts.
1-Employment contracts 2-Insurance contracts. 3- Facility contracts
10/17/08
8
Different Names of Contracts
Service Contracts.
1-Works and material contracts 2-Transport contracts. 3- Arbitration contracts
10/17/08
9
Type of Contracts
A variety of contractual arrangements are available and the engineer will often need to carefully select the form of contract which is best suited for the particular project.
10/17/08
10
Type of Contracts Lump Sum Contract The simplest type of civil engineering contract . Without quantities , the the contractor will have to assess the amount of works , the employer has essentially assigned all risks to the contractor, then the contractor will give an offer with high Price to allow himself a sufficient margin to cover for any items that may have missed. Furthermore, there is no satisfactory method of assessing the cost of variations.
10/17/08
11
Type of Contracts Bill of quantities Contracts / Re-measured or unit Price contracts •
•
•
• •
The most commonly used form of contract for works of civil engineering. The quantities of the works can be computed with reasonable accuracy from the drawings and associated documents. The contractor is paid for the actual amount of worked done. There is facility for dealing with varied or additional works. Most of contractor are familiar with this type of contract.
10/17/08
12
Type of Contracts Cost Reimbursement Contracts •
The employer pays to the contractor actual costs of works plus a management fee which will include the overhead charges , supervision costs and profit.
10/17/08
13
Type of Contracts Cost Plus fixed percentage fee contract •
For certain type of construction or extremely pressing needs, the employer is sometimes forced to assume all risks overrun.
Actual costs + fixed percentage an little incentive to reduce job cost. 10/17/08
14
Type of Contracts Cost Plus fixed fee contract Actual costs + fixed fee and will have Some incentive to complete the job regardless the duration of the project and the employer will assume all risks overrun incentive to complete the job quickly since its fee is fixed
10/17/08
15
Type of Contracts Cost Plus variable percentage contracts
The contractor agrees to a penalty if the actual cost exceeds the estimated job cost or a reward if the actual cost below the estimated job cost. For taking the risks on its own estimate , the contractor is allowed a variable percentage of direct job cost for its fee. The project duration is specified . This type of contract allocates considerable risks for cost overrun to the owner . Provide incentives to contractor to reduce costs as much as possible
10/17/08
16
Type of Contracts Target Estimate contracts
Specifies penalty or reward to a contractor . The percentage of saving or overrun to be shared by the owner and contractor.
10/17/08
17
Type of Contracts Guaranteed maximum Cost contracts
As turnkey contract
10/17/08
18
Type of Contracts
Procurement Forms
Traditional Forms.
Responsibility for the design lie with the employer ( consultant) , thus the contractor is only responsible for construction only
10/17/08
19
Type of Contracts
Procurement Forms
Design - Build Forms.
Package deal Between the employer and the contractor whereby the contractor also undertake all of or a proportion of the design of the works
10/17/08
20
Type of Contracts
Procurement Forms Design - Build Forms. Develop contract ( employer led design) Design – Build ( 1- stage) ( employer led design) Design – Build ( 2- Stage ) ( contractor led design) Turnkey .
10/17/08
21
Type of Contracts
Standard Forms British Forms GC – Government contract. ICE- Conditions FIDIC - Conditions
10/17/08
22
Type of Contracts Standard Forms FIDIC Forms New Red Book (1999) Design works by employer New Orange Book (1999) Plant and Design – Build , Design works by contractor Conditions The Silver Book (1999) – EPC – Turnkey. The Green Book - Short form of contract. The White Book ( 3 rd 1998) for pre- investment , feasibility studies, design and administration of construction and project management 10/17/08
23
Type of Contracts
Standard Forms American Forms AIA – American Institution of Architect. AGC – Associated General Contractors.
10/17/08
24
Claims & Disputes In Construction Industry
10/17/08
25
Claims & Disputes
“ The means available to the parties to adjust the contractual and economic relationship between them to meet changing conditions”
10/17/08
26
Contents Introduction Definitions. Classification and legal basis of claims.
10/17/08
27
Contents Section 1 - Classification by subject. Existence of contract. Documentation. Execution of works. Payments. Prolongation. Default……etc. Notification. Presentation. Establishment. Examination. 10/17/08
28
Contents Section 2 – Claims concerning the existence of a contract. General. Recognition of a valid contract. Capacity. Agency. Intention to create legal relations. Consideration. Agreement.
10/17/08
29
Contents Section 2 – Claims concerning the existence of a contract. Offer and acceptance. Offers. Revocation. Acceptance. Counter-offers. Acceptance subject to conditions. Letter of intent.
10/17/08
30
Contents Section 3 – Claims arising from documentation. General. Contract / Policy. Errors and discrepancy. AD-HOC Conditions. Counter-offers.
10/17/08
31
Contents Section 4 – Claims in connection with execution of works. Contractor to satisfy himself. Work to be the satisfaction of engineer. Damages to the works. Issue of further drawings , Instructions. Nominated Subcontractor. Defects.
10/17/08
32
Contents Section 5 – Claims concerning payment Provisions. General. Valuation of contract works. Valuation of Varied works. Issue of further drawings , Instructions.
10/17/08
33
Contents Section 6 – Claims concerning Time. General. Evaluation of delay claim. Disruption.. Case : Claim in respect of acceleration of works.
10/17/08
34
Contents Section 7 – Claims arising from default, determination. Liquidated damages. Determination. Frustration. War Clauses
10/17/08
35
Contents Section 8 – Presentation and Payments Presentation of a claim. Format of a claim. Negotiations. War Clauses
10/17/08
36
Contents Section 9 – Alternative Dispute Resolutions ( ADR). Mediation. Conciliation. Disadvantages of ADR. Adjudication.
10/17/08
37
Details for the Course
10/17/08
38
Contents Introduction Definitions. Classification and legal basis of claims.
10/17/08
39
Introduction Impact of Claims 3) Cause budgetary difficulties to employer 5) Cause financial difficulties and restrictions of Cash flow , loss of liquidity to the contractor So , it would be to the benefit of the whole industry if the impact of claims was reduced”
10/17/08
40
Introduction “Claims
are a fact of life”
“ Claims are here to stay “ How we can reduce the impact of claims Coordination between the Engineer and contractor to mitigate the effects of claims
10/17/08
41
Definition A Claim •
A demand , a request , for something presumed entitlement to which.
•
A contractor consider ( Rightly or Wrongly) he is entitled to which.
•
Agreement has not yet been reached.
10/17/08
42
Classification and legal basis of claims Four legal and one non-legal concepts 3) 4)
5)
Under Contract – there is a remedy in particular conditions for that claim as issuing drawings in certain date and the employer fails to meet it in its time ( remedy designed in contract). Out of contract – a term of the contract had been breached But where the remedy is not designed in the contract. If the claim is valid then it may be settled by amicably or by applicable law stated in the contract. Where no contract exists then legal system called “ Quantum meruit” Actual Cost + Part of profit.
10/17/08
43
Classification and legal basis of claims Four legal and one non-legal concepts 4) Claims under the law of tort of the applicable law. 5) Ex-gratia Claims – no legal basis but rather some commercial sense in making a settlement The scope of study is concerning with :• •
Claims under contract have remedy. Claims under contract have no remedy then applicable law will be applied.
10/17/08
44
Classification and legal basis of claims We can divide the claims into three types :•
Contractual claims : which have a basis in the contract it self.
•
Extra – contractual claims : which have no basis in the contract but where entitlement Stems from the law then will be settlement in arbitration or in litigation.
•
Ex-gratia claims : which the contractor has no contractual provision to rely on and No breach or tort by the employer.
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Contents Section 1 - Classification of Claims by subject. Existence of contract. Documentation. Execution of works. Payments. Prolongation. Default……etc. Notification. Presentation. Establishment. Examination. 10/17/08
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Section 1 : Classification of claims by subject Existence of Contract “ the contract must be binding ( offer , acceptance, consideration) “ If not the contract will be void by a court. Economic duress make the new rates imposed by any parties during execution of the contract are void the dispute is which is right the contract is binding or void
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Section 1 : Classification of claims by subject Documentation Shortcomings of documents as important information may not have been referred in tender. Correspondences passing between tender and acceptance may not have included in the contract. Ambiguity and discrepancies between documents This may lead to Claims
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Section 1 : Classification of claims by subject Execution of Works
Supply of information / delay in giving Variation Risks / responsibility for . Defects
This may lead to Claims
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Section 1 : Classification of claims by subject Payments Valuation of contract works ( Progress of works) Valuation of varied works( under which item it is executed. This may lead to Claims
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Section 1 : Classification of claims by subject Prolongation Delay for which the employer is responsible Delays in giving drawings and information in consequence the contractor incurs extra cost, the works will be slowed down as if it was stopped, this reduce the productivity of contractor. This may lead to Claims
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Section 1 : Classification of claims by subject Prolongation Delay for which the employer is not responsible Exceptionally inclement weather , Strikes …. Then according to FIDIC the contractor is entitlement to an extension of time but not to Compensation. This may lead to Claims
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Section 1 : Classification of claims by subject Default Failure to complete within the stipulated time for which provision is made for liquidated damages This may lead to Claims
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Section 1 : Classification of claims by subject General Terms Presentation The contractor must clear the “ merit of the claim”
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Section 1 : Classification of claims by subject General Terms Establishment For the contractor to state the reasons why he considers himself entitled
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Section 1 : Classification of claims by subject General Terms Examination The technique to be employed in examining claims , check the facts ( documents which constitute the contract)
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Contents Section 2 – Claims concerning the existence of a contract. General. Recognition of a valid contract. Capacity. Agency. Intention to create legal relations. Consideration. Agreement.
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Contents Section 2 – Claims concerning the existence of a contract. Offer and acceptance. Offers. Revocation. Acceptance. Counter-offers. Acceptance subject to conditions. Letter of intent.
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Section 2 – Claims concerning the existence of a contract. General Claims are mostly concerned with “ entitlements and liabilities “ , for such claims the contract must be come into existence and legally valid, but the existence of a valid contract may be disputed as : An employer issues a letter of intent and denies that a binding contract exists. A contractor denies that a variation or a supplementary contract is binding.
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Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge Cleveland bridge were contractors for building with space frames roof in Dammam. They contacted BSC Company to supply Steel nodes required and issued a letter of intent. As the work is urgent , BSC started immediately and in the fact completed all 137 nodes. The negotiations on the terms of a contact were still continuing , agreement on terms was never reached.
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Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge BSC Sued for 200,000 Pounds as value of nodes. Cleveland Bridges Claimed 800,000 Pounds for damages due to late of delivery nodes. What is held ?
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Section 2 – Claims concerning the existence of a contract. Example :- British Steel Corporation v Cleveland bridge It was held there was no contract .BSC were entitled to 200,000 Pounds as value of nodes. The above case on the basis of quasi- contract and is called “ Inchoate contract”
“ Inchoate contract “ is one where the process leading to agreement has been started but not completed . And it is accordingly not binding in law
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Section 2 – Claims concerning the existence of a contract. Recognition of a valid contract For binding contract there are three essential requirements : Intention to Create legal relations Consideration ( terms of payments). Agreement.
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Section 2 – Claims concerning the existence of a contract. Capacity For a contract to be binding , the parties must each have the capacity to contract.
“ The capacity “ is fundamental and is concerned with legality. “ The Authority “ is concerned with permission. In business an individual may have the legal capacity to contract but not the authority of his employer
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Section 2 – Claims concerning the existence of a contract. Agency An agent is a person with the power to change the legal position of another person known as his “ Principle”. in short an agent has the authority to change Types of agency Actual agency or authority He has written permission to act. Apparent agency or authority He has the authority by conduct to act . 10/17/08
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Section 2 – Claims concerning the existence of a contract. Intention to create legal relations An intention by parties to contract to create legal relations, and to be legally bound by the contents of the contract. Contents of a contract must be clearly apparent. A contract can be enforced be a court. If the parties intended their promises to be binding as a natural of consequence of this , the court will provide remedies for the breaking of binding known as breach of contract.
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Section 2 – Claims concerning the existence of a contract. Consideration The legal word for the money that is paid for the supply of the goods or services which is called :-
“Terms of payments”
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Section 2 – Claims concerning the existence of a contract.
Agreement The final essential requirement for a valid contract is agreement. The agreement must be on all material points.
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Section 2 – Claims concerning the existence of a contract. Offer and Acceptance Agreement is normally analyzed in terms of “offer and acceptance” , due to the communication between parties it called legally “ Bilateral Contract”. The other is called “ Unilateral Contract” does not need communication ,or negotiations for acceptance.
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Section 2 – Claims concerning the existence of a contract. Offer An offer , in order to be capable of acceptance must indicate an intention to be bound. Invitation to treat does not necessary constitute an offer.
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Section 2 – Claims concerning the existence of a contract. Revocation An offer may generally be revoked at any time before it is accepted. Example , “ Tender Bond ” will be loss in case of withdrawal the offer
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Section 2 – Claims concerning the existence of a contract. Acceptance For acceptance of an offer to lead to a binding contract , the acceptance must state which offer is accepted. The acceptance of an offer must be unconditional.
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Section 2 – Claims concerning the existence of a contract. Counter -offer Counter offer Kills off the original offer. Example : The contractor sent an offer to the employer. The employer reply and change the terms of payments for the offer, then the last is called counter offer and kills the first. The contractor sent another offer in replying , then it is called “ counter –counter offer” an kills the “counter – offer”
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Section 2 – Claims concerning the existence of a contract. Acceptance Subject to Conditions If an acceptance is made “ Subject to conditions “ as receiving certain information being received. Then the contract would arise on the receipt of such information
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Section 2 – Claims concerning the existence of a contract. Letter of intent It is important to emphasize that the effect of a letter of intent depends on the wording of the letter rather than its heading. It may lead to “ mini contract “
The End of Section
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Contents Section 3 – Claims arising from documentation. General. Contract / Policy. Errors and discrepancy. AD-HOC Conditions. Counter-offers.
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Section 3 – Claims arising from documentation General In preparing and examining claims it is essential to bear in mind that one is concerned with what the documents say and what provide, not with what on thinks they should have said or what must been intended.
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Section 3 – Claims arising from documentation Contract / Policy For employer and according to his policy to provide for “ Price fluctuation “ in contract .
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Section 3 – Claims arising from documentation Errors and discrepancies
Discrepancies between different documents “ Drawings and Specifications …. ) , generally Drawings should be regarded as stating what is required. The Specifications stating the quality of workmanships and materials. The Conditions of Contract stating the obligations of the parties and the allocation of risks between them . The Bill of Quantities determining the amount to be paid.
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Section 3 – Claims arising from documentation AD-HOC Conditions Conditions of Contract are usually one of the “ Standard Forms” as “ FIDIC, ICE, JCT….. ” In most cases some ad-hoc conditions are needed to drafted to the particular requirements of a given job. Great care is needed in drafting such ad-hoc conditions and must ensure that they are contractually do not conflict with the Standard Clauses. The End Of Section
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Contents Section 4 – Claims in connection with execution of works. Contractor to satisfy himself. Work to be the satisfaction of engineer. Damages to the works. Issue of further drawings , Instructions. Nominated Subcontractor. Defects.
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Section 4 – Claims in connection with Execution of the Works Contractor to satisfy himself It is requirement that the contractor satisfies himself about what he is undertaking . ICE Clause 11 stated “ he is deemed to have inspected and examined the site and its surroundings and to have satisfied himself before submitting his tender as to the nature of the ground and subsoil. If the Contractor requires more information and considers there is insufficient time in the period allowed for tendering he must ask for an extension of the tendering period . The contractor must make his own enquiries consult, geological survey , ask Soils experts, and if he does not , he carries the risk according to FIDIC , ICE 10/17/08
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Section 4 – Claims in connection with Execution of the Works Work to be the satisfaction of engineer The work has to be the satisfaction of the engineer and must be according to . iv. Specification . v. Drawings vi. Employer requirements
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Section 4 – Claims in connection with Execution of the Works Damages to the works
During construction the Contractor is responsible for making good any damage to the works and will will depend on the actual Contract.
Issue of Further drawings and instructions
The Engineer is required to issue Further drawings and instructions from time to time during the course of the work. In any event an Engineer who delays issuing further drawings and instructions then he is putting his Employer at risk.
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Section 4 – Claims in connection with Execution of the Works
Nominated Subcontractor
Nominated Subcontractor Pose very considerable problems, the machinery for their operation in both JCT and ICE. The alternative of separate direct Contract may overcome some problems , but substitute others ( difficulty of coordination and control, and the effect of delay)
Defects
“Defects” in the sense used in maintenance clause , means materials and / or workmanship. The Contractor Is therefore technically in “ Breach” and is entitlement to remedy such breach until the end of maintenance period or “ defects liability Period”
The End of Section
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Contents Section 5 – Claims concerning payment Provisions. General. Valuation of contract works. Valuation of Varied works. Issue of further drawings , Instructions.
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Section 5 – Claims concerning payments Provisions Valuation of Contract works Two schools in respect of valuation of Contract Works. One considers that the rates in the B.O.Q are applying whatever the quantities. Second considers that some adjustment of the rates up or down in case of changing the quantities. Standard Forms of Contracts ( ICE) dealt with these matters
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Section 5 – Claims concerning payments Provisions Valuation of Varied Works Standard Forms of Contracts ( FIDIC) make some reference to the applicability of B.O.Q Prices to Similar Conditions
The End of Section
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