Learner resource
Unit code: CPCCBC4003A
Unit name: Select and prepare a construction contract
TAFE NSW would like to pay our respect and acknowledge Aboriginal and Torres Strait
Islander Peoples as the Traditional Custodians of the Land, Rivers and Sea. We acknowledge
and pay our respect to the Elders, both past and present of all Nations.
Version:
24/09/2019
Date created:
02/08/2018
Date modified:
21/05/2020
For queries, please contact:
Infrastructure, Energy and Construction SkillsPoint
Mount Druitt
© NSW TAFE Commission 2019
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This resource can be found in the TAFE NSW Learning Bank.
The content in this document is copyright © NSW TAFE Commission 2019 and should
not be reproduced without the permission of the TAFE NSW. Information contained
in this document is correct at time of printing: 21 May 2020. For current information
please refer to our website or your teacher as appropriate.
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Contents
1.1 Types of Contract.................................................................................................................. 7
1.1.1 Lump sum contracts ..................................................................................................... 7
1.1.2 Schedule of rates contracts ......................................................................................... 7
1.1.3 Cost plus contract ........................................................................................................ 7
1.1.4 Design and construct contracts ................................................................................... 8
1.1.5 Management contracts................................................................................................ 8
1.2 Standard printed contract forms .......................................................................................... 9
1.2.1 Head contract ............................................................................................................... 9
1.2.2 Subcontracts................................................................................................................. 9
1.2.3 Nominated subcontractor ......................................................................................... 10
1.2.4 Demolition contract ................................................................................................... 11
1.2.5 Supply agreement ...................................................................................................... 11
1.2.6 Standard building contracts ...................................................................................... 11
1.3 Contract documents ........................................................................................................... 13
1.3.1 Conditions of agreement ........................................................................................... 13
1.3.2 Tender letter ............................................................................................................... 13
1.3.3 Drawings..................................................................................................................... 13
1.3.4 Specification ............................................................................................................... 14
1.3.5 Bill of quantities ......................................................................................................... 14
1.3.6 Evidence of insurance ................................................................................................ 14
1.3.7 Evidence of liquidity/bank guarantee ....................................................................... 15
1.3.8 Conditions of development consent or other authority approvals ......................... 15
1.3.9 Summary .................................................................................................................... 15
1.4 Acceptance ......................................................................................................................... 15
2.1 What is a contract?............................................................................................................. 18
2.1.1 Requirements of a contract ........................................................................................ 18
2.2 Essential elements of a contract ........................................................................................ 19
2.2.1 Acceptance ................................................................................................................. 21
2.2.2 Other provisions relating to offer and acceptance ..................................................... 22
Communication of acceptance ............................................................................................ 22
2.2.3 Consideration.............................................................................................................. 23
2.3 When a contract must be in writing ................................................................................... 24
2.4 Terms relating to essential elements of a contract ............................................................ 25
2.4.1 Intention to create a legal relationship ...................................................................... 25
2.4.2 Consent to the agreement by the parties .................................................................. 26
2.4.3 Objects of the agreement must be legal ................................................................... 27
2.5 Forms of contract ............................................................................................................... 27
2.5.1 Simple and formal contracts ..................................................................................... 27
2.5.2 Express and implied contracts ................................................................................... 27
2.6 Standard express provisions of contract ............................................................................ 28
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2.6.1 General ....................................................................................................................... 28
2.6.2 Documents ................................................................................................................. 28
2.6.10 Payment and adjustment of contract sum.............................................................. 28
The procedure for claiming progress payments and the intervals at which they may be
claimed will be provided here. The time allowed for the other party to respond and the
consequences of failure to respond within that time should also be set out. .................... 28
2.6.11 Final certificate and final payment ......................................................................... 29
2.6.12 Determination .......................................................................................................... 30
2.6.13 Dispute resolution ................................................................................................... 30
2.6.14 Special conditions .................................................................................................... 30
2.7 Implied provisions of contract ............................................................................................ 30
2.7.1 The obligations of the contractor ............................................................................... 31
2.7.2 Obligations of the proprietor ...................................................................................... 32
2.8 Legislative requirements under the Home Building Act 1989 (NSW Specific) ................... 34
2.9 Implied terms ..................................................................................................................... 36
2.9.1 Materials .................................................................................................................... 36
2.9.2 Efficacy of works ........................................................................................................ 36
2.9.3 Compliance with regulations..................................................................................... 37
2.91 Express terms and procedures ......................................................................................... 37
2.91.1 Time for completion ................................................................................................ 37
2.91.2 Permits ..................................................................................................................... 38
2.91.3 Provisional sums ...................................................................................................... 38
2.91.4 Bills of quantities ..................................................................................................... 39
2.91.5 Progress payments................................................................................................... 39
2.91.6 Architects instructions ............................................................................................. 39
2.91.7 Rise and fall clauses ................................................................................................. 40
2.92 Illegal contracts................................................................................................................. 44
2.92.1 Void by statute ......................................................................................................... 44
2.92.2 Prohibited by statute ............................................................................................... 44
2.92.3 Against public policy ................................................................................................ 44
2.93 Rights and liabilities of parties under a contract ............................................................. 45
2.94 Discharge of the contract ................................................................................................. 46
2.94.1 Discharge from further performance ...................................................................... 46
3.1 Industry associations .......................................................................................................... 49
3.2 Solicitors & Barristers ......................................................................................................... 49
3.2.1 Building contracts ...................................................................................................... 49
3.2.2 Contract administration............................................................................................. 49
3.2.3 Dealing with disputes ................................................................................................ 50
3.2.4 Retaining expert witnesses, building consultants and specialist counsel ............... 50
3.3 Contract payment ............................................................................................................... 51
3.3.1 Entire contracts .......................................................................................................... 51
3.3.2 Progress payments ..................................................................................................... 51
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3.3.3 Quantum meruit ........................................................................................................ 51
3.3.4 Extensions of time ..................................................................................................... 52
3.3.5 Liquidated damages and penalties ........................................................................... 52
3.3.6 Dispute resolution ..................................................................................................... 52
3.4 Approval and acceptance of work and the types of certificates ........................................ 53
3.4.1 Introduction ............................................................................................................... 53
3.4.2 Progress certificate .................................................................................................... 53
3.4.3 Certificate of practical completion ............................................................................ 54
3.4.4 Final certificate........................................................................................................... 55
3.4.5 Variations ................................................................................................................... 55
3.4.6 Contract finalisation .................................................................................................. 56
3.5 Breach of contract .............................................................................................................. 56
3.5.1 Breaches that discharge the contract........................................................................ 57
3.5.2 Breaches that do not discharge the contract ............................................................ 57
3.5.3 Remedies .................................................................................................................... 57
General Business Contracts ................................................................................................. 60
Financial Contracts .............................................................................................................. 64
Property Contracts .............................................................................................................. 65
Latin Contracts .................................................................................................................... 66
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Topic 1
Types of contract
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1.1 Types of Contract
Later in this section we will look at some standard general conditions of contract
available in Australia. Here we will simply consider the types of contracts available.
These documents can be divided into the following types of contracts:
1.1.1 Lump sum contracts
These may be either a fixed or firm fee contract or a contract subject to rise and fall. In
other words, the tenderer is asked to submit a single price to undertake the project. This
price may exclude any provision permitting price variation due to rising (or falling) costs
of labour and materials. In other words, it may be a fixed fee. Alternatively, it may be a
single price to undertake the project but with a provision that future rising or falling
labour and material costs will result in adjustments to the contract value. In other words,
there is a process of risk allocation between the builder and building owner. In one case
the owner takes the risk of price increases and in the other the builder takes the risk.
1.1.2 Schedule of rates contracts
This type of contract is used where the exact nature or quantity of work required is not
known at the commencement of a project. Each item of work is described in sufficient
detail for its costs to be determined, and estimates are given of the quantities of each
item required. Normally no guarantee is given as to whether the estimated quantities will
be reached or exceeded.
It will usually be possible to obtain a reasonable approximation of the total cost of the
project at the tender stage.
A variation of this form of contract can occur in a ‘design and construct’ project where the
project is broken into elements (such as external walls, partitions etc.) and elemental
costs are agreed, with an agreed range of permissible variation.
Schedules of rates can also form a part of a lump sum contract.
1.1.3 Cost plus contract
Probably the form of contract that will most likely result in a dispute with the
other party and therefore the riskiest one to be a party to. You, the builder, are
paid the actual cost of the project plus an allowance or percentage for your
superintendence of the work and your profit. The risk lies in the open-ended
nature of the project cost, the need on your part to provide high quality reporting
on the project and its costs, and the need for both parties to have a high level of
trust of each other.
Variations include agreeing on a fixed fee for superintendence and profit, and a target
price with bonuses for completion under the target.
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1.1.4 Design and construct contracts
Also called ‘package deal’ and ‘turnkey’ contracts, this form of contract includes the
design service in the builder’s contract. They come in a wide range of forms and tend to
be complex. The tender documents often include a design brief and a mechanism to
manage costs and quality as the design develops. They will sometimes require
prototypes.
1.1.5 Management contracts
This form of contract incorporates a construction manager directly responsible to the
building owner. The construction manager would normally become involved in the
project during the design phase and take on most of the roles of the head contractor. The
construction manager, as the term implies, manages the construction. This differs from a
project manager who has management of the overall project, including the client’s
consultants.
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1.2 Standard printed contract forms
There will be standard printed contract forms for any type of contracting arrangement
that a builder may feel are appropriate to use. Later in this section, some standard
contract forms will be listed.
First, though, we will briefly discuss head or main contracts, subcontracts, demolition
contracts and supply agreements.
1.2.1 Head contract
This is the contract between the proprietor and the contractor. It may be that the
building works are to be supervised by an architect. If so, it is still the head contract that
applies.
The contract will be for an undertaking that the contractor will complete a defined
amount of building work for an agreed return.
Invariably the contract will contain a clause indemnifying the proprietor against any
claims that may be made by the contractor’s subcontractors against the proprietor.
1.2.2 Subcontracts
These are contracts between the head contractor and the subcontract trades companies
or tradespersons. Subcontractors who engage in building trades work with the main
contractor are subject to the same conditions and agreement of the main contract.
Standard printed subcontract forms are usually available from the same suppliers that
stock head contract forms.
The producers of these standard forms have arranged the marriage of compatible main
contract and subcontract forms. This enables the contractor to easily apply the
conditions of agreement to the subcontractor’s work.
A matter regarding subcontracts, which continues to cause builders problems, occurs
during tendering and acceptance of the head contract. In tendering for a project, you
will normally obtain prices for subcontract work from several firms. On the basis of the
tenders received you will make up and submit your tender.
When you receive notice that your tender has been accepted you will be in the
position that you have not accepted the subcontract tenders that you have received.
It occasionally happens that the subcontract tender that you have relied on
withdraws their tender at this stage, leaving you facing an unexpected cost increase
in your project. In Australia you cannot stop a subcontractor from withdrawing at this
stage unless you have entered into a contract with the subcontractor to hold the
subcontract price open for acceptance for a specific period. You can only have such a
contract if there is consideration. Even something nominal such as a carton of beer
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will do provided that you have the clear acknowledgment from the subcontractor
that this is acceptable consideration.
1.2.3 Nominated subcontractor
A nominated subcontractor is a person or firm that has been selected by the
proprietor, or the agent of the proprietor, to undertake a specific part of the
contracted works at a price that has been agreed.
This person or firm becomes, with the consent of both the builder and the nominated
subcontractor, a subcontractor to the builder.
Subletting of subcontracts
The building contractor signs the main contract with the proprietor, and also signs
subcontracts with the tradespeople who are subcontracting (e.g. for work involving
brickwork, false ceilings, concrete works and structural steel).
The subcontractor, within the organisation of the company, may decide to establish a
piecework arrangement or further subcontract to the site staff performing the work.
This is, in fact, an arrangement where a subcontractor is subcontracting to a
subcontractor, who is subcontracting to the main contractor.
This arrangement may work very well but you should consider the legality of such a
solution before it is embarked upon. The main contractor has an obligation to the
proprietor for indemnity from all claims. This, of course, includes all subcontracting
personnel. If you extend subcontracting beyond the first line of subcontracts, you
should seek legal interpretation of the contract and of any law affecting such an
arrangement.
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1.2.4 Demolition contract
This is a contract to be used when demolition or removal of structures is required. It is
vital that prior to letting the demolition contract, the builder checks and receives
copies of current workers’ compensation policies and public liabilities insurances.
These insurances are a requirement under standard demolition contracts.
