Construction Contracts: Key Terms & Legal Concepts

Topics

• Framework / environment
• Meaning of common terms
• Formation of contracts
• Execution of contracts
• Tenders / Code of Tendering
• Procurement basics, cost engineering
• Basic legal concepts

Framework/Environment

• 'Work under the Contract' (WUC) and 'Work under the Subcontract' (WUS) is term from the contract.
• 'work' and 'the Works' are terms from the contract.
• Part 3 Licensing means 'building work' under the QBCC Act and QBCC Regs.
• Part 4A Building contracts includes subcontracts and means 'building work', other than DBC and under the QBCC Act and QBCC Regs.
• Part 5 Home Warranty Insurance includes 'residential construction work', 'primary insurable work', and 'associated insurable work' under the QBCC Act and QBCC Regs.
• Part 6 Rectification of Defective Building Work and Remediation of Consequential Damage refers to 'building work' under the QBCC Act and QBCC Regs.
• Part 6AA Building Products means 'building products' under the QBCC Act and QBCC Regs.
• Schedule 1B Domestic Building Contracts refers to 'domestic building work' and 'excluded building work' under the QBCC Act and QBCC Regs.
• "Project trust work", "protected work", and "related services" are used in Chapter 2 Statutory Trusts.
• Chapter 3 Progress Payments includes 'construction work' and 'related goods or services'.
• Chapter 4 Subcontractors' Charge includes 'work'.
• 'building work' is in item 13.
• 'labour hire services' and 'labour hire services provider' are in items 14 and 15, respectively.
• Common law, Law of Torts, Criminal law, Property law, Employment law, Constitutional law, and Administrative law are all part of the framework.
• Queensland legislation is located at http://www.legislation.qld.gov.au

Legislation Applicable to Contract Type

• Domestic building contract (single house, duplex) - head contract: Parts 3, 5, 6, 6AA QBCC Act; Schedule 1B QBCC Act; Chapter 3 BIF Act; LHL Act; and Building Act.
• Head contract for building work: Parts 3, 4A, 5 (possibly), 6, 6AA QBCC Act; Chapter 2 BIF Act; Chapter 3 BIF Act; Chapter 4 BIF Act; LHL Act; and Building Act.
• First Tier Subcontract (for building work): Parts 3, 4A, 6, 6AA QBCC Act; Chapter 2 BIF Act; Chapter 3 BIF Act; Chapter 4 BIF Act; LHL Act; and Building Act.
• Lower Tier Subcontracts (for building work): Part 3 (possibly), 4A, 6, 6АА QBCC Act; Chapter 3 BIF Act; Chapter 4 BIF Act (not on DBW); LHL Act; and Building Act.
• Civil engineering contracts (e.g. roadworks): Parts 3, 4A, 6, 6AA QBCC Act (sometimes); Chapter 2 BIF Act; Chapter 3 BIF Act; Chapter 4 BIF Act; LHL Act; and Building Act (sometimes).
• Mines / Heavy Engineering contracts: Part 3, 4A, 6, 6AA QBCC Act (sometimes); Chapter 2 BIF Act (possibly); Chapter 3 BIF Act; Chapter 4 BIF Act; LHL Act; and Building Act (sometimes).
• Supplier contracts: Part 6AA QBCC Act; Chapter 2 BIF Act (sometimes); and Chapter 3 BIF Act.
• Consulting contracts (e.g. engineer, architect): Parts 6, 6AA QBCC Act; Chapter 2 BIF Act; Chapter 3 BIF Act; LHL Act; and Building Act.

Common Terms

• A contract is a promise or set of promises which the law will enforce under some circumstances.
• Contract Administration is the administration of the rights and obligations created by the contract.
• A contract may be in writing, verbal, or partly written and party verbal.

Elements of a Contract

• Agreement (offer and acceptance)
• Certainty and Completion
• Intention to create legal relations
• Consideration
• Legal capacity
• Legality of purpose

Offer

• It is a proposal by one party, offeror, to another to do something or not to do something.
• It differs from an invitation to offer such as a request for expressions of interest or an offer to tender.

Acceptance

• "Meeting of the minds" is a must, offer has is to match.
• Silence generally does not mean acceptance; notification is needed.
• Counter-offer is not acceptance.

Certainty

• It is important to be able to show the terms of an agreement.
• Unclear terms may lead to unenforceability due to the inability to demonstrate the offer and its acceptance.
• To determine the outcome concerning uncertain aspects, there is a chance for them to be removed from the contract without influencing the entire agreement, provided that the agreement remains secure.

Intention

• Both parties involved need to intend to enter a legally binding agreement when offering and accepting; the agreement must create enforceable rights and obligations.

Consideration

• This is the 'price' paid to the offeror/promisor in exchange for their promise
• $1 can be sufficient in consideration
• It is not always a fundamental element of a contract
• It doesn't need to be monetary - it requires a benefit to one party or could act as a detriment to one party.

Capacity

• One must have the legal capacity to understand the agreed-upon bargain.
• Parties have to willingly enter the contract without force.
• The consideration of cognitive function, mental age and capacity, language barriers, maturity, socio-economic elements, and physical age is a must.

Legality

• A certain agreement that goes against legislation/law can be unenforceable.
• Contactors are not permitted to enter into building work-related contracts so thy cannot depend on the agreement.

Basis of a Contract

• Verbal or Written
• Partly verbal and partly written
• Partly implied and partly express terms
• Some express duties and some implied duties
• Express terms are written terms
• Terms implied by legislation include Schedule 1B QBCC Act and domestic building contracts or common law.
• Express duties are written into the contract.
• Implied duties are to do everything to enable the other party to perform the contract and to act in good faith.

Risk Allocation

• The party best able to manage a particular risk should bear it.
• Typically refers to 'legal' control, not 'physical' control
• If either party would typically bear the risk, project productivity is important to consider

Risk Allocation Examples

• Design under a ‘construct only’ contract: Principal
• Increased materials prices if the contract has a ‘rise and fall’ clause: Principal
• Delays due to variations to the contract: Principal
• Design under a ‘design and construct’ contract: Contractor
• Wet weather: Contractor
• Delays due to suppliers and/or subcontractors: Contractor
• Industrial relations: Contractor

Parties to the Contract

• Higher party is the contracting party engaging their contractual chain.
• Lower party is the contracted party executing work for the contracting party.
• Contracting Party must pay the contracted party the contract price.
• The Contracting Party must give possession of the site to the contracted party.
• The Contracting Party must provide the contracted party with information and documents to perform the works.
• The Contracting Party must respond to claims made by the Contracted Party within prescribed times.
• Contracted Party carry out the work in accordance with the contract and all relevant legislative requirements.
• Contracted Party supply all labour and materials UNO.
• Contracted Party manage industrial relations and site safety.
• Contracted Party submit claims with prescribed timeframes.

Formation of Contracts

• Contracting Party issues an invitation to offer, request for tender.
• Contracted Party submits an offer as a tender.
• Contracting Party accepts the offer via letter of acceptance.
• Contract terms are agreed on, preferably in writing.
• Consideration is provided by the principal as the contract price.

'Others' Relevant to a Contract

• A Principal's Representative represents the Principal.
• A Contractor's Representative represents the Contractor.
• A Superintendent may be appointed by the Principal to administer the contract.
• Representatives and Superintendents are not parties to the contract but are responsible under the contract for their actions.
• Principal will be in breach if Superintendent fails to carry out their duties in accordance with the contract.
• Superintendent is to act honestly, fairly, and reasonably.
• Superintendent must act within the time prescribed by the contract.
• Superindentent must arrive at reasonable measures for the value of work quantities and time.
• Superintendents are to give directions.
• Contract may state that the Principal's Representative/ Superindentent may only be required to act in the Principal's best interest.
• A Superintendent's Representative carries out some or all of duties that are assigned to the Superintendent.

Common Terms

• Contracting Party: The person engaging the contracted party (higher party in the chain).
• Contracted Party: Person engaged by the contracting party (lower party in the chain).
• Scope of works: Work and goods that must be done/supplied under the contract.
• Practical Completion: When work is completed in accordance with the contract. May be a specified term in the contract or by legislation.
• Date for Practical Completion: Date when work must reach practical completion
• Date of Practical Completion: Date when work actually reached practical completion
• Variation: Any change to the contract terms including design, quality, specifications, materials, order of work, timeframes, scope price, etc.
• Delay: Event that causes work to be done at a later time.
• Extension of time claim: A claim asking for the Date for Practical Completion to be extended to account for a delay due to an event the party is responsible for.
• Damages: Loss suffered due to a breach of contract. It must be proven.
• Liquidated Damages: Damages due to a breach in the contract for late completion of work. It is an agreed amount but it has to be reasonable before entering the contract. These do not need to be proven to be enforced.
• Progress Payment Claim: Claim for payment for work completed to date.
• Stage Payment Claim: Claim for payment for a package of agreed work.
• Payment Schedule: Party assessment of the amount due to the other.
• Security: E.g. Bank guarantees, cash retention and insurance bonds for performance of contract.Can be given by both parties, usually the Contracted party.
• Defective Work: Work not in accordance with the contract and Legislative requirements (e.g. National Construction Code)

Execution of Contracts

• Double signatures
• In counterparts (one person signs and sends it to the other, the other signs and sends back)
• Consistent conduct

Procurement

• Engineering includes feasibility, schematic design, detailed design, tender assessment innovation, operations, construction, constructability, and objectives.
• It also refers to Alignment of objectives, Probity, Clarity, Competition, and Adversarial.

Traditional Procurement

• It goes in order of Principal>Architect>Building Contactor>Sub-Contractors, or Principal>Design Consultants and Quantity Surveyor> Building Contactor>Nominated Sub-Contractors.

Tender Process

• A Contracting party seeks prices and terms from entities to carry out work.
• The party requests for a tender consideration.
• Done via a public form of advertisement or a short pre-qualified list.
• Invitation to tender includes contract terms, and the tender is submitted (typically confidential).

Code of Tendering AS4120

• The standard seeks to encourage high ethical standards in construction through productivity, eliminating malpractice, and quality work; this will benefit the entire community.
• Sets the parameters for best practices and denies condoning unethical behavior.
• Adoption of this standard requires the willingness to deal with those who follow the performance and behavior set out.

Code of Tendering Obligations of Parties

• Call for tenders
• Returning of tender documents
• Evaluation of tender document submission

Basic Legal Concepts

• Estoppel: Involves fairness and reasonability (detriment of unfair departure in promise).
• Waiver: Choosing to abandon under contract/right that must be known.
• Quantum meruit: What the job is worth.
• Unjust enrichment: When one party derives benefit at the expense of another.
• Time at large: No agreed time limit - must be reasonable.
• Prevention principle: Party cannot benefit if in breach or responsible for a delayed work.
• Order of precedence: Application of certain contract documents on discrepancies or incoherence.

Construction Contracts

• Recall from Week 1:
  • Construct only
  • Design and construct
  • Construction management
  • Minor works
  • Domestic building works
  • Design consultancy services
• The Engineering process also includes:
  • Procurement and construction management (EPCM)
  • Procurement and construction (EPC)
  • Design, construction, maintenance (DCM)
  • Build, Own Operate (BOO)
  • Build, Own, Operate, Transfer (BOOT)
  • Build, Lease, Transfer (BLT)
• Different basis to calculate contract price:
  • Lump sum
  • Fixed
  • Costs plus
  • Schedule of rates
  • Bill of quantities
  • Guaranteed maximum sum (GMS)
  • Guaranteed maximum price (GMP)