Contract Structure and Documentation - 210

FUNDAMENTS OF CONTRACT
STRUCTURE
LAW OF CONTRACT
 FORMATION OF A CONTRACT

Most construction work is performed under contract, and

therefore a contractual obligation exists.
A contract sets out the obligations, rights and duties of the
parties; sometimes it will contain many detailed terms, but
at other times it can be simply be contained in a letter.
 FORMATION OF A CONTRACT
. A contract sets out the obligations, rights and duties of the
parties; sometimes it will contain many detailed terms, but
at other times it can be simply be contained in a letter.
 FORMATION OF A CONTRACT

.
The principles of the present-day law of contract were laid
in the 19th century. This in UK history saw the rapid
expansion of trade and industry, and an increase in the
volume of commercial and construction disputes
. Businessmen turned to the courts for a solution.
Gradually, the judges developed a body of settled rules
which reflected both the commercial background of
their disputes from which they arose and the prevailing
beliefs of the time
The philosophy was mirrored in the law of contract
by two assumptions:
freedom of contract and equality of bargaining power.
The assumed that everyone was free to choose which
contracts they entered into and the terms on which
they did so.

If negotiations could not produce an acceptable basis for

agreement, the parties were, in theory, free to take
their business elsewhere. The parties were deemed to
be of equal bargaining strength
 FORMATION OF A CONTRACT
A contract is a device whereby rights and obligations are
created between two or more persons. These people then
are known as the parties to the contract. In detail, the
contract will provide:
· Statements and definitions relating to the scope of the
work to be undertaken
· The standards to be achieved
· The terms for payment and the time for completion.
· Mechanisms for the control of the work.
· A statement regarding the risk which each party assumes
under the contract.
 FORMATION OF A CONTRACT
The English law contract was developed at a time when it was
fashionable to permit complete freedom of contract. The
result is a rule of contract which states:
“whatever the parties have agreed, in circumstances where it
is clear that they intended the agreement to bind them, the
law will enforce that agreement through the courts”.
The parties to a construction contract are therefore entirely at
liberty to choose whatever terms and obligations they wish
to govern their agreement.
•Law of Contract forms the basis of trade and commerce
•A contract is an exchange of promises
•Creates legal obligations on both parties
•Creates remedies if the parties fail to meet obligations
•Parties deemed to be of equal bargaining strength
•Two main legal systems
• “Common Law” system
• “Civil Code” system
•A contract has been defined, "A promise or set of
promises which the law will enforce“ However, not all
promises or agreements give rise to contracts.
•Law of Contracts is not the whole law of agreements,
nor is it the whole law of obligations. It is the Law of
those agreements which create obligations and those
obligations which have their source in agreements"
• Common Law system founded in the UK and spread
through countries where UK had an influence.
• UK, India, Australia, Canada and USA amongst others
• The law developed by judges, courts and similar
tribunals
• Decide individual cases but in addition have
precedential effect on future cases
• Civil Code system originating in Europe but many
countries now have a civil code
• Europe, Middle East, South America amongst others
•Common Law or Civil Code

•Statute Law or Procedural Codes

•Specific contract conditions – General and Particular

•Implied terms arising from the contract

 Common Law Civil Code

Common Law Civil Code

Statute Law Civil Procedures

Conditions of Contract Conditions of Contract

Implied Terms Implied Terms

• The Law of the Contract may not necessarily be the law
of the country where the work is being executed

• However, we should differentiate this from the Law of

the Country which will deal with such issues as Planning,
Health and Safety, Labour legislation etc.

• As we will see later when we deal with Dispute

Resolution, we also have to consider:

• The relevant Arbitration Law

• The seat of the Arbitration

• Civil Code (As amended by Federal Law No 1) 1987

• Further Federal Laws

• Civil Procedure Code Federal Law 11 1992 which
includes section on Arbitration

• Federal Decrees
• Law no (22) of 2004 Regarding Promulgating the Civil
Code 22 / 2004

• Further Federal Laws

• Law no (13) of 1990 The Civil and Commercial Code
of Procedure (incorporates Arbitration at Articles
190 to 210)

• Federal Decrees
• Civil Code (As amended by Federal Law No 1) 1987
• Law no (22) of 2004 Regarding Promulgating the Civil
Code 22 / 2004
• Contracts may be classified in terms of their form,
or in terms of their enforceability, or the way they
are created. The formal contracts are known as
deeds. Formally these contracts had to be in writing
and signed, sealed and delivered.
• Other type of contracts is known as simple
contracts. These are contracts may be made orally,
in writing or they may be implied from conduct
Contracts may be classified also in terms of
their enforceability or validity as
1)Valid contracts,
2)Voidable contracts,
3)Void contracts or void agreements, and
4)Unenforceable contracts
A Valid Contract is an agreement which is
binding and enforceable.
A Void Contract is really not a contract at all.
The term means an agreement which is with-
out any legal effects.
A Voidable Contract is an agreement that is
binding and enforceable but, because of the
lack of one or more of the essentials of a
valid contract, it may be repudiated by the
aggrieved party at his option. If the party
having the right to avoid his obligation does
not exercise the right within a reasonable
time, the agreement is binding and
enforceable..
An un-enforceable contract is one which,
though perfectly valid in all other respects,
lacks some technical requirement needed to
make it enforceable. Such contracts will not
be enforced by the courts unless and until the
defects is rectified. These contracts are not
void
An executed contract is one that has been completely
performed. In other words, an executed contract is
one under the terms of which nothing remains to be
done by either party.

A contract may be executed at once, (i.e., at the time

the contract is made), as in the case of cash sale; or
it may become executed in the future by its terms
being carried out in due time
An executory contract is composed of undertaking in
which one or both parties are under an obligation to
do ornot to do certain things. In other words, under
the terms of the contract something remains to be
done.

For example, if an electric supply company agrees to

furnish electricity to another party for a specified
period of time at a stipulated price the contract is
executory. If the entire price is paid in advance, the
contract is still deemed executory; although, strictly
.A unilateral contract means just one party undertakes
an obligation
.
Bilateral contracts or synallagmatic contracts means
those under which both parties undertake obligations.

A unilateral contract would be the offer of a reward

for the return of property or lost cat.

A bilateral contract comprises the exchange of a

promise for a promise such as 'I will find your cat if
you promise to pay me $10
• 5 key elements to a Valid and Binding Contract
• An agreement made between the parties consisting of
• Offer;
• Acceptance; and
• Consideration
• Intention to create legal relations
• Certainty as to the terms of the Agreement
• the parties must be legally capable of forming a
contract and, in some cases, certain formalities
must be complied with.
•Important tenets of the law – Offer, Acceptance and
Consideration
•Most important to remember – ACCEPTANCE MUST BE
CLEAR, COMMUNICATED AND UNQUALIFIED
•Final and unqualified assent to the terms of an offer
•Intention to place order not sufficient
•Where offer makes alternative proposals it must be clear
which alternative is being accepted
• Acceptance not valid if attempts to vary the offer e.g.
• amend the quantity
• change fixed price to variable
• These are considered as counter offers

• UAE Article 140.- (1) The acceptance must coincide with the offer.
• (2) If the acceptance exceeds the subject matter of the offer or
places a restriction on it or varies it, that shall be regarded as a
rejection containing a new offer.
•Tender normally amounts to an offer
•Where tender accepted without qualification this will
create a binding contract
•Unless, terms stipulate that certain formal documents
have to be executed
•Where tender for indefinite amount, acceptance only
binding when order placed for specific amount
•Tender for indefinite amount – whether it can be
withdrawn depends on wording
•Difference between conditions and warranties:
• conditions – goes to the root of the contract. Entitles
the injured party to damages and to repudiate the
contract
• warranties – entitles the injured party to damages
but not necessarily repudiation
• Warranties has 2 distinct meanings:
• the first as an express term of the contract as
described previously
• the second is a warranty often provided to an
Employer by a sub-contractor where the
subcontractor has carried out design
• called a direct or collateral warranty
•Opposite of Express Terms
•Implied Terms, implied by the court, by custom or by
statute:
• implied by the court
• implied in fact
• Implied in law
• implied by custom – but not contrary to the express
terms
• implied by statute
•UAE Article 246
• The contract shall not be restricted to an obligation upon the
contracting party to do that which is (expressly) contained in it,
but shall also embrace that which is appurtenant to it by virtue
of the law, custom, and the nature of the transaction.
•Qatar Article 172
• A contract shall not be limited only to binding a party to its
provisions but shall also cover whatever is required by law,
customary practice and justice in accordance with the nature of
the obligations contained in the contract.
•UAE Article 141
•If the parties agree on the essential elements of the obligation and the
remainder of the other lawful conditions which both parties regard as
essential and they leave matters of detail to be agreed upon afterwards
but they do not stipulate that the contract shall not be regarded as made
in the event of absence of agreement upon such matters, the contract
shall be deemed to have been made, and if a dispute arises as to the
matters which have not been agreed upon, the judge shall adjudicate
thereon in accordance with the nature of the transaction and the
provisions of the law.
• Express an intention to enter into a contract
• Must be cautious to ensure correct wording
• Should state that only legally binding in respect of the
limited work to be carried out
• Preferable to state an upper limit in value terms of the
work to be carried out
 Each letter of intent must be construed in its own fact
content.
For example, it may be just a letter of comfort intended
have no legal effect an intention to carry out work pend
the formal agreement of a more complex contract for wh
one party will pay the other party a reasonable sum if
final agreement is not concluded
Include an executory ancillary agreement entitling
recipient of the letter of intent to reasonable costs (“quant
meruit”) if the future complex contract is not concluded a
imposing an obligation on the recipient of the let
regarding the quality and suitability of the work carried
pursuant to the terms of such a letter
“I am writing to confirm that it is our company’s intention, subject to
the satisfactory conclusion of negotiations between us, to place a sub
contract with your company for ....(eg the design, supply, construction
and commissioning of .............) for the sum of £............ This letter is not
intended to create a legally binding contract for anything other than
the limited works stipulated in this letter.

On the placing of the contract with you, all work carried out by you
under this letter of intent will be deemed to have been carried out by
you under the terms and conditions of the contract.

Please take this order as an instruction to commence work pending

the finalisation of the contract documents for signature.

Please acknowledge your acceptance of this letter and confirm that

you will be starting work as per the schedule. Thank you.
• Clarity and Certainty

• Procedures

• Risk Allocation
• Parties rights and obligations
• Extent of design
• Provision of guarantees, bonds and insurance etc.
• Variations
• Unforeseeable conditions
• Termination
• Etc. etc. etc
 As well as setting out the parties’ rights and obligations,
the construction contract should also provide the parties
with procedures to be followed in certain cases or to
obtain a certain result. One important aspect of the
procedural side of contracts such as FIDIC is that they
set out rules for the notification and processing of
claims.

• Variation process

• Interim payments
A properly written construction contract will allocate
the risk of loss or damage occurring to the project
clearly and completely, so that each party knows
precisely which risks he bears and what the
consequences are should a risk eventuate:

•Design – Employer, Contractor

•Geotechnical investigations, unforeseeable conditions

•Availability of resources, weather, political risks

Does the design for critical parts of the plant
or structure, for example, achieve the
performance expected? Is it efficient and
workable?
Which party bears the risk of
geotechnical investigations, for
example, where tunnelling or extensive
excavation work is required ?
Which party bears the risk associated with the
construction process: the availability of resources and
materials, on time, in the right quantities and of the
right quality; encountering unexpectedly poor ground
conditions even where adequate site investigations
have been carried out; the occurrence of
unforeseeable events such as bad weather, flooding,
and the risk of injury to persons and damage to
property; and industrial and political risks, of labour
disputes, war, or other civil disturbance
Will the Employer or owner pay when the work stages are
achieved?

What happens if the contractor become insolvent before

the work is competed?