It is also vital prior to starting works that the demolition contractor provides state or
territory Demolition Licences prior to starting works. In some states and territories it
is mandatory to also provide evidence that the local authority has been notified
before the works commence.
1.2.5 Supply agreement
This is an agreement or contract between a builder/contractor and supplier, where the
supplier sells and usually delivers materials and/or goods mentioned in the contract.
Nominated supplier
A nominated supplier is a person or firm that has been selected by the proprietor or agent
of the proprietor to supply some specific item or items for the project. The proprietor or
the proprietor’s agent has selected the item and a price to supply has been agreed. With
the consent of both the builder and the nominated supplier, the nominated supplier
becomes the supplier of the item to the builder. A contract for the supply of the item
between the proprietor and the nominated supplier does not exist.
1.2.6 Standard building contracts
These contracts are designed for use in their existing and complete form and changes to
them are discouraged unless warranted by particular circumstances. It should also be noted
that each industry association or contract author [NSW Fair Trading (FT), Housing Industry
Association (HIA), Master Builders Association (MBA), and Australian Building Industry
Contract (ABIC)] can update and change the names and conditions of the contracts listed
below. It is vital you keep yourself updated with the most current form of contract.
•
Home building contract (NSW FT) — for works over $5000.
•
Home building contract (NSW FT) — for works between $1001 and $5000.
•
Medium works contract — no architect/superintendent supervising (HIA) – For
works over
$25 000 with no architect/superintendent supervising.
•
Medium works contract — architect/superintendent supervising (HIA) – For works
over $25 000 with an architect/superintendent supervising.
•
Small works contract (HIA) — Used for works up to $25 000.
•
NSW Residential Building Contract for Renovations/Additions (HIA) — used for all
types of residential alterations, additions, renovations and restorations.
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•
NSW Residential Cost Plus contract (HIA) — a contract between two parties that is
not lump sum fixed price contract. Costs are totalled and a percentage or fixed sum
added for administration, supervision and profit.
•
BC4 (MBA) — Lump sum contract for new houses or major renovations with no
architect supervising.
•
PEMWC (MBA) — A Plain English Minor Works contract for small building works less
than $12 000.
•
SFRB (MBA) — Lump Sum Short form residential building contract for projects
between
$12 000 and $60 000.
•
BW1 (ABIC) — Architect-administered Basic Works Contract for basic works up to
$50 000.
•
SW1 (ABIC) — Architect-administered Simple Works Contract for medium-sized
projects between $50 000 and $3 000 000.
•
MW1 (ABIC) — Recommended for major and complex building projects valued from
$250 000.
•
FF/C — Cost plus contract intended for commercial building works which is
administered by an architect.
•
AS 4000 1997 Superintendent administered contract for medium to large projects. It
is classed as a Plain English contract and can be amended as required.
•
AS2124 – 1992 Standards association of Australia Superintendent managed project
and is intended for use on major building or engineering projects.
•
AS4300 General conditions of a Design & Construct contract.
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1.3 Contract documents
You will be aware by now that a valid building industry head contract is between a builder
and a proprietor (property-owner or lessee). It requires certain conditions to be met and
formally agreed upon. Tender documents now become the contract documents (i.e. part
of the agreement between the contracting parties).
The printed contract form rarely contains enough information to ensure that the
agreement between parties is fully documented. Other information in written or diagram
form is usually added to make up the complete contract.
The size and complexity of the proposed building works will determine the amount of
documentation added to the contract, and contract documents will be unique to
each contract. They could be made up from the following list.
1.3.1 Conditions of agreement
This is the actual printed standard document with all the conditions and clause. Both
parties sign it and initial all pages and amendments. Special conditions and any
schedules are filled in. In the building industry there are also commonly referred to
as ‘contracts’, ‘general conditions’ and ‘conditions of agreement’.
1.3.2 Tender letter
The tender letter that you submit to the client at the time of tender should be
attached to the contract conditions and referenced therein. The tender letter gives
the conditions and exclusions that your price is based on.
1.3.3 Drawings
Drawings would be the original tender drawings (which should be working drawings)
with or without amendments. They provide a graphical representation of the extent of
the works. They will be a complete set and will all be numbered and the numbers listed
as part of the contract.
The drawings could include:
• Architectural drawings approved by the local council.
•
Architectural details.
•
Engineer’s drawings.
•
Mechanical services drawings.
•
Services drawings of:
o drainage
o plumbing
o fire service
o electrical
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o landscape drawings.
1.3.4 Specification
The specification is a written description of the work detailed in the drawings and to be
read in conjunction with the drawings, with reference to other drawings and
specifications for specialist work (such as the installation of lifts, fire services etc.).
The objectives of a specification are to:
• Supplement the information given in the working drawings.
•
Details quality of workmanship required through multiple referencing to applicable
Australian Standards for various trades and inclusions.
•
Inform the quantity surveyor or builder.
•
Advise initial prospective tenderers of conditions.
•
Convey the intentions of the proprietor to the builder.
•
Inform public authorities on details not shown on the drawings.
•
Guide draftspersons in the preparation of details.
1.3.5 Bill of quantities
A quantity surveyor usually prepares bills of quantities. It is a pre-determined take-off of
quantities against which a competitive tender may be awarded. Although it provides a
common basis for tenderers to price, there is greater risk to the client providing the bills
of quantities to ensure they are complete and comprehensively cover everything
involved in the project. Therefore there has been less reliance on their use as tender and
contract documents.
It may or may not be included in the contract documents. Its inclusion will depend upon
the printed conditions of agreement contract form. Generally, in residential building works
(unless large scale) they are not included in the contract.
1.3.6 Evidence of insurance
A Contractor must effect and maintain insurances as stipulated in the conditions of
contract (e.g. workers’ compensation, public risk, etc.). Copies of these are required to be
given to the client prior to commencement of work and at any time as requested by the
client.
In NSW, for residential building work, the certificate of Home Warranty Insurance
should also be attached to the contract. Home warranty insurance protects
consumers from faulty and incomplete work where the contractor becomes
insolvent, dies or disappears. Builders and tradespeople must take out home
warranty insurance on residential projects costing more than $20 000. For multistorey residential buildings (buildings that have a rise of more than three storeys and
contains two or more dwellings), home warranty insurance is not required.
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1.3.7 Evidence of liquidity/bank guarantee
The contractor may be required to obtain a guarantee of finance from a reputable
bank or lending body up to a nominated amount or for a nominated proportion of
the contract. The endorsed bank undertaking would form part of the contract
documents.
1.3.8 Conditions of development consent or other authority
approvals
As a general rule, all necessary building and other approvals should be obtained prior
to signing of the contract, and attached to the contract agreement/conditions. As the
builder, it is your responsibility to comply with the conditions of consent. You should
have received a copy of these conditions at the time of tender and allowed for them
in your price. If they were not received, your tender letter should provide a condition
that your price has not allowed for ‘non-standard’ or site specific Authority Approval
Conditions.
1.3.9 Summary
The extent of the inclusion of these documents in the contract would depend on the size
and complexity of the project to be undertaken and the policy of the principles
organising the documents (e.g. government departments, private developers, residential
owners). Each will have varying needs in this regard.
1.4 Acceptance
You are now fully aware that once your offer is accepted a contract
is in place.
When does acceptance occur?
Usually you will get a phone call advising you that your tender is accepted or is to be
accepted. This may sometimes be followed by a letter of intent. The letter of intent gives
authorisation for you, the contractor, to commence and proceed with the works
described in the letter. The letter of intent may specify a maximum value your works can
go up to until the execution of the proposed contract.
Often the parties consider themselves bound when the proprietor (or employer) notifies the
builder that his or her tender is accepted. Frequently the builder commences work on this
assumption.
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Contracts in general
When we think of the word ‘contract’ we usually think of that thick wad of printed paper
that, apart from stating the agreed tender price, the time allowed for the work, who the
work is for and where it is situated, tells us little of what we have to do to complete the
job. This, in a sense, is true: it doesn’t tell us what the job is. That is the role of the
drawings, specifications and bill of quantities, which are, incidentally, also part of the
contract documents. Because the drawings, specs etc. tell us exactly (we hope) what we
have to build, they are the part of the contract documents to which we continually refer.
The standard clauses have little role here.
However, the standard clauses, and the specials some firms like to include, do have a
fundamental role, that of allocation of risk. Risk exists in all contracts. How is it shared,
how are disputes involving it resolved? We could simply leave all these issues out of the
contract and let the courts resolve them for us.
The reason why we do not leave these issues to the courts is that, if we can agree on
them before we enter into the contract, we will, if we find ourselves in dispute with the
other party, be more likely to resolve them in a shorter time and at a lower cost than the
courts will.
However, there is much more to the law of contract than this.
The study of the law of contract is intended to provide you with background knowledge
that will enable you to comprehend the contractual situation you are in or are
proposing to place yourself in and against which to assess contracts and contract
conditions.
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Topic 2
Contract law
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2.1 What is a contract?
Definition
A contract has been defined as ‘an agreement which gives rise to rights and
obligations which can be enforced by law’. A more complete definition is that a
contract is an agreement between two or more parties, which comprises a promise,
an acceptance and a payment of consideration. This agreement gives rise to a duty
on the part of parties to the contract such that if any party defaults on its promise
then the law will give damages or other forms of compensation to the other party or
parties.
2.1.1 Requirements of a contract
A contract therefore arises when three elements exist:
• An offer.
• An acceptance.
• Consideration.
The offer and acceptance are, collectively, called the agreement.
To be valid in law a contract must also meet other requirements. There must be an
intention on the part of all the parties to create a legal relationship, each party to the
contract must have the legal capacity to act, there must be consent to the agreement by
the parties and the objects of the agreement must be legal.
As a builder you will occasionally be required to enter into a contract under seal. If this
is properly constructed it is a deed. Although deeds have a different history of
development, there are now only four characteristics by which they differ from a
contract. These are:
•
•
They must be in writing in a form that includes some standard phrasing (see the
example at the end of this unit).
They do not require to have consideration to be valid.
•
The limitation period (see statute of limitations) after which action cannot be taken
against the other party is different to that of a contract.
•
You can enter into a deed with someone or entity that cannot enter into a contract.
Classification of contracts
Contracts are also classified in another way. There are contracts for service, contracts for
goods and contracts for both goods and service. A building contract is normally a contract
for goods and service, i.e. the supply of labour and materials. A contract for the supply of
labour only is a contract for service and a contract for the supply of bricks, for example, is
a contract for the supply of goods. Contracts for the supply of goods are governed by the
Sale of Goods Acts in each State and will not be covered in this course. Contracts for the
supply of labour and for the supply of labour and materials are covered by the same law
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and they are the subject of this course.
There is a small complication that must be added at this stage, which, although it will not
be considered in this course, you should understand regarding contracts for goods.
Goods, as covered by the Sale of Goods Act, are part of the concept lawyers call
‘property’. There is personal property and real property. Personal properly is ‘goods real
property is ‘land’ and dealings in land are part of land law and are covered by legislation
such as the Real Property Act.
Contracts may be either oral (parol) or in writing. A contract that is oral is equally as
valid as a written contract, except where a written contract is specifically required by
statute, as for example in the sale of land. The problem people face with oral contracts
is not with respect to their validity; but whether they can be enforced by law.
2.2 Essential elements of a contract
The three essential elements of a contract are:
• Offer.
•
Acceptance.
•
Consideration.
Other matters that determine whether or not there is a valid contract are:
• Legal capacity of the parties.
•
Intention on the part of all the parties to create a legal relationship.
•
Consent to the agreement by the parties.
•
Objects of the agreement must be legal.
Offer
An offer is a statement of the terms under which a person is prepared to enter into a
contract with another. In a building contract an offer is made when a builder submits a
tender to undertake specific work.
For large building contracts it will not be difficult to identify what the offer is, will it? For
example,
•
Is it the phone call from the consultants asking you if you would like to put in a
tender?
•
Is it the great pile of tender documents delivered to the builder’s office as a
result of the phone call, or
•
Is it the builder’s tender?
Normally it is the builder’s tender. The phone call and the documents that arrived by
courier from the architects, engineers or project managers were ‘an invitation to treat’.
Withdrawal of offer
Offers can, furthermore be withdrawn at any time before an acceptance is given. Once an
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offer is accepted it cannot be withdrawn without invoking a breach of contract.
It is worth noting here that if you, as a tenderer, agree to hold your tender open and
available for acceptance until, say, a specific date m the future, this will be the
maximum time available for the other party to accept. But the promise you made is not
binding on you and, at any time prior to the date you nominated as being the date to
which you would hold the tender open, you can withdraw the tender. To be prudent the
withdrawal should be in writing. An exception to this would occur if the other party
were able to show that it was not a mere promise on your part but that they and you
entered into a contract to hold the tender open. This would occur, for example, if you
were paid a fee to hold the contract open for this length of time.
A withdrawal of an offer does not take effect until the other party is told.
Death of offeree or offer
Although it might be assumed that the death of the offeror will mean that the offer can
no longer be accepted, the legal opinion is not clear on this matter. Similarly, there is
doubt as to the effect of the death of the offeree. A company, of course, does not suffer
from this problem, although exactly what the situation is in the case of a company with a
single director (now possible since an amendment to the Corporations Law) where that
director dies may require resolution.
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Counter offer
Counter offers will be considered with acceptance but their effect on the original offer is
to extinguish it. A person cannot make a counter offer and then change his or her mind
and accept the original offer. For the person to accept the original offer it mu.st be
repeated, either actually or by implication.
Offers crossing in the post
A circumstance can arise where two offers, one from each party, cross in the post. In
these circumstances, even where the two offers are identical to each other, there is no
contract. You cannot accept an offer that you do not even know exists.
2.2.1 Acceptance
Acceptance is the unequivocal agreement by the other party
of the offer. This action is called the agreement.
Acceptance can be implied from the conduct of the acceptor. Implied acceptance by the
offeree can lead to a bilateral contract, i.e. a contract for future performance or to a
unilateral contract, which is a contract to carry out the requested act. The
commencement, for example, of a building contract prior to receiving the notification of
acceptance would be an example of implied acceptance of a bilateral contract. The
contract arising from the sale of an airline ticket is, by contrast, a unilateral contract.
Counter offer
Offers can be complicated when, instead of receiving an acceptance, the offeror receives
a counter offer. Normally offers and counter offers are simply part of a bargaining
process, which eventually, results in final offer and acceptance. This is not always the
case, and it is worth remembering that a counter offer as a response to an offer can
permit the party making the original offer to walk away from the process without any
offer being left for acceptance by the other party. The original offer does not have to be
withdrawn; it can simply lapse, given the builder should have a validity date in his tender
after which the price can be reviewed.
Time available to accept an offer
An offer is open and available for acceptance for a ‘reasonable period’, unless it is
withdrawn or unless a counter offer is received.
What is a reasonable period will depend on the circumstances. For example, a reasonable
period for acceptance of an interest rate on the short-term money market might be half
an hour, whereas a reasonable period for acceptance of a building tender might be a
month and 28 days is generally the normal period unless the tender documents request a
set timeframe.
Where an offer is stated to be open for acceptance for a stipulated time period, the offer
will automatically lapse at the expiry of that period.
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Retrospective acceptance
Courts will try to find the existence of a contract, particularly where one of the parties
has acted on the assumption that what they are doing will be covered later by a
contract. However, the court is unlikely to give retrospective effect to a contract that
does not include an express provision for it.
Acceptance by conduct
Contracts may be deemed to be accepted by the conduct of the parties involved.
In the case of a building contract that involves detailed contract documents requiring
the signature of the parties, the significance of the period between the signing of the
contract documents to the date of commencement of the project will vary.
For a builder who has tendered on a project and who is finally notified in writing that their
tender is accepted ‘subject to a formal contract’ or ‘subject to a proper contract', the
question arises whether this expression is a condition that must be complied with for a
contract to come into force or is it simply an indication of the manner in which the other
party desires the already agreed on transaction to go through. So, where you are invited
to attend an office for the purpose of signing the contract documents, the significance of
the letter and the formal contract signing party could well differ, depending on your prior
relationship with the other party. For example, if you have regularly done work for the
other party and have fallen into the habit of commencing work on receipt of the letter
without any objection ever being raised by the other party, both you and the other party
are treating the signing of the contract as a formality of confirmation that a contract is on
foot. The terms of that contract will be those contained in the formal documents.
Where, however, you have never dealt with the other party before, entering into a
contract in such a casual manner would be imprudent. Where there is a written contract
requiring signature a contract will not come into force until it is signed. It is the intent with
which the parties hold the function of a formal signing of a contract that is important. So
far as you as a builder are concerned a cautious approach is the prudent one to take.
2.2.2 Other provisions relating to offer and acceptance
Communication of acceptance
An agreement is not complete until the acceptance is communicated to the offeror.
Silence from the offeree shall not be deemed consent. The court will deny that that
condition can achieve acceptance. However, the offeror can waive the requirement to
communicate acceptance provided that the offeror assumes all the risks associated with
that and provided that he does not impose any obligation on the other party in doing so.
Also, the offeror can stipulate the mode of reply in communicating acceptance and
where the method of reply is not stipulated the method of delivery of the acceptance
should match that of the offer. For example, the ‘offer’ and acceptance could both be
completed by email.
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Postal communications
Although the rules relating to postal offers and acceptance were devised in the 19th
century to deal with the normal business dealings of the time, they have not been
overturned. Acceptance of an offer occurs when the acceptance is posted, i.e. before
the offeror receives it. This rule can be avoided if in the offer there is a requirement that
notice of the acceptance is to be in writing addressed to the offeror.
Note that this rule of acceptance differs from the case where the offer is withdrawn. The
withdrawal of an offer requires that notice of the withdrawal must be in the hands of
the other party before it becomes effective.
Protracted negotiations
A normal situation for a builder will be that, after a tender has been submitted, the other
party will make contact and initiate discussions to modify, usually reduce, the cost of the
work. Under the rules set out above, these discussions could at times be construed as a
counter offer. However, another reading of these types of negotiations might be that they
are intended to elicit from the builder an alternative offer, one that is based on a slightly
different set of criteria. This would leave either offer available for acceptance by the other
party.
2.2.3 Consideration
The third essential element of a contract is consideration. It must be something of value.
It need not be money, but could be a right or an interest or profit or even forbearance to
pursue a loss. It is said that consideration must be sufficient and, although it need not be
adequate, it must not be illusionary. It could be in the form of money, physical objects or
services.
In building contracts consideration is the tender price and, consequently, is normally
quite clear.
Adequacy of consideration
If you, as a contractor, enter into a contract where it becomes clear over time that you
badly underestimated the costs, you cannot claim insufficiency of consideration as a
reason for modifying the contract.
Past consideration
What is called past consideration is not good consideration. Past consideration is
consideration offered for a past deed. For example, if you build a shed for a person and
after it is completed the owner promises to pay you $10 000 for it, you cannot, as the
builder, enforce that promise. You can, however, claim a reasonable sum for its erection
and use the owner’s broken promise as evidence of what the owner thought was a
reasonable sum for the work.
Contracts under seal
A contract under seal is a deed and, as such, does not require consideration for it to be
binding. Another side effect of signing a contract under seal is that statements of fact in
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the contract document in the recitals prevent you later denying the truth of them. If, for
example, the recitals state that you, the contractor, have examined the site and the
drawings and have satisfied yourself as to the accuracy of the levels and dimensions
shown, you will be prevented from denying these in any subsequent claim in court.
On the other hand, in a contract that is signed only and is not under seal, these recitals
are evidence of the truth of the facts stated. Other evidence, such as actual levels taken
by a surveyor, can rebut this evidence.
Building owners tend to like contracts under seal, not so much for this reason but
rather for the additional period of your liability available to them.
It is no longer compulsory for a company in Australia to have a common seal.
Variation of contracts
The terms of contracts not under seal can be varied by the subsequent agreement of the
parties, supported by consideration, in other words by a contract to vary the earlier
contract. A contract under seal cannot be so varied.
2.3 When a contract must be in writing
Generally, contracts do not have to be written down to be legally binding. Most of the
everyday contracts we make, such as buying a ticket for a movie or going to the doctor,
are not put in writing, but they are still legally binding. There is no need for a written
agreement, because everyone understands what their obligations are.
However, if a contract is of special importance, involves a substantial sum of money, or if
there is a possibility of a dispute about it in the future, it is wise to have a written
agreement. A lawyer can prepare this for you, and advise you about your obligations and
any pitfalls. The written agreement can be helpful in case of a dispute, in proving that
there was a contract, and just what was agreed.
Without a written agreement, if the dispute has to go to court, the court will only have
each party's word to assist it in working out what happened.
There are also some special contracts which are legally required to be in writing. Some of
these are:
•
Credit contracts and consumer leases, for example, contracts supplying credit or
consumer mortgages.
•
Contracts for the performance of domestic building work to the value of $12 000 or
more [Building Work Contractors Act 2011 s 28].
•
Contracts for the sale of second hand motor vehicles by dealers [Second Hand
Vehicle Dealers Act 1995 s 17].
•
Contracts for the sale of land, or any interest in or concerning land [Law of Property
Act 1936 s 26].
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•
Door to door sales contracts where the total consideration payable by the consumer
cannot be ascertained at the time that the contract is made or where the amount of
the contracts exceeds $50 [Fair Trading Act 1987 s 16].
Otherwise, an oral contract is just as legal and binding as a written one, although it can
be harder to prove exactly what was agreed and enforce the contract.
It is also important to note that there are some agreements which will not be legally
enforceable, even if written down and signed. These include agreements where there
was no consideration, or agreements to do things that are illegal.
2.4 Terms relating to essential elements of a
contract
With these elements in place a contract comes into existence. However, it may not be a
valid or enforceable contract. E.g. a contract between two people to rob a bank may
contain the essential elements of a contract but it is not enforceable. To determine this
we must consider four other matters.
The legal capacity of the parties
A party to a contract must have the legal capacity to enter into one, otherwise the
contract is void.
Once upon a time the capacity of a company to enter into a contract was rigidly
restricted by its articles of association. Activity outside the powers granted by the
articles was what is called ultra vires (i.e. outside the power) and therefore invalid.
Since the Corporations Law, however, this restriction has been lifted completely. Bodies
incorporated under other Acts or unincorporated bodies, however, should be looked at
carefully to determine capacity. Companies only act through human agents and the
power of the agent to commit the company should be checked and verified.
People with mental health issues and drunkards can enter valid and enforceable
contracts, provided that it can be proved that at the tune of entering into the contract
they were clearly aware of what they were doing, a task which may prove difficult.
Minors, who are by law anyone under 18 years of age, can enter into a contract,
provided that the contract is for the minor’s benefit. There are limits to the recovery
available against the minor where the minor is in breach of the contract. These
contracts are limited to goods that are necessaries as set out in the Sale of Goods Acts
They are also able to enter into contracts for education, apprenticeships or service.
2.4.1 Intention to create a legal relationship
For a contract to come into existence there must be an intention to create a legal
relationship. Normally it will be assumed that there is an intention to create a legal
relationship where one is dealing in a business relationship. In fact, other than in domestic
and social situations there is a presumption that such an intention exists.
However, in both social and domestic situations there is no such presumption and in
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these cases the parties must make such an intention clear to others.
In some circumstances that apparently involve a business relationship the assumption of
an intention to create a legal relationship can be rebutted, such as in the case of Dietrich
v Dare (1980) 54 ALJR 388. In this case the defendant had engaged a painter, the plaintiff,
as a charitable act. The plaintiff, who was an alcoholic, fell and injured himself while
doing the work requested of him by the defendant. The court decided that the
relationship did not result in the formation of a contract between the two.
2.4.2 Consent to the agreement by the parties
Consent requires all parties to the contract to have a common understanding of the
contract. Consent, therefore, must be genuine by all parties. Where this does not exist there
is lack of consent, which may void the contract.
Lack of consent may be due to:
•
Mistake
•
Misrepresentation
•
Duress
Mistake
Mistake is classified into three divisions. Common mistake is a mistake shared by all
parties. An example would be if you enter into a contract with another person to
purchase an article which is already owned by you. A mistake can also be a mutual
mistake, where both parties are mistaken about different things regarding the contract.
The third form of mistake is unilateral mistake where only one party is mistaken and the
other party is aware of it.
Misrepresentation
Misrepresentation in a contract can be dealt with under s 52 of the Trades Practices Act
as well as under the common law. To be a misrepresentation the statement must be a
statement of fact. A statement of law, or of intention, or of fiction, cannot be a
misrepresentation. Further, the misrepresentation must have been intended to be acted
on and must have induced the contract.
Duress
Duress has traditionally meant actual violence or threats of violence, either directly or
through an agent. It can now include what is called economic duress. Similar to duress is
the concept of undue influence. Undue influence concerns cases where the relationship
between the contracting parties is clearly unequal and where the stronger party takes
unconscientious advantage of its position of dominance or ascendancy.
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2.4.3 Objects of the agreement must be legal
Contracts might be illegal because:
•
They are void by statute, but not illegal.
•
They are against public policy.
•
They are prohibited by statute.
2.5 Forms of contract
2.5.1 Simple and formal contracts
Formal contracts
These are contracts under seal.
A contract under seal prevents a party to it from denying the facts expressed in it, which
is not the case in the matter of simple Contracts. The term estoppel (inability to deny
stated details of contract) is at times used to describe a contract under seal. This form of
contract is uncommon in the residential building industry. It more often not, benefits the
client more than the builder.
Simple contracts
All contracts not executed under seal are termed ‘simple contracts’. Simple contracts
may be formed:
• By means of a verbal agreement. When the contract is formed verbally, the contents
are a matter of evidence for the judge. To prove the content of a verbal contract is
often difficult. It is for this reason that the parties to a contract should make the
terms of the contract in writing.
•
Implied from the conduct of the parties.
•
In writing. Under the HomeBuilding Act (NSW) 1989, a written contract must be
made for residential building work where the value of the contract is more than
$1000. Regardless of the value of work, it is vital that all agreements are in writing.
2.5.2 Express and implied contracts
Express contracts
This is the normal form of a building contract, its characteristics being:
• A statement of responsibilities as regards various forms of commitments and the
tunes at which they will be implemented.
•
Reference to various documents (such as plans. specification, bill of quantities etc.)
which form part of the contract documents.
•
Time for completion.
•
Penalty clauses.
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Implied contracts
This is a contract without words. It results from failure either by ignorance or design by
parties concerned to enter into a properly valid contract. Again, due to legislation, these
types of contracts in the residential building industry are not relevant.
2.6 Standard express provisions of contract
2.6.1 General
All the parties to the contract are stated, with the contract sum agreed for the work. The
location of the project is identified and a brief description of the project is given. The date of
the agreement and the applicable State law are given. Whether or not the contract is
assignable is addressed.
Words that have a meaning specific to the contract are defined here. Make sure you are
familiar with these words as they will have an effect on how you interpret the contract
clauses. Note that the ‘Definitions’ clause usually refers to the use of the specifically
defined words in the agreement, which includes all documents forming the contract.
Therefore a word that is defined here, when used in the specification or on a drawing,
has the meaning given in this clause unless its meaning has been expressly changed.
The broad obligations of each party to the contract are also set out.
2.6.2 Documents
All documents that form the contract are listed. Ownership and the right of use of the
documents are addressed.
The right of the contractor to receive a number of copies of the drawings and
specification without charge is set out.
A statement will be made regarding the priority of documents where ambiguity of meaning
exists between them. This is the order of precedence of the documents. For example,
engineering drawings are to take precedence over the architectural drawings.
2.6.10 Payment and adjustment of contract sum
The procedure for claiming progress payments and the intervals at which they may be
claimed will be provided here. The time allowed for the other party to respond and the
consequences of failure to respond within that time should also be set out.
The maximum amount that the proprietor may retain under the contract as security
against bankruptcy or failure by the builder to complete the work will be given. Also the
rate at which the retention sum may be deducted from the sums payable should be
given.
Provision should be given for the option of a bank guarantee instead of a retention sum as
security.
The procedures by which variations to the contract arising from changes to the work by
the proprietor, alterations to correct documentation errors, additional work necessary or
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adjustments to the provisional sums should be defined. These should include the way
variations to be priced by the contractor are to be set out, the overheads allowed or
agreed and the time by which variations that will affect the progress of the work must be
accepted.
Variations will often incur an extension of time, so compare the procedures for
variations and for time.
A damages clause, normally referred to as liquidated and ascertained damages,
sometimes coupled with a bonus for early completion, is included here. Damages that
are set as part of a contract must reflect the costs that the proprietor will reasonably
suffer through delay. Where this delay is the fault of the contractor, the proprietor will
have little trouble in obtaining damages, provided that they reasonably reflect the
actual loss likely to be incurred.
The loss must be able to be calculated—it is not simply someone’s opinion. Where, in a
contract, the damages anticipated appear excessive, you should ask to be shown how it
is calculated before you enter into a contract. A high figure may, for example, indicate
that you are taking a higher than normal risk by becoming involved in the project.
These damages represent only what the parties to the contract have agreed on; they
do not limit either party from seeking higher damages through the court where that
is warranted.
Note that damages agreed to under the contract may, under some contracts, be
deducted from the progress payments or be treated as a debt and pursued through
the court.
Damages, in the form of unliquidated damages, may be available from the court where
they are warranted. In the case of Baese Pty Ltd v R A Braken Building Pty Ltd [1990] 6
BCL 137 the Supreme Court of NSW awarded unliquidated damages to the proprietor
where the contract (a JCC contract) had the appendix for the amount of liquidated
damages as ‘nil’. By comparison, in a later case, that of C S Phillips Pty Ltd v Baulderstone
Hornibrook Pty Ltd (unreported), Supreme Court of NSW, 26 October 1994, the
appropriate appendix insertion was made as ‘N/A’. In this case the court held that the
effect was that the proprietor was not entitled to either liquidated or unliquidated
damages.
In fact, where there is no damages clause in a contract, the proprietor will be entitled to
unliquidated and liquidated damages at the discretion of the court.
The distinction between liquidated damages and unliquidated damages is that
liquidated damages are actual expenses that are incurred, or will be incurred. They can
be accurately calculated.
Unliquidated damages are those that cannot be calculated and include such matters as
loss of reputation and loss of confidence in the business. They may be assessed only by
a judge in court.
2.6.11 Final certificate and final payment
The legal significance of the final certificate, the requirements to be met before it is
issued, the procedure to be undergone to request it and the time period allowed for
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its issue and payment are listed. Also covered is the release of the security or retention
sum.
Unless there is some specific authority provided under the contract, the proprietor is not
permitted to withhold part of the final certificate payment. Such an action would permit
recovery of the amount withheld as a debt.
2.6.12 Determination
Both parties have certain rights to determine or terminate the contract. The express rights
are set out in this clause.
Due to the subsequent risk of damages, a decision to determine the contract should be
made only after gaining good legal advice.
2.6.13 Dispute resolution
Set procedures for resolving a dispute between the parties will normally be included in the
standard conditions. The process proposed may be arbitration or some alternative dispute
resolution procedure.
Formal arbitration procedures are usually more costly than the alternative
dispute resolution procedures, such as mediation or conciliation.
The inclusion of this clause will not prevent you from taking court action to resolve a
dispute, but it is likely that the court will require you to first undertake the agreed
procedure and show that it has failed before hearing the case. You should note that court
hearings are normally longer and more expensive that the contract alternatives.
A concept called ‘partnering’ is being used in some building projects and one of its roles is
the minimisation of disputes. It is not used to replace dispute resolution procedures but is
intended to eliminate their need.
2.6.14 Special conditions
Any special conditions that the other party wishes to impose upon you will be included here
by either actual insertion or by reference.
2.7 Implied provisions of contract
The implied provisions of a contract include both those set out more fully in the contract
document and those given no mention.
Unless the written agreement modifies or stipulates that they are not to be included in the
contract, they form part of the agreement.
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2.7.1 The obligations of the contractor
Obligation to complete
There is an obligation upon the contractor to complete the whole of the work. You, as
the builder, cannot stop halfway through a contract and sue for the value of work done
to date, or for half the price. This will have an effect on you, as a builder, if you enter into
a contract where there is no provision for progress payments. You will not be entitled in
these circumstances to any payment until the whole of the work is complete. The
standard building contracts, of course, have provision for interim payments.
Obligations regarding design and quality of materials and work
This obligation extends into three areas of a project:
• Design
•
Materials
•
Workmanship
Design includes not only the dimensions, shape and location of the work, but also any
structural calculations required by the contractor and, where they are left to the
discretion of the contractor, the choice of materials for particular functions and the
choice and sequence of work processes.
The selection of materials is an element of the design of a project, and contracts
usually define materials with some degree of precision. Irrespective of this, there is
an implied warranty on the part of the contractor that the materials used of good
quality and effective.
Where there is a precise description and the architect or engineer specifies the
materials, the warranty is limited to materials of good quality conforming to the
express description given in the specification. Therefore if you, as the contractor,
substitute a different brand to that specified, you lose the limited protection given in
this qualification.
The contractor carries the implied condition that the work will be carried out with care
and skill, or in a good and workmanlike manner. Where the work is sufficiently described,
this amounts to a warranty that reasonable skill and care has been used to carry out the
work described.
Notices before claims
The standard conditions of contract generally require that the contractor give notice in
reasonable time of an event that is likely to incur additional costs under the contract. The
purpose of this is obviously to allow the proprietor time to decide, after considering his
or her financial position, whether to approve, amend or cancel the variation. If you, the
contractor, fail to give notice in a reasonable time, you may find that the court will not
enforce your claim for the additional costs incurred.
In this situation what is a reasonable time may vary. It would normally be the time set
down in the standard conditions of contract, but if it were a major cost which was clearly
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foreseen by you some time in advance, you may be under an obligation to give notice
earlier than that set by the contract. Conversely, a minor unforeseen cost not detectable
within the time set under the contract would not draw the same conclusion. The court
would look at what is reasonable in the circumstances.
Progress
There is an implied obligation on the contractor to complete the project within a
reasonable time and you must proceed with reasonable speed to achieve this goal.
2.7.2 Obligations of the proprietor
Payment
There is an obligation on the part of the proprietor to pay for the work.
This obligation is to pay upon completion and, unless there are specific provisions in the
contract, there is no requirement to make progress payments.
Possession of the site
The proprietor has no obligation to warrant the state of the site to the contractor but
must give possession of the site and sufficient area around the site to permit
construction. In most contracts possession is exclusive to the contractor but it could be
partial access or shared access, as in the case of an alterations or renovations project
where the owner continues to trade in the premises.
Despite this lack of obligation on the part of the proprietor, most contract documents
carry considerable information on the site. The degree of responsibility of the
proprietor and consultants for this information will vary depending on the wording of
the disclaimer clause in the contract.
Administration
Where the contract stipulates that an architect, engineer, surveyor or project manager
is to be appointed to administer the contract on behalf of the proprietor, it would
normally be a condition that such an appointment be made prior to the commencement
on site by the contractor.
Instructions
The failure by the proprietor, or by the architect or engineer acting as the agent of the
proprietor, to issue instructions within a sufficient and reasonable time to continue the
project is a breach of the contract on the part of the proprietor. Apart from recovering
costs incurred under the contract, the contractor would have a cause for action for any
damages sustained.
Progress of work
The proprietor has no right to dictate the order in which the work is to be done nor to
refuse to allow the contractor to carry out the work in the order of choice.
The conditions of contract may, of course, modify this right by requiring that tenders be
prepared and work executed in a particular sequence or where the contractor is
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required to allow for the disturbance created by other contractors working on the same
site.
Nominated subcontractors and suppliers
It is reasonable to conclude that there is an obligation on the proprietor to select a
subcontractor in sufficient time to permit the work to proceed without delay.
When you place your order with the nominated subcontractor or supplier it is a
contract between you and that subcontractor, and the proprietor incurs no further
obligation. But you cannot be compelled to enter a subcontract that does not
adequately protect you, so either ensure that the terms of the subcontract provide
obligations consistent with those of the main contract or that the main contract
conditions are amended to reflect the change in liability proposed.
Carrying out of work or the supply of materials by the proprietor
Where the contract stipulates that the proprietor is to carry out some part of the work or
supply some of the materials to be used, the proprietor will generally be liable for
damages for failure to undertake the work or supply the materials within a reasonable
time.
Exceptions to this exist as, for example, where the proprietor takes over the
responsibility for the supply of materials originally required to be provided by the
contractor, due to the failure by the contractor to obtain supplies.
Carrying out the whole work
The proprietor must allow the contractor to carry out the whole of the work. Where the
proprietor prevents the contractor from doing this, the contractor has a remedy in
either quantum meruit or damages.
This does not prevent the proprietor from deleting work as a genuine variation.
However the deletion of work cannot be done with a view of having someone else or a
nominated subcontractor do it later.
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2.8 Legislative requirements under the
Home Building Act 1989 (NSW Specific)
By law, in NSW the written contract must contain:
•
The date and signatures of both the contractor and home owner.
•
The home owner’s name and the exact name on your contractor’s licence and
licence number.
•
A sufficient description of the work to be carried out.
•
Attached plans and specifications.
•
Relevant warranties required by the Home Building Act 1989.
•
The contract price, which must be prominently displayed on the first page and a
warning with an explanation if the contract price is not known or subject to change.
•
A clause that states that any agreement to vary the contract or any plans and
specifications to be done under the contract (including variations):
o Are taken to form part of the contract.
o Must be in writing and signed by both the home owner and contractor.
•
A check list of 12 items.
•
A caution about signing the contract if the home owner cannot answer yes to all
items in the check list.
•
A note about the home owner’s entitlement to a copy of the signed contract within
five days of signing.
•
A note about the contractor's obligation to give a certificate of home warranty
insurance if the contract value is over $12,000.
•
A clear statement setting out the cooling-off period of five clear business days within
which the home owner may cancel the contract, applicable to contracts valued at
over $12,000.
•
The contractor must provide the home owner with a copy of the Consumer building
guide. The home owner must provide a statement of acknowledgement that they
have:
o Read and understood the Consumer building guide which explains procedures
for the resolution of contract and insurance disputes.
o Completed the checklist and answered yes to all items on it.
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•
A 'work compliance clause' that states the work will comply with the Building Code
of Australia, to the extent required under the Environmental Planning and
Assessment Act 1979.
•
All other relevant codes, standards and specifications that the work is required to
comply with under any law.
•
The conditions of any relevant development consent or complying development
certificate.
•
A clause that states that the contract may limit the liability of the contractor for
failure to comply with the above work compliance clause if the failure relates solely
to:
o A design or specification prepared by or on behalf of the home owner or
o A design or specification required by the home owner if the contractor has
advised the home owner in writing that they go against the 'work
compliance clause'.
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2.9 Implied terms
Workmanship
Where the written contract is silent on the matter there is an implied term of the
contract that the works will be built in a good and workmanlike manner.
Most disputes involving building contracts have a mixture of facts which suggest that
selection or appropriateness of materials used was a major component of the issue.
What is a good and workmanlike manner will vary depending on the nature of the project.
Finishes required in a six star hotel, for example, will differ from those required in a
factory building. A number of matters will help you understand what the term means in
any particular project on which you are tendering. Prior knowledge, or reputation, of the
contract administrator is one, another is the degree or precision of the drawings and
specifications; a third is the quality and cost of the finishes specified. If you are still unsure
and want further verification you could ask to inspect a suitable or comparable finished
project.
Of course, not only should you understand what you are going to be required to achieve,
you should make sure your sub-contractors also know the requirements.
Whilst with this approach you do run the risk of overpricing a project, failing to
appreciate what is required can lead to cost overrun and disputes during the project.
Pre-tender selection processes are intended to, in part, select tenderers with appropriate
standards of workmanship. Where this has occurred you should be confident that the
normal quality of your firm’s workmanship is acceptable.
2.9.1 Materials
In all contracts it is implied that materials chosen are new, good and proper and fit for their
purpose.
Exceptions occur where the materials are from nominated suppliers, or approved by the
architects or are specifically specified.
2.9.2 Efficacy of works
This term is also described as fitness for purpose.
As a general rule, but particularly where the works have been constructed in accordance
with contract documents provided by others, contractors have no liability to ensure that
the works, when completed, are fit for the purpose intended.
However exceptions to this rule exist for example a contractor who undertakes to design
a certain element of the works, knowing their intended purpose, incurs an implied
warranty the component in question is fit for its intended use.
Also a contractor who enters into a design and construct contract enters into a contract
which has an implied term that the works, on completion, will be fit for their purpose. This,
of course, is the liability of the designer
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2.9.3 Compliance with regulations
Building regulations generally require the submission of all the plans of proposed
works be submitted to the approving authority for approval prior to the
commencement of work and they prohibit any carrying out of work without such
approval.
Commencement of the works without such approval is, therefore, an illegality even
though the contract itself is not illegal. Despite the fact that it may be normal practice for
the architect or engineer (or owner) to obtain these approvals, the contractor will share
liability if works are commenced before they are obtained. In these circumstances the
contractor’s ability to recover costs incurred will be jeopardised. The contract may, of
course, state expressly that the contractor is liable to obtain these approvals, as in the JCC
standard conditions
Other approvals necessary to undertake the work in, for example, a particular manner or
required as part of a trade licence would be reasonably implied as the contractor’s
responsibility under the contract even though not expressly stated.
2.91 Express terms and procedures
2.91.1 Time for completion
Almost all building contracts will include a date by which the parties have agreed that
the building is to be complete. If not, the court will presume that the parties had in mind
a completion date by which the works could be reasonably complete. This date, or it
might be expressed as a time in weeks from the signing of the contract, is the date by
which practical completion, and hence occupation and use, is to be achieved.
In virtually all standard contracts this completion date will have mechanisms by which it
may be adjusted to take account of unforeseen circumstances. However, you may come
across contracts which state a final and ultimate date by which the work must be
completed. An example of this might be buildings necessary for the running of the Sydney
Olympic Games in the year 2000. These buildings would have no value if they were not
complete until after the games were over.
When tendering you will therefore see several possible ways by which the time for
completion will be determined. You might be required to state the amount of time you
required to undertake the work, you may be given a set number of weeks to complete
the work, or you may be given a set completion date. With the latter you should, of
course, ensure that you have an equally well defined commencement date. If there is not
one given it would be prudent to set a starting date or a date by which you require the
building site.
The date for completion, as adjusted for additional work, poor weather and any other
agreed factor by which the date can be varied, is the date from which liquidated and
ascertained damages run.
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2.91.2 Permits
The word ‘permits’ means all the statutory approvals (this includes governmental, local
government, statutory authorities and regulating bodies) that you, as the builder, and your
sub- contractors are required to have to undertake the project. They may include a permit
for blasting, a permit to connect to the sewer, gas , water and power supplies, a permit to
occupy public land, etc. depending on the nature of the project. It is your job to inform
yourself on the nature and extent of permits required for your project.
2.91.3 Provisional sums
These are specified amounts of money, or amounts that you are required to include in your
tender price for the undertaking of a specific item of work. The cost of which could not be
quantified at the time of tendering.
With that monetary allowance you will be expected to have allowed an amount you
consider necessary to carry out any additional work associated with the provisional sum
item. So, for example if you have to provide lifting equipment, if you have to take
delivery of an item, if you have to protect an item, you must include the cost of this
additional work in your tender in addition to the monetary allowance specified. You
should also allow for any overhead and administrative costs and profit in addition to the
monetary sum.
The contract will normally set out a procedure whereby the sum allowed can be adjusted
to reflect the actual final cost of the item. The contract administrator will normally
request evidence of actual costs incurred for this item. It may be more or less than the
amount specified/allocated. This adjustment procedure should include a mechanism to
take account of the changes to your profit and administrative costs resulting from
changes in the amount spent.
Provisional sums are part of a group of allowances you will be required to include
which are broadly referred to as monetary sums. They include provisional sums,
provisional quantities, provisional rates, PC sums and contingency sums. They are all
simply amounts to be allowed in your tender plus any additional costs or profits you
consider necessary.
Provisional sums are intended to be used for complete items of work, including
labour and materials, (i.e.) the work of a specialist or nominated sub-contractor.
PC items are intended to cover the supply only of items of equipment. You may
condition your tender to clearly exclude delivery costs.
Provisional quantities are allowances to be made in a tender for amounts of specific
work to be carried out. For example you may be asked to allow for the excavation,
removal and disposal of 20m3 of rock.
Provisional rates are usually coupled with provisional quantities. In the example above
you might be asked to provide the rate per cubic metre for the excavation of between 15
and 30m3 of rock and include in your tender the cost at this rate for the removal of 20m 3
of rock. The final cost of this item will be adjusted, either up or down, depending on the
actual quantity required.
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Contingency sums are simply amounts of money that you are asked to include in your
tender for as yet undefined work.
2.91.4 Bills of quantities
A bill of quantities is an itemised detailed list of all the trades and services required for the
construction of a building showing labour and material quantities for each showing the
quantity of labour and material. The tender drawings are used as the basis of measurement
and calculation of these quantities. Measurement is carried out to a standard method or
code of practice.
The role of the bill in the contract will vary, depending on the standard contract form
proposed. However, all standard forms of contracts have mechanisms for the
adjustment of the tender price where there is an error in measurement of the
quantities. Some non-standard contracts will, however, attempt to place the liability
for errors onto the builder.
If you enter into a contract which places the risk of errors solely on your shoulders, except
for errors which are the result of negligence or fraud, you will be taking all the risks
associated.
2.91.5 Progress payments
As the contractor, you have no right to progress payments unless the contract authorises
them. In practice, progress payments are a normal part of a building contract.
A progress payment is a part payment for work in progress. The payment should reflect
the value of work completed and, in some cases, will include work done off site and
materials supplied but not fixed. However the proprietor faces legal difficulties with
payments for these latter two. In the event of you becoming bankrupt and owing money
on unfixed materials or work done off site there will be a contest between the proprietor
and the firm owed the money for ownership of or title to the goods.
Building contracts will normally include a retention sum, unless they are replaced by a bank
guarantee. A retention sum is a % of the contract sum that is to be withheld by the
proprietor, usually until the completion of works or defects liability period. Reductions are
made from progress payments until the nominated total retention sum is reached. The
progress payment is therefore a payment of the value of work carried out less a deduction
of a percentage to be held as a retention sum.
2.91.6 Architects instructions
Whoever is responsible for the superintendence and administration of the contract on
behalf of the proprietor will, from time to time, find it necessary to issue the contractor with
instructions on matters such as how to overcome a difficulty or giving approval to proceed
with a variation or instruct the contractor to accept a particular nominated sub-contractor.
The contract administrator has, traditionally, been an architect and almost all the RAIA
contracts refer to these instructions as architects’ instructions. However an engineer may
well administer some types of building contracts and Government Departments often have
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specialist contract administrators. In some cases the client may act as contract
administrator.
Also some contracts provide for superintendence by more than one type of person. A
civil engineer may oversee site preparation, a structural engineer the structural frame,
all co-ordinated by the general superintendence of an architect. How architects
instructions or site instructions are issued and managed in this type of situation must be
defined before project commencement.
Since you will have wisely only entered into a building contract which is in writing it is
most important that architects instructions (or site instructions) are all in writing.
Contract conditions do include the power for the supervisor to issue verbal instructions
in emergencies. The contract normally calls for these to be confirmed in writing within a
very short period, by which time, of course, the work may be completed.
Where there is an emergency or a real need for an urgent decision you will have no
choice other than accept that decision, particularly if failure to accept and act on it would
lead to additional costs. Since no-one’s memory is perfect it is in your interests to
minimise these situations as far as possible. Where your memory differs from the
architect’s is the potential beginning of a dispute.
Apart from managing your project so as to minimise the possibility of urgent decision
making, you can adopt the practice of having on site an instruction book with triplicate
numbered pages and insist that all on the spot instructions are to be recorded in the book
with a copy to you, a copy to the architect and a book copy for reference in case one of the
other copies is lost. This book could be the architects’ instruction book or it could be an
interim instruction book where the instruction is confirmed in the standard format
instruction within an agreed number of days.
2.91.7 Rise and fall clauses
In times of high inflation or general economic uncertainty due to changing prices it is normal
that a building contractor would insist on rise and fall provisions being inserted into the
contract. These are intended to permit adjustment of the contract amount resulting from
changes in costs to be met by the contractor in the execution of the project. In other words
the contractor is seeking to transfer the risk of rising costs onto the proprietor.
If falling costs were the problem it would be the proprietor who would be seeking to
include a rise and fall clause.
The mechanism can come in many forms, depending on the elements of uncertainty.
Labour costs are normally adjusted by using an appropriate labour rate index, probably
one issued by the Australian Bureau of Statistics. Material costs changes can be similarly
treated. Where both are changing the above two techniques are combined in a
proportion intended to reflect the relative value of labour and materials in the project.
Sometimes single materials fluctuate wildly in cost and an adjustment format suitable for
one item must be devised.
The adjustment formula is applied at the time of each progress payment resulting in an
incremental change in the contract price. It is not simply a levy applied at the conclusion
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of the project.
A number of disputes have arisen over the application of rise and fall clauses,
particularly in the 1970’s over what the unions called ‘conditions of employment’ so,
take care. An agreement between you and the union over site conditions may not, with
a rise and fall clause in place, result in a claimable rise under the contract.
In general, proprietors lack confidence in the fairness of rise and fall contracts.
2.91.8 Construction Schedules
Most building company’s today use a computerised Construction Project Management
System. This allows them to schedule tasks efficiently, manage resources, monitor costs and
report on projects for analysis and presentation i.e. the detailed work schedule is prepared
using computerised Construction Project Management software.
In planning the programme for a construction project, it is necessary to know all distinct
operations of the project. How they would be done, who will do them, and in what
sequence they can be carried out. Working times will then be determined for the various
operations and each operation will be fitted into a “builders’ calendar” period over which
the contract will be completed.
The builder will approach the scheduling work on the “KEY DATE TABULATION PRINCIPLE”.
Under this method they will establish starting and finishing dates for the basic elements of
the work, eg. preliminaries, soil and water management, bulk excavations, retaining walls,
concrete piers, footing and pads, brickwork, internal sewer drainage, cast in-situ concrete
floors, wall frames, roof frames, insulation and roofing work and so on.
Detailed operations will be then fitted into this overall plan, keeping in mind the necessary
sequences. The construction programme is aimed for effective co-ordination of activities,
therefore congestion and interference will be kept to a minimal. The schedules needed
constant revision and updating during the contract period, and preplanning provides the
means of meeting these changes.
The Construction Project is broken into tasks and then the task is divided into phases or
steps. Here is an example of “Preliminaries”:
Preliminaries:
•
•
•
•
•
Assign a full time Project Manager / Site Supervisor.
Send suppliers & subcontractors tender packages including your company’s “Terms
of Engagement”.
Examine quotations received from suppliers & subcontractors
"Signing trade contracts (SC2), to successful suppliers / subcontractors clearly specify
contractual conditions & terms of engagement ".
Work Cover Notice of Intention to Commence Construction Work / submit notice.
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•
•
•
Surveyor to check existing levels and contours indicated on the site drawings
Setting out work
Obtain Survey Set-out Certificate
The objective of using a project management system for a construction project is to assess
the features of the project before it is begun. It should enable the project to run as
smoothly as possible based on a predicted sequence of events and activities that has been
carefully compiled and analysed. The construction programme allows the builder to:
•
•
•
•
•
•
•
•
co-ordinate project activities,
predict purchasing requirements,
arrange for timely delivery of materials,
plan for efficient use of resources,
predict cash flow for the duration of the project,
monitor costs,
monitor performance,
monitor overall progress.
These management functions that are undertaken by the builder are organisational issues
that are made easier by having a construction programme.
The builder can also use the ability to monitor costs and progress on various aspects of the
project to control the overall progress, and make allowances or changes as necessary.
There are various methods of planning but to ensure useability, a construction programme
needs to be:
•
•
•
•
•
easy to interpret,
easy to change (flexible),
accurate, and
have input from all involved parties, as well as
show all required, relevant information.
Construction activities and sequence
In order to be able to generate a construction programme, it is necessary to be able to
identify activities and to understand the relationship between the activities. This will
generally require some experience of construction techniques and also of all of the tasks
involved in a project from site establishment to completion and handover.
It is also important to be able to assess the level to which the job needs to be broken down.
Too detailed a list of activities can make the planning process too time consuming and of no
additional use in the management of the job.
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Conversely, too little detail will not allow the job to be managed efficiently. A large project
with an unwieldy number of activities can be planned at different levels.
The overall job can be planned to allow an overview and general monitoring, and selected
components of the job can be planned and analysed in more detail as a sub-plan. This subplan can be consulted only as required but can also serve as the main planning tool that is
used by the supervisor of that section of the work.
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2.92 Illegal contracts
Earlier we considered the illegality of a contract in terms of the illegality of the
objectives. Illegality in a contract may arise because it is:
•
Void by statute.
•
Prohibited by statute; or
•
Against public policy.
Illegality may occur in a contract for all the purposes of the contract, or for only some
purposes. Also, the contract may be void from its commencement or become void or illegal
during its execution due to changes in the law.
2.92.1 Void by statute
Contracts that are void by statute are those contracts where a statute has not made it an
offence to enter into a contract but has simply made the contract impossible to be enforced
by the court. So, although no offence was created by the contract agreement and therefore
the contract is legal, the agreement is nevertheless void or, in other words, the contract is
unenforceable. Another way of expressing this is that the payment of a cheque for a
contract that is void by statute is not illegal or void but is given for void consideration.
2.92.2 Prohibited by statute
Contracts prohibited by statute, either expressly or impliedly, are illegal. The term ‘statute’
here includes Acts, Regulations, Bylaws, Ordinances, and Rules authorised by statute or
issued under the authority of an Act.
2.92.3 Against public policy
Contracts that are against public policy have similar consequences to those that are void or
illegal by statute. With these, however, the public policy has been developed by the
common law or court, not by Parliament. However, this category includes both void and
illegal contracts. Contracts that the courts have held as illegal include contracts to commit a
crime, a tort (a wrong) or a fraud on a third party, contracts that involve sexual immorality
to an objectionable degree, contracts that prejudice public safety, contracts that tend to
induce corruption in public life and contracts to defraud the revenue.
Contracts that offend public policy to a lesser degree and have thus been treated by
the courts as being void rather than illegal include contracts to oust the jurisdiction of
the courts, contracts prejudicial to the status of marriage and contracts that impose
an unreasonable restraint on trade.
Alternatively, these may be considered as contracts to commit a legal wrong, contracts
injurious to public life, immoral contracts and contracts in restraint of trade.
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2.93 Rights and liabilities of parties under a
contract
Each party has the right, enforceable at law, to receive what it is due under the
agreement made. There are also rights that are implied in the contract. These rights are
normally phrased in terms of the obligations of one party to the other.
Those rights or obligations that are expressly stated in the contract define the basic
purpose of the contract.
The rights of the contractor in a building contract are:
• To receive payment for work undertaken.
• To be given possession of the site.
• To have, where the contract so provides, an architect, engineer or surveyor or other
administrator appointed.
• To receive instructions as to the carrying out of the work.
• To be free of interference in the progress of the work.
• To receive timely nomination of specialist subcontractors and suppliers.
• To have timely carrying out of any work or supplying of any materials to be
undertaken by the other party.
• To be permitted to carry out the whole of the work.
The rights of the proprietor in a building contract are:
• To have the work completed.
• To have the contractor carry out his or her obligations as to the design and quality of
materials and work.
• To have the contractor provide all indemnities and insurance required.
• To be given adequate notice of all claims.
• To have the work proceed at a reasonable rate of progress.
Some of these rights can be transferred to the other party to the contract where
the contract provisions state this.
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2.94 Discharge of the contract
Breaches of these rights under the contract may provide the other party with an
opportunity to discharge themselves of further liability under the contract. Most
standard building contracts have provision for termination of the contract under certain
specific circumstances, such as bankruptcy.
2.94.1 Discharge from further performance
A contracting party may be discharged from its obligations under the contract because
of a number of reasons. The most usual one is that full performance of the contract has
been achieved. Another method of discharge that requires little comment is discharge
by mutual consent. The other forms are not so pleasant.
They are:
•
repudiation
•
release
•
impossibility and frustration
•
death or illness of a party
•
illegality
Repudiation
This is an act or an omission by one party to a contract that can reasonably be
considered as being an intention by that party to be no longer bound by the contract.
Where the contract has been repudiated by one party, the other party has the option of
rescinding the contract or permitting it to continue and hold the repudiating party
responsible for all the consequences of its repudiation. The problem this latter course of
action has for the innocent party is that it provides a continuing opportunity to take
advantage of any supervening circumstances that would justify the repudiating party
declining to complete.
An example might be where a proprietor who, having engaged a contractor for a project,
finds that the contractor persistently refuses to comply with one or more of the
contractual obligations. The proprietor may choose to either rescind the contract or
permit the contractor to complete and then sue for damages at the conclusion of the
contract. If, having decided to permit the contract to continue, the proprietor is lulled into
ignoring some of his or her own contractual obligations and, as a result, comes to default
on those obligations, the contractor may treat this default as a repudiation on the part of
the proprietor and rescind the contract. Where the party against whom the contract has
been repudiated decides to rescind the contract, this decision must be notified to the
repudiating party, either expressly or by clear implication.
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Release
The parties to a contract may discharge their obligations under a contract by mutually
releasing each other from further performance obligations at any time. They also may
also discharge their obligations by entering into a fresh agreement in substitution.
Impossibility and frustration
Frustration normally arises whereby some event, such as the destruction of the site,
means that resumption of the project is impossible or by the passage of legislation that
makes the project illegal. For example, in Codefa Constructions Pty Ltd v State Rail
Authority (NSW) (1982) 149 CLR 337 the High Court held that the contract was frustrated
as the result of the imposition of injunctions reducing the hours available for the
contractor to work from those originally contemplated on the part of both parties. Other
contractors have not been so fortunate. In Aurel Forras Pty Ltd v Graham Karp
Developments Pty Ltd [1975] VR 202 a claim by the contractor that strikes had frustrated
some of the provisions of the contract was rejected.
Death or illness of a party
Building contracts are not normally personal in character so the death of a party merely
transfers the benefits and burdens of the contract to the executors and administrators of
the estate. Illness affords no excuse as it is open to a party to arrange for the vicarious
performance of his or her liabilities.
However, in rare circumstances, where the personality of the builder is of vital
importance to the other party, the effect of death is to dissolve the contract from the
date of death. Similarly, in these circumstances illness of sufficient gravity will dissolve
the contract.
Illegality
The effect of illegality on a contract, which is to make the contract void and
unenforceable, has already been considered.
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Topic 3
Getting professional advice
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3.1 Industry associations
Most industry associations have their own comprehensive suites of contracts and
subcontracts which can be used in the building and construction industry ranging from
those suitable to small building works through to major commercial construction projects.
Most of these industry associations also offer a legal advice service to their members to aid
in contract interpretation, use and administration and also for dispute resolution. Some
associations also release/publish Advice notes and Practice Notes for their members.
3.2 Solicitors & Barristers
Sometimes there may be a need to engage a solicitor to assist in the interpretation of a
contract, for preparing a special form of contract or for dispute resolution. There are a
number of law firms who specialise in building and construction industry matters. These
firms can offer a wide range of services such as:
3.2.1 Building contracts
You may require specialist advice in relation to the following:
•
Home building contracts.
•
Fixed price contracts.
•
Cost plus contracts.
•
Small to large scale building works.
•
Renovation and home extensions.
•
Sub-contracting and owner builders.
•
Commercial building works.
•
Drafting special conditions of contract.
•
Advice before signing contracts.
•
Review of contract documents, terms and conditions of contract, specifications, bills
of quantities, tenders, quotations, engineering drawings and architectural plans.
3.2.2 Contract administration
You may require information and advice concerning building works during construction.
Specialist law firms can provide advice on:
•
Understanding contract documents.
•
Contractor licences and home owner's warranty insurance.
•
Implied terms of contracts.
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•
Progress payments.
•
Approval and certification of work.
•
Variations to contracts.
•
Time for completion and practical completion.
•
Quality of construction and warranties applicable to home building.
3.2.3 Dealing with disputes
When building disputes occur, legal advice to inform you of your rights and
responsibilities is sometimes necessary. Specialist law firms can help with:
•
Skilled informal dispute resolution.
•
Identification of items of defective and incomplete building work.
•
Clearly outlining the responsibilities of builders, proprietors, material suppliers,
architects, engineers, private certifiers, property developers, real estate agents,
council and other authorities.
•
Evidence gathering and engagement of expert witnesses.
•
Building the foundations of a case for litigation.
•
Determining-termination of building contracts and advising on contracting with
another contractor.
•
Quantum meruit claims.
•
Litigation within the Court.
3.2.4 Retaining expert witnesses, building consultants and
specialist counsel
When building disputes proceed to litigation it is essential that all available evidence be
examined and documented by specialist building consultants who appear as expert
witnesses. Some legal firms can recommend expert witnesses to prepare building
reports for use in litigation and appear before the court for clients in the following
areas of specialisation:
•
Home building and compliance with Australian Standards and the Building Code of
Australia.
•
Structural engineering.
•
Mechanical engineering.
•
Hydraulic engineering.
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Forensic accountants.
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Forensic architects.
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Quantity surveyors.
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Fire safety consultants.
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Project management consultants.
3.3 Contract payment
3.3.1 Entire contracts
As was mentioned under the heading of Progress payment above there is no automatic right
to progress payments, it is a right conferred under the contract.
A contract which has no provision for progress payments is called an entire contract with
payment becoming due only on completion. When you take a pair of shoes to the
bootmaker for repairs you only make a payment for the repair work when you collect the
shoes but you entered into the contract when you gave the shoes to the bootmaker with
your instructions to repair them.
You are wondering where the consideration is when you did not agree to a price for the
work? There is a presumption that in the course of ordinary trade that when you ask for
work to be done it is to be done for a reasonable price. You are presumed to have given
consideration.
3.3.2 Progress payments
Progress payments are payments made which correspond to the value of work carried out,
less a percentage for a retention fund. Unfixed materials and work carried out off-site are
normally excluded but at times some provision has to be made for these to be included,
such as with lift and escalator fabrication. It is both your and the proprietor’s interest to
ensure that payment for any off- site work includes the provision for that work to be clearly
identified as your property. In the event the firm doing the off-site work goes into
liquidation it will assist you in claiming the work. If, in the unlikely event that the proprietor
agrees to make a progress payment for unfixed materials you will find that there will be an
insistence on clear identification of the materials as being the property of the proprietor.
The architect, under standard building contracts, is required within a set period of time, to
issue a progress certificate, after a claim has been submitted. The certificate gives the
contractor the right to payment for that amount from the proprietor. Progress claims must
normally be made at set intervals, usually monthly and by a set date in the month.
3.3.3 Quantum meruit
Quantum meruit is part of that area of law called quasi-contract. The law recognises, in
certain situations, that an obligation to pay money arises not as a result of a contract, a tort
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or a trust. These situations are based on a sense that there is a duty to restore or
compensate a person for a benefit gained. This benefit might be the result of a refusal to
repay money paid by mistake or a refusal to pay for work where the product of the work is
retained.
In the case of the recovery of money for work performed, where it is not possible to make a
valid claim via a contract, because of circumstances such as the contract not being validly
formed or having been discharged, the recovery is on the basis of a reasonable sum for the
services or work performed.
For example if you, as a builder, received an express request or one which you could
reasonably imply, to carry out work for someone without remuneration being discussed.
Provided that in the circumstances it would have been reasonable for you to have expected
to be paid, there is an implied promise by the other party to pay a sum of money to the
value that the work deserves. This payment is a quantum meruit payment.
3.3.4 Extensions of time
Standard building contracts normally have express provisions covering the circumstances
where a valid claim for an extension of time may be made. Construction work is often
delayed and can cause potential costs to both parties to avoid potential delays it is crucial
for both parties to obey the rules laid out in the particular form of contract.
The Fair Trading’s Home Building Contract, for example, sets out in clause 7 causes which
will allow for extension of time claims.
Under Clause 34.5 of an AS4000 contract, an ‘extension of time’ must be applied for by the
Contractor and may be granted for ‘qualifying causes of delay‘. The Superintendent must
assess the application and advise in writing whether or not extension is granted.
3.3.5 Liquidated damages and penalties
Damages can be divided into two types, liquidated and unliquidated.
Liquidated damages are those where it is possible for the person claiming the damages to
calculate a genuine pre-estimate of the losses which will be suffered if the builder breaches
the contract by failing to complete on time. Liquidated damages are compensation for that
loss, they are not a penalty.
Unliquidated damages are those damages which the proprietor is not in a position to
calculate. For example compensation for an injury or death sustained are not able to be
calculated and the establishment of a value as ‘compensation’ is reserved for the courts.
3.3.6 Dispute resolution
The inclusion of clauses on dispute resolution in a contract will not prevent either party
from taking court action to resolve a dispute. However it is likely that the court will require
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you to first undertake the agreed procedure and show that it has failed before hearing the
case. You should note that court hearings are normally longer and more expensive that the
contract dispute resolution alternatives.
3.4 Approval and acceptance of work and the
types of certificates
3.4.1 Introduction
It is intended to consider here the types of problems or issues which are associated with
approval and acceptance of the work and the types of certificates which are issued as a
result. Since the governing factor in this is the type of certificate we will consider the
matter in terms of each type of certificate and its relationship to approval or acceptance
of the work.
There are three types of certificate issued during a building contract. They are:
•
•
•
Progress certificate.
Certificate of practical completion.
Final certificate.
3.4.2 Progress certificate
The normal standard contracts for building work, whether or not there is a person
designated as the contract administrator (i.e. an architect or engineer), provide for the
regular payment for work carried out during the progress of the project. This is usually
made as a monthly payment, which is initiated by what the contract describes as a
progress claim submitted by the builder.
This progress claim will normally be due on a set date each month and should provide a
detailed statement of the work completed and its value, including variations and, where
the contract permits, the value of unfixed materials. They may alternatively become due
when particular stages of the work are completed.
The onus of preparing this claim and submitting lies with the contractor.
The progress certificate which is issued to you as a result of this claim gives you the
entitlement to payment of the amount certified from the proprietor. It will vary from
the amount you claimed by deducting an amount for inclusion in the retention fund and
may be varied where the contract administrator disagrees with your valuation of work
completed.
The project administrator has a specific time under the contract within which to issue
the progress certificate.
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Issuing a progress certificate does not imply that the work undertaken has been
accepted by the contract administrator or the proprietor. A payment which has been
made under a progress certificate can be adjusted in a later certificate if it has been
found to be wrong.
Whether or not the proprietor has the right to vary the amount paid by deducting or
withholding money from the progress certificate depends on whether this is permitted
by the contract. This right by the proprietor is an express right and cannot be implied into
the contract. Also a clause giving this right will be strictly interpreted by the courts.
3.4.3 Certificate of practical completion
The certificate of practical completion differs from the progress certificate in five respects.
1. It sets the date for the commencement of the defects liability period.
2. It provides the date at which the contract administrator deems that the project is
sufficiently completed for the proprietor to take up occupation.
3. It terminates the contractor’s liability with respect to time.
4. It reduces the contractor’s liability to the retention fund.
5. It transfers the risk associated with the property from the contractor to the
proprietor.
The role of the project administrator also alters at this point of time. He or she is no
longer able to issue instructions for further variations to the project.
The process of determining practical completion commences with the contractor issuing
an application for practical completion by written notice to the project administrator.
This is not necessarily made at the same time as an application for a progress payment is
made. As with progress claims there is a set period of time by which the contract
administrator must respond. There are several responses available to the contract
administrator, he or she may, after making a detailed inspection of the project with the
contractor, simply issue a notice of practical completion or, more likely, after the
inspection issue a list of items requiring attention prior to issuing a practical completion
notice. A third, less pleasant response, is to issue a statement to the effect that the work
has not reached practical completion and that no detailed statement of outstanding
work is attached as the outstanding work is too extensive to enumerate. Normally the
second of these three possibilities will occur.
There is a type of practical completion called ‘staged practical completion’. This is
available under some contracts. For this concept to operate the project must be capable
of being divided into distinct portions which can, without jeopardy to the occupants, be
occupied by the proprietor whilst the remaining portions are still being constructed. This
complicates not only the concept of practical completion and the defects liability period
but also insurance covering risks to the property.
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Under certain circumstances practical completion of the project may be deemed to have
occurred. It can occur where the project is occupied before a formal certificate of
practical completion has been issued or where the project administrator has failed to
meet the time limits set for his or her response to the contractor’s application for
practical completion.
3.4.4 Final certificate
The issue of the final certificate means that the contracted work has been
completed and all contractual obligations, apart from those relating to latent
defects, have been discharged.
The process of achieving final completion will vary from contract to contract.
This statement will most likely initiate discussions which, when finally resolved, will
result in the payment of all outstanding monies except the balance of the retention fund
(or release of the balance of the contractor’s guarantee) which is required by the
contract to be held until the issue of the final certificate.
A final claim will be made by the contractor after all defects have been corrected and
after the end of the defects liability period. Certain documents will be required from the
contractor at this stage. The results of these actions will be that the contract
administrator will issue a final certificate for the project. This certificate has the effect of
making the proprietor liable for paying all outstanding monies for the project.
At this point, apart from latent defects and provided that the contractor has not acted
fraudulently in obtaining the final certificate, all contractual obligations on the part of the
contractor cease.
In the case of projects which have staged completion dates a type of certificate called a
semi-final certificate is issued for each stage. Although its effect on the portion certified
is not exactly the same as the final certificate it has the effect of releasing the
contractor from all the contractual obligations with respect to the portion completed
which can be released independently of the remainder of the contract.
3.4.5 Variations
No building contract of any reasonable scale is likely to be completed without having
variations. Consequently all building contracts include a clause or clauses which
permit variations.
Variations are changes to works which are the subject of the contract. They usually
affect the cost of the project and often affect the time required for completion. They
are simply changes to the scope of work as documented.
As the contractor you must ensure that you receive written approval for all variations
which are carried out.
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Variations, however, must be permitted only within limits. If this were not so you
could find yourself tendering on a chook shed and building a multistorey building. As
a result standard contracts have a provision which restrict variations which are
permitted to be ordered to those ‘within the general scope’, or ‘within the character
and extent contemplated by the contract’, or ‘within the scope of the contract’ or
other similar phrasing.
You may be ordered to carry out variations for a number of reasons. The building owner
may have had a change of mind, there might be a component of the work requiring
modification to avoid breaching statutory requirements, there might be an error in a
contract document or a discrepancy between documents, a product specification may
have changed or a new and more suitable product may have been introduced onto the
market. You may have made a proposal which would improve the project.
Whilst the need for a variation may be initiated in several ways the authority to carry out
a variation will come to the contractor solely by the issue of a written instruction from
the contract administrator, who is the only person with the power to issue a variation
order. Where the contract has provision for the issue of urgent verbal instructions, these
will also only be issued by or under the authority of the contract administrator.
Normally the real issues with variations is their cost and any extensions of time they incur.
Where a bill of quantities or schedule rates exist the variation is normally costed on the
basis of the rates included in these documents. In cases where these do not exist it is
usually possible to quote on the variation and agree on the cost and time required before
proceeding. The variations where neither of these possibilities exist are usually the
subject of a detailed costing submission followed by agreement, discussion and
compromise or, in a worst case scenario, disputation and rejection.
3.4.6 Contract finalisation
Finalisation of the contract commences at the point of practical completion. When
practical completion has been reached the contract enters the phase of the defects
liability period which, provided all defects are attended to, is of a finite duration at
the end of which the contractor is entitled to the issue of the final certificate.
The issue of the final certificate completes the contractual liabilities apart, as was
mentioned above, for the rectification of latent defects.
3.5 Breach of contract
There are two situations that we will consider here; breaches that discharge the contract
and breaches that do not discharge the contract. We will not consider remedies that are
available within the contract. In any dispute where you have a contract in place, you
should first try to resolve it within the provisions of the contract. This, if it is successful,
will minimise the actual cost of the dispute resolution procedure and the costs involved
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in the time taken to resolve the dispute. In taking this approach, however, you should be
aware that some parties adopt a different procedure. Some people believe in initiating
legal proceedings so as to ensure that they get the pick of the best legal help. If you are
in a situation where you think that litigation is highly probable, keep this fact in mind and
try to fully monitor what the other party is actually doing. Obtaining good quality legal
advice may be well worth while at this stage.
3.5.1 Breaches that discharge the contract
The elements that make up the obligations of parties to a contract are divided into
conditions and warranties. Conditions are the fundamental elements of a contract, and
their breach by one party, either actual or anticipatory, gives rise to the right to the
other party to terminate or discharge the contract.
This right must be exercised promptly or it will be lost.
3.5.2 Breaches that do not discharge the contract
The following are those remedies available for breaches of the contract, which do not
give rise to the right of termination.
3.5.3 Remedies
Termination
Termination is a common law right. It is a remedy that is available only for fundamental
breaches of the contract or for breaches where the contract explicitly permits
termination. So a breach of a condition, or a breach of a condition or warranty where the
contract specifically provides for this remedy, gives the right of termination. It is a right,
therefore, conferred either by the contract or by the law.
Where you have the right to terminate you must exercise that right promptly. Otherwise
you will lose the right to terminate. You can exercise the right to terminate without the
need to litigate, but if you terminate without having the right you place yourself in breach
of the contract.
The effect of terminating the contract is to discharge both parties from any future
obligation under the contract. However, rights that were accrued under the contract
prior to termination are not affected, so there will be a liability for payment for work
executed prior to termination.
Termination does not prevent a party from exercising other remedies, such as
seeking damages resulting from non-performance.
The intention to terminate must be transmitted to the other party explicitly.
Also, the exercise of your right to terminate must be done fairly, and in doing so you
must be in a position to be ready to continue to perform your side of the contract
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bargain. If you are unable or unwilling to perform you cannot use the other party’s
unwillingness or inability to perform as an excuse to terminate.
Damages generally
Damages may be awarded under both common law and equity and they may be awarded
in addition to any other remedy available. Also, in a contract damages may be awarded
for breaches of the contract or in tort.
Damages in contract
Damages in contract and in tort have the same function and both are common law
actions. It is an award by the court of money to compensate the plaintiff for the wrong
inflicted by the defendant. That monetary compensation is, so far as possible, to place
the plaintiff in the same situation as if the contract had been performed.
To award damages, the court must find that there was a breach of the contract, that the
breach injured or caused a loss to the plaintiff, that a loss arose from the breach or was
the probable result of the breach, and that the plaintiff did all within his or her power to
minimise any unnecessary loss.
Damages in tort
The award of damages in tort requires the court to find that the plaintiff has a cause of
action in tort against the defendant. This will normally be an action based on negligence
on the part of the defendant. Where the defendant has knowingly breached a term of the
contract, negligence is not difficult to prove. The court must find that that cause resulted
in the plaintiff’s loss and was a reasonably foreseeable consequence of the defendant’s
negligence. As with damages in contract, the plaintiff must make all reasonable attempts
to minimise the consequences of the negligence.
Restitution
Restitution is the basis of the common law remedy of quantum meruit. It arises in
circumstances where a contract has been terminated, is void or unenforceable. It is a
remedy not available where full compensatory damages are asked for. A quantum meruit
claim is, therefore, a claim for restitution. It is a claim to recover reasonable
remuneration for the services supplied by the plaintiff to the defendant. Restitution is
also available to recover money paid under a contract where the consideration for the
payment has failed, but it is not available as a remedy for partial failure of consideration.
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Topic 4
Glossary of contract law
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General Business Contracts
Terms
Definition
Acceptance
The unconditional agreement to an offer. This creates the
contract. Before acceptance, any offer can be withdrawn, but
once accepted the contract is binding on both sides. Any
conditions have the effect of a counter offer that must be
accepted by the other party.
Agent
Somebody appointed to act on behalf of another person (known
as the principal). The amount of authority to deal that the agent
has is subject to agreement between the principal and the agent.
However, unless told otherwise, third parties can assume the
agent has full powers to deal.
Arbitration
Using an independent third party to settle disputes without
going to court. The third party acting as arbitrator must be
agreed by both sides. Contracts often include arbitration clauses
nominating an arbitrator in advance.
Breach of contract
Failure by one party to a contract to uphold their part of the deal.
A breach of contract will make the whole contract void and can
lead to damages being awarded against the party which is in
breach.
Collective agreement
Term used for agreements made between employees and
employers, usually involving trade unions. They often cover more
than one organization. Although these can be seen as contracts,
they are governed by employment law, not contract law.
Company seal
An embossing press used to indicate the official signature of a
company when accompanied by the signatures of two officers of
the company. Since 1989 it has been possible for a company to
indicate its agreement without use of the seal, by two signatures
(directors or company secretary) plus a formal declaration.
However, some companies still prefer to use a seal and the articles
of a company can override the law and require a seal to be used.
Conditions
Major terms in a contract. Conditions are the basis of any contract
and if one of them fails or is broken, the contract is breached.
These are in contrast to warranties, the other type of contract
term, which are less important and will not usually lead to the
breach of the contract - but rather an adjustment in price or a
payment of damages.
Confidentiality agreement
An agreement made to protect confidential information if it has
to be disclosed to another party. This often happens during
negotiations for a larger contract, when the parties may need to
divulge information about their operations to each other. In this
situation, the confidentiality agreement forms a binding
contract not to pass on that information whether or not the
actual contract is ever signed. Also known as a non-disclosure
agreement.
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Consideration
In a contract each side must give some consideration to the other.
Often referred to as the quid pro quo - see the Latin terms below.
Usually this is the price paid by one side and the goods supplied
by the other. But it can be anything of value to the other party,
and can be negative - e.g. someone promising not to exercise a
right of access over somebody else's land in return for a payment
would be a valid contract, even if there was no intention of ever
using the right anyway.
Consumer
A person who buys goods or services but not as part of their
business. A company can be a consumer for contracts not related
to its business - especially for goods or services it buys for its
employees. Charities are also treated as consumers.
Due diligence
The formal process of investigating the background of a business,
either prior to buying it, or as another party in a major contract. It
is used to ensure that there are no hidden details that could affect
the deal
Employment contract
A contract between an employer and an employee. This
differs from other contracts in that it is governed by
employment legislation - which takes precedence over
normal contract law.
Express terms
The terms actually stated in the contract. These can be the
written terms, or verbal ones agreed before or at the time the
contract is made (see implied terms).
Going concern
Accounting idea that a business should be valued on the basis
that it will be continuing to trade and able to use its assets for
their intended purpose. The alternative is a break-up basis, which
sets values according to what the assets could be sold for
immediately - often much less than their value if they were kept
in use.
Implied terms
Are terms and clauses that are implied in a contract by law or
custom and practice without actually being mentioned by any
party. Terms implied by custom and practice can always be
overridden by express terms, but some terms implied by law
cannot be overridden, particularly those relating to consumers
(see exemption clauses).
Injunction
A remedy sometimes awarded by the court that stops some
action being taken. It can be used to stop another party doing
something against the terms of the contract.
Injunctions are at the court's discretion and a judge may refuse to
give one and award damages instead - see the finance contract
terms below.
Joint and several liability
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Where parties act together in a contract as partners they have
joint and several liability. In addition to all the partners being
responsible together, each partner is also liable individually for
the entire contract - so a creditor could recover a whole debt
from any one of them individually, leaving that person to recover
their shares from the rest of the partners.
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Joint venture
An agreement between two or more independent businesses in a
business enterprise, in which they will share the costs,
management, profits or benefits arising from the venture. The
exact shares and responsibilities will be set out in a Joint Venture
Agreement.
Jurisdiction
A jurisdiction clause sets out the country or state whose laws
will govern the contract and where any legal action must take
place. Don't forget that England and Scotland have different
legal codes, and this may need to be specified.
Liability
A person or business deemed liable is subject to a legal
obligation. A person/business who commits a wrong or breaks a
contract or trust is said to be liable or responsible for it.
Limited liability
Usually refers to limited companies where the owners' liability to
pay the debts of the company is limited to the value of their
shares. It can also apply to contracts where a valid limitation
clause has been included in the terms.
Liquidation
The formal breaking up of a company or partnership by realising
(selling or transferring to pay a debt) the assets of the business.
This usually happens when the business is insolvent, but a solvent
business can be liquidated if it no longer wishes to continue
trading for whatever reason (see receivership in the financial
terms below).
Misrepresentation
Where one party to a contract makes a false statement of fact
to the other which that other person relies on. Where there
has been a misrepresentation then the party who received the
false statement can get damages for their loss. The remedy of
rescission (putting things back to how they were before the
contract began) is sometimes available, but where it is not
possible or too difficult the court can award damages instead.
Offer
An offer to contract must be made with the intention to create,
if accepted, a legal relationship. It must be capable of being
accepted (not containing any impossible conditions), must also
be complete (not requiring more information to define the offer)
and not merely advertising.
Parent company
Where one company owns more than 50 per cent of the voting
rights of another company it is the parent of that company which
in turn becomes its subsidiary. It can also occur where the parent
has less than 50 per cent but can control the board of directors of
the subsidiary: that is, it has the power to appoint and remove
directors without referring to other shareholders.
Partnership
When two or more people or organizations join together to
carry on a business.
Quorum
The minimum number of people needed at a meeting for it to
proceed and make any decisions.
Registered Office
The official address of the company as stated on the register at
Companies House. Any documents delivered to this address are
considered to be legally served on the company.
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Repudiation
Has two meanings in contract law. The first is where a party
refuses to comply with a contract and this amounts to a breach of
contract. The second is where a contract was made by a minor
(person under the age of 18) who then repudiates it at or shortly
after the age of 18. Then the repudiation voids the contract
rather than causing a breach of contract.
Subject to contract
Words used on documents exchanged by parties during contract
negotiations. They denote that the document is not an offer or
acceptance and negotiations are ongoing. Often the expression
without prejudice is used when subject to contract is meant.
Unfair terms
Some terms are made unfair by legislation and will not be
enforced by the courts and may even be interpreted against the
person who included them in the contract. The legislation mainly
protects consumers, but can also apply where there is a businessto-business contract in which one party is significantly more
powerful than the other.
Void
A void contract is one that cannot be performed or completed at
all. A void contract is void from the beginning (ab initio - see the
Latin terms below) and the normal remedy, if possible, is to put
things back to where they were before the contract. Contracts are
void where one party lacks the capacity to perform the contracted
task, it is based on a mistake, or it is illegal.
Warranties
Promises made in a contract, but which are less than a
condition. Failure of a warranty results in liability to pay
damages (see the financial terms below) but will not be a
breach of contract unlike failure of a condition, which does
breach the contract.
Without prejudice
A term used by solicitors in negotiations over disputes where an
offer is made in an attempt to avoid going to court. If the case
does go to court no offer or facts stated to be without prejudice
can be disclosed as evidence. Often misused by businesses during
negotiations when they actually mean subject to contract.
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Financial Contracts
Terms
Definitions
Bankruptcy
The formal recognition that a person cannot pay their debts as
they are due. Note this only applies to individuals, companies
and partnerships that become insolvent are wound up.
Damages
Money paid as the normal remedy in the law as compensation
for an individual or company's loss. If another type of remedy is
wanted (such as an injunction - see general contract terms
below) but cannot be or is not given by the court, then damages
will be awarded instead.
Guarantee
A secondary agreement by which one person promises to honour
the debt of another if that debtor fails to pay. Banks and other
creditors often call on directors of small companies to give their
personal guarantees for company debts. A guarantee must be in
writing. The guarantor can only be sued if the actual debtor can't
pay, in contrast to indemnity.
Indemnity
A promise by a third party to pay a debt owed, or repay a loss
caused, by another party. Unlike a guarantee, the person owed
can get the money direct from the indemnifier without having to
chase the debtor first. Insurance contracts are contracts of
indemnity: the insurance company pays first, and then tries to
recover the loss from whoever caused it.
Insolvency
The situation where a person or business cannot pay its debts
as they fall due (see bankruptcy, liquidation and
receivership).
Liquidation
The formal breaking up of a company or partnership by realising
(selling or transferring to pay a debt) the assets of the business.
This usually happens when the business is insolvent, but a solvent
business can be liquidated if it no longer wishes to continue
trading for whatever reason (see receivership).
Receivership
The appointment of a licensed insolvency practitioner to take over
the running of a company. A creditor with a secured debt appoints
the receiver. The job of the receiver is to recover the debt either
by taking the security and selling it or by running the business as a
going concern until the debt is paid off (see liquidation).
Remedy/Remedies
Payments or actions ordered by the court as settlement of a
dispute. The most common is damages (a payment of money).
Others include specific performance (of an action required in the
contract), injunction (see the general contract terms above) and
rescission - putting things back to how they were before the
contract was signed.
Stamp duty
A tax on transactions. Only applied to specific types of
transactions e.g. dealings in land and buildings, shares and ships.
Wound up
Winding-up is the formal procedure for disbanding a
company.
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Property Contracts
Terms
Definitions
Covenant
a promise within a contract for the performance or nonperformance of a specified act
Deed
A written document by which a person transfers ownership of
real property to another. A deed must be properly executed and
delivered in order to be effective.
Disclaimer
A written document denying legal responsibility, or a
limitation of rights that might otherwise be claimed.
Easement
An interest in land owned by another that entitles its holder to a
specific limited use or enjoyment e.g. the right to cross the land,
or to continue to have an unobstructed view over it.
Encroachment
When a building or some portion of it, or a wall or fence, extends
beyond the land of the owner and illegally intrudes upon that of
an adjoining owner.
Freehold
Outright ownership of a property. This type of tenure
contrasts with leasehold where the leaseholder has the rights
to occupy a property for a specified period of time.
Habitable
Suitable and fit for a person to live in and free of any faults that
might endanger the health and safety of occupants.
Landlord
The owner of property that is leased or rented to others.
Lease
A contract by which an owner of property conveys exclusive
possession and use of it for a specified rent and for a specified
period - after which the property reverts to the owner.
Legal duty
The responsibility to others to act according to the law.
Occupancy
Holding, possessing, or occupying premises.
Occupant
someone who occupies a particular place
Party wall
a wall that divides two separate premises, which is the joint
responsibility of both owners
Premises
a building or part of a building usually including the adjacent
grounds
Reasonable wear and tear
Damage sustained in the course of normal use.
Search
An inspection carried out to establish whether any legal
restraints, planning applications or aspects of legal
ownership might affect the purchase of a property.
Solicitors will look into land registry and local government
records when pursuing this
Trespass
A willful act or active negligence that causes an injury to a
person or the invasion of their property.
Vendee (purchaser)
The person to whom a property is sold.
Vendor
The person who is selling a property.
Resource ID: IEC_18_005_SW_1of1_20200521
© NSW TAFE Commission
Page 65 of 66
Latin Contