Construction Contract Management
“Ref to the Syllabus”
Lec 2
What is a Contract!!
• Malik sb is interested to repair his house
• If Makhdoom Sb says to Malik Sb, ‘I will repair your house.
• Malik Sb makes no promise in return. No agreement
• If Malik Sb says, ‘I will pay you 1000 rupees, then there is still no agreement. Why?
• An agreement involves an exchange of promises or goods.
• Makhdoom Sb has not yet agreed to accept 1000 rupees for doing the work
• If Makhdoom Sb says, ‘I will accept 1000 rupees, there is agreement on price, but is there a
contract?
• Makhdoom Sb and Malik Sb must know exactly what work is necessary, for example repair of a
leak in the roof. In that event, the actual work to be performed is agreed and there may be a
contract.
• Unless there is agreement on all the essential terms, the law does not recognize the existence of
a contract.
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What is a Contract!!
• Express and Implied Terms
• The contract is the sum of express and implied terms.
• Effort is to reduce implied terms: Nothing should be left to be
implied
• In reality implied terms do exist
• The contract consists of following express terms:
Makhdoom Sb will repair Malik Sb house
Malik Sb will pay $1000
Makhdoom Sb will accept $1000
• These terms are said to be ‘express’ because they are the
actual words written or spoken. 3
What is a Contract!!
• Implied Terms
• The contract also includes two types of ‘implied’ terms. An implied term is
one that ‘goes without saying’.
• The first type of implied term is implied from the circumstances — since
Makhdoom Sb and Malik Sb know exactly what repair work they are referring
to, the implied term is: ‘The work is the repair of the leak in the roof’. If both
or even one party doesn’t know exactly what repair work they are
referring………Not IMPLIED
• The second category of implied term is implied by law. The law implies
certain terms in any contract in which the express terms do not cover the
matter. Some of the terms that the law would imply in this contract would be:
• the work will be completed within a reasonable time
• payment will be made upon completion of the work
• the work will be done in a reasonably workmanlike manner
• Malik Sb will give Makhdoom Sb reasonable access to the roof to enable him to carry
out the work.
• Terms may also be implied by statute (law), for example health and safety
What is a Contract!!
Not all agreements are contracts:
• the agreement was not meant by the parties to create a
legal relationship (e.g. an agreement by a parent to buy a
child an ice-cream if the child behaves properly — it was
never envisaged by either party that breach would give
rise to a right to sue for damages)
• the promise of one party was made under duress (e.g. at
knife point)
• One party did not have a capacity to make a legally binding
bargain (e.g. a person under 18, someone handicapped)
• the terms of the agreement are not sufficiently certain
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Agreement
Essentials of Forming an Agreement:
•Parties - There must be two or more parties to form an agreement.
•Offer or proposal - The proposal must be made by one party to the other.
•The person(s) to whom the proposal has been made must clearly understand all the aspects and terms of
the proposal
•Acceptance - The offeree or the person to whom the offer has been made, must accept the proposal and
give his assent to all its terms: When the proposal is accepted it becomes an accepted proposal or a
promise. A proposal is not synonymous to a promise but becomes one only after its acceptance
What when followings essential comes:
Consideration - An agreement is accepted with a consideration which is the price for the promise made to be
paid as a consideration.
Legal Obligation- The parties entering into a Contract must have the intention of entering into a legal
obligation. Social agreements and obligations are not considered a Contract as they do not create any legal
obligations on any party.
Certain Terms- A legal Contract must have certainty of meaning. E-G A valid Contract must define the exact
amount that A intends to pay B for buying his house.
Possibility of Performance- A Contract is considered valid only when it does not involve the performance of
an impossible Act.
Competency- The parties must be legally competent to enter into a Contract
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Legal Consideration- as something not forbidden by law.
QUIZ
An agreement to sell a bike for Rs10000 may be a contract Yes/No
An agreement to go to the movie may be ---------------------.
a mere agreement not enforceable by law. To go to a movie is a social agreement and social agreements are not
enforceable by law.
Discussion point
Let’s imagine you tell your friend to come and stay at your house while in the area. Your
friend agrees…..
Is this a Contract or Agreement?
How it will be changed to contract or agreement?
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Essential Elements of a Contract
• Competent Parties – anyone, acting in good faith, can enter into a contract (excludes
minors, persons intoxicated, or deemed mentally incompetent)
• Lawful Subject Matter – definite and clearly defined, cannot violate dictates of
common law nor be contrary to public policy
• Certain Terms - A legal Contract must have certainty of meaning
• Consideration – exchange of something of value applies to both parties
• Meeting of the minds – parties agree on the basic meaning and legal implications of
the contract
• Offer and Acceptance
• Offer is revocable as long as it has not been accepted – acceptance creates the contract
(submission of a bid is an offer….)
• Acceptance must be definite, unqualified and unconditional
If above elements exists - Legal Obligation – Breach can be challenged in courts
1. A Agrees to Buy B’s House for a Sum of Fifty Lakh Rupees. Is this a
Valid Contract?
Ans: It will be a valid Contract only if:
•B has been made a party to this Contract
•Since the statement says that A ‘agrees’ to buy the house, it denotes that an offer has been
made to A and if he accepts the offer he must communicate his acceptance to B.
2. James Puts an Advertisement Outside His House for Selling it for One
Lakh Rupees. Jack Sees the Advertisement and Agrees to Buy the House
but James Refuses to Sell the House to Him. Can Jack Sue James for
Breach of Contract?
Ans: The advertisement was only an invitation to offer and not an offer by itself. Since James
had not accepted Jack’s offer or bid of purchase there was no Contract between them.
Acceptance is an integral part of a valid Contract. Hence Jack cannot sue James for a breach of
Contract.
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Lawful Subject Matter
• Contractor was to build a building that was in
compliance with all applicable laws, regulations,
and codes. When construction was well
underway, it was discovered that the building had
major deficiencies related to fire escape laws.
The owner contended the contract had been
breached. The contractor said it was his first
building in that city and was not aware of the
laws.
• Q: Is ignorance of the law an excuse?
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Lawful Subject Matter
• Decision:
• No. When a contract is entered stipulating
compliance with certain laws, it is the contractor’s
duty to ascertain what the laws are.
The Contractor’s Legal Problems by Hayward - p. 27
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Meeting of the Minds
• A roofing contractor entered a purchase agreement
with a supplier of roofing materials for a set price.
The contract could be altered due to “strikes, fires,
transportation, and business conditions that render
performance commercially impracticable”. Both
parties were beneficiaries of the clause. The price of
roofing materials spiraled up (+10%) due to inflation.
The supplier refused to deliver at the agreed price
contending it was “commercially impracticable”.
• Q: Was the supplier obligated to deliver?
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Meeting of the Minds
• Decision:
• Yes. Although it may be “commercially unprofitable”,
the clause in the agreement did not apply. The
contractor bought the supplies from another firm and
successfully sued the original supplier for the
difference in the prices.
The Contractor’s Legal Problems by Hayward - p. 45
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Offer and Acceptance
• When a local cement supplier ran out of stock, a
contractor ordered 850 bags to be delivered by an
upriver source at a higher price. Shortly after placing
the order, the local supplier’s cement shipment came
in. The contractor decided to buy from the local
supplier and pay damages for returning the cement
upriver as agreed by upriver source. Two days later a
shipment of 1,000 bags from upriver arrived. Since
850 bags had been ordered, the contractor said he
refused the entire shipment of 1,000 bags.
• Q: Must the cont’r buy any upriver cement?
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Offer and Acceptance
• Decision:
• A seller who “knowingly sends more or less than the
quantity ordered is guilty of an intentional violation of
the contract...” The seller got greedy and padded the
order. The contractor owed nothing.
The Contractor’s Legal Problems by Hayward - p. 10
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Consideration
• A contractor sublet the foundation to a subcontractor,
who in turn sublet the excavation to a sub-subcont’r.
The subcont’r did not pay the sub-subcont’r so the
sub-subcont’r quit. The contractor told the sub-
subcont’r to finish the work and he would pay him
$3/yard extra. When the sub-subcont’r finished the
work, the contractor refused to pay since there was no
consideration. He had simply asked the sub-subcont’r
to do what he had already contracted to do.
• Q: Must the contractor pay for the work?
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Consideration
• Decision:
• The contractor received the benefit of the sub-
subcontractor’s work, sufficient benefit to qualify as
consideration.
The Contractor’s Legal Problems by Hayward - p. 154
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Nullifying a Contract – Contracts are
based on facts
Can nullify a contract if….
• Parties do not have same perception of the subject of the agreement
• Subject of agreement does not exist due to death, destruction by fire
etc.
• Misrepresentation – innocently giving a false or misleading account of
the nature of something- If the buyer knows the original nature,
he/she won’t be entering into the contract
• Fraud – intentional deception intended for financial or other gain
• Duress - threats, violence, constraints, or other action brought to bear
on someone to do something against their will or better judgment
Adhesion
• Contract formed when one party, due to the strength of its bargaining position, gets
the other party to agree to lopsided terms
Examples may be:
• Leases and rental agreements
• Mortgages
• Automobile purchases
• Consumer credit applications
• Insurance documents
• Installment contracts
• End-user license agreements
Estopple
• A contract can be binding in spite of the fact no formal agreement
was made between the parties
• Essentially a court action that asserts a contract did exist based on
behavior of the parties
• Promissory Estopple – not the same as estopple –
• example – subcontractor submits bid,
• Prime relies on the bid in its bid,
• subcontractor refuses to sign a contract,
• Prime has to hire more expensive sub.
Estoppel
• November 18 - Sub gives base quote of $28,000;
contractor uses the sub’s price; contractor does not
officially accept the bid.
December 3 - Contractor orally accepts the sub’s
price.
December 21 - Sub submits base quote of $29,876.
April - Sub submits base quote of $33,562.
August - Work is completed by the sub; contractor
and sub disagree on amount due.
• Q: What amount should the sub receive?
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Estoppel
• Decision:
• Sub’s quote of November 18 was used by contractor.
Estoppel puts that value in the agreement.
Subsequent quotes entailed no consideration above
the initial quote. Pay $28,000 to the sub.
Ferrer v. Taft (587 P 2d 77)
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Contracts on the basis of
Validity
Illegal Contract
A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of law or is
fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to
public policy. These agreements are punishable by law
Valid Contract
An agreement enforceable by law when all the essential features of a valid contract are present
Void or Voidable Contract
A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid
and binding on the parties. It may subsequently become void.
An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of
other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right
on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and
enforceable unless it is repudiated by the aggrieved party.
Example
• A threatens to shoot B if he does not sell his bike to A. B agrees. This contract is voidable at the option of B
• “A contract which ceases to be enforceable by law becomes void.”
• The contract is voidable if a minor is involved as a one party at the option of minor
• Contract is voidable if one party breach the contract
• If elements of contract are not present, contract becomes void or voidable 23
• A contract is illegal if dealing with unlawful subject
