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Ad hoc and standard contracts are the two types of contracts mostly found in Construction law. A standard form contract is usually used when appointing a contractor to construct a building, but it is sometimes used especially in housing construction.
In the housing construction market, ad hoc contracts are used, which are prepared based on the needs and terms of one party(Fisher Stark Cash, 2012).
In modern times, industrial activities related to building construction are very complicated, and standard contracts take an important place in the daily transactions of most contracts. The use of standard-form contracts is not essential, but it is very beneficial.
The motive of standardizing a contract is usually to describe the principal variables related to building procedures and business.
For example, sometimes, the actual work done by the contractor differs from the work described in the contract, and these differences are the main cause of many disagreements and disputes. In such situations, standard contracts prescribe arrangements to deal with such differences.
Standardcontracts are generally prepared by an authorized body of the sector, to which all the parties recognize, framing the terms and provisions which set the limitations for carrying out the work. In the true spirit of standardization, these forms are not and work.
Among the many standard forms of contract in the construction industry are NEC, JCT, and FIDIC(Davis, 1986).
The use of standard forms of construction agreements has several benefits. Standard contracts normally come from various sectors of the construction industry.
They have been designed as an output of an action of debate between the different sectors of the industry. Moreover, a number of groups are entertained and considered in the preparation of standard contracts; there is a probability of fair and balanced risk reduction among the parties involved.
The main cause that makes the construction industry accept the standard forms of contracts is awareness. The main benefit of adopting a standard contract form is that by regular use of a document, parties become familiar with the contents of the agreement. Hence, they are aware of its effectiveness and loopholes. Precedent is the other vital factor that originates from being similar to the contract and is beneficial to the involved parties. (Murdoch & Hughes, 2007)
Standardization of contract forms provides fundamental legal frameworks that recognize the rights, responsibilities, and duties of the parties and highlight the scope of the contract manager’s powers and duties.
Additionally, the standardization of contracts guides a greater degree of confidence and trustworthiness during the process of tendering . They become the basis of evaluation and familiarity with the content makes it convenient and faster in pricing as well.
Facts:
- ABC Construction Ltd has received a letter from XY developers regarding their tender dated 7 June 2014 for the construction of XY homes.
- The XY developers, in their letter through their Chief Executive Richard Butler, have confirmed that they intend to award the carrying out of the work to ABC Construction.
- XY developers, through their letter, also informed ABC construction to mobilize and stated that they would be penalized 50 pounds per day in case of delay in the completion of work.
- After receiving the above letter, ABC Construction Ltd. started mobilizing and made arrangements by placing purchase orders to complete the work on time.
- When ABC Construction asked XY developers for advance payment, XY Homes denied the existence of any contract.
Issues:
- Did the parties ABC Construction Ltd and XY Developers have a valid contract existing between them?
- Are XY developers legally bound to pay the damages to ABC Construction Ltd?
Relevant laws:
- The contract between the parties ABC Construction Ltd and XY Developers is completed when ABC Construction Ltd receives the letter of intimation from the Chief Executive of the XY Developers(Company, 2013). The chief executive is an authorized person to intimate the contracting party about the acceptance of their offer. The XY developers cannot deny the existence of the contract as the tender of ABC Construction Ltd dated 7th June 2014 was an offer made to XY Developers, which they have accepted through the letter of intimation from the chief executive of XY Homes. (Kirsh, H. J., & Roth, 1997)
- ABC Construction Ltd with their Bonafide intention to complete the work on time and to avoid the penalty as stated in the letter from the XY developers started mobilizing and placed purchasing orders believing the statements made in the letter, making the XY developers bound by the law of contract to pay the damages incurred by the ABC Construction Ltd.
Conclusion
The ABC Construction Ltd has a good chance of succeeding in action for damages against the XY Developers
Once parties enter into a contract, they need to identify what obligations the contract imposes on them. To identify these obligations, the parties need to understand the terms it includes.
Contracts include three types of contractual terms: the express terms of the contract, the implied terms of the contract, and legal responsibility under the law of tort.
The express terms are those which are specifically agreed between the parties to the contract. A written contract, express terms are those which are written in the contract document.
While the contract is a valuable management tool and the express terms of it guide the parties’ actions, in some instances, its legal impact can be worthless without an awareness of the law that governs it(Pope, 2011).
The law can impose liabilities or responsibilities that are simply not mentioned in the written contract. In other circumstances, the law will provide the manner in which the express terms of the contract will be interpreted by the court of law.
Liquidated damages are usually provided for delays in construction contracts (a pre-agreed amount of money to compensate the employer if the contractor delivers the project late). Still, the law allows the court to reduce or extinguish the sum entirely.
Then, there are cases where the law will overrule the express terms the parties have agreed to in the contract. For example, any express term restraining the parties from making a claim for breach of contract will be overruled by the law.
An express term will not be binding if performing it would be illegal or even just contrary to public order or morals. (Dahlin, R. L., & D, B. G. ,2006)
Implied obligations in construction contracts. The formation of construction contracts requires that some of the obligations in the absence of express terms are read into contracts.
These are referred to as implied obligations. Parties to contracts for construction, subcontracts, consultancy work, and design should also be aware that the Courts will, in relation to some affairs, import language to satisfy the Parties’ motives.
Accordingly, what obligations the Courts will entail in a contract will completely rest on the facts of each case; however, introducing obligations in order to make the contract fair is not likely to happen.
Any term included has to be essential to make the contract work, and the Courts will try to avoid obstructing the free bargaining power of the Parties.
In so far as workmanship is related, when express terms are not present there is an indirect obligation that the bodily implementation the Contractor shall do the work with proper procedure and with the skill and care of an ordinary competent workman. (Dubroff, H.,2006)
A tort is a wrong of civil nature which is not based on a contract. By using Limitation of Liability headingsthe contracting parties try to limit their general loss exposure to a fixed (pre-agreed) price.
Limitation of Liability clauses can provide certainty and help the parties govern and reduce risk when entering into new transactions(Salmon LLP, 2005).
- Articles of agreement: an article of agreement is a memorandum or set of obligations in a standard construction agreement which is in writing. The articles of agreement contain all the conditions of the construction agreement. The articles of agreement include all the terms and conditions of the time and procedure to complete the work by the contractor.
The articles of agreement contain all the conditions regarding the working procedure and the time within which the work is to be completed.
The articles of agreement provide specifically the number of subcontractors to be deployed in the carrying out of the work.
The articles of agreement are an important document for adjudicating the disputes arising out of the contract. The articles of agreement play a vital role in fixing the liability in case of breach of a contract. (Thrope, J. ,1999).
- Particular and general conditions: particular or general conditions are those which are set out in standard forms which are prepared by one of the engineering institutions. Particular and general conditions are an essential document of the contract. This document contains all the conditions of the contract. General conditions are the common conditions of the contract while the particular conditions refer to the conditions specifically related to a specific contract(Out-law.com, 2011).
The conditions of the contract govern the rights and liabilities of the parties to the contract. They are the central element of the contract, bringing together the other documents and defining their importance and effect.
The conditions of contract contain standard general conditions published by FIDIC and any particular conditions that are specific to an individual contract. (Caplicki,2008)
- Specifications:the contract specifications are essential for understanding the work completelyto be performed by the contractor. Most conditions of the contract recognize the importance of construction specifications and refer to specifications as a part of the contract documents, with equally important as are the drawings. Because of this, it is imperative that all parties identified in the agreement understand the role of specifications and understand how the specifications are used in the bidding and performance of the work under the contract. (Spratt, 2011)
- Drawings: drawings are a vital document of the contract. Drawings are the graphic descriptions of the work to be done by the contractor. Theserepresent the form, size, location and arrangement of various elements of the project. This information should not be described in specifications because it is best visible in graphic drawings. The purpose of the Drawings is to convey information regarding the intention of the design and depictions of the work to be accomplished.
- Bills of Quantities: The motive of bills of quantities and their status, may differ under different standard form contracts. That’s why when used, they are beyond doubt specified as a contract document. In JCT agreements, when bills are used they are known as contract bills and they have a broad ranging role because they define the obligations of the contractor for quality and quantity of the work(Maxwell, 2011).
This new act has the potential to change the whole regime of third-party liabilities in construction projects and remove the justifications for collateral warranties.
Collateral warranties have arisen in part because of the law of privity of contract which means that only parties to the contract can initiate an action for the breach of contract(Naddaf, 2013).
This is turned upside down with the new law so that even the third parties to the contract, such as finances, end users and purchasers can also be given rights under the contract which each of them can enforce.
This will arise where the terms of the contract in writing state that the third party can legally bind a contractual obligation. It is not necessary that such a third party be specifically identified by name. It could be identified as an associate of a class or answering a particular interpretation.
The result is that instead of receiving collateral warranties, third parties can now be identified in the professional appointment or building contract and given the right to enforce terms equivalent to all the matters which might otherwise be covered by collateral warranties.
Unfortunately, every change in the law brings uncertainty. Thus far, the general reaction of the construction industry to this act has been that the third party rights should not be used.
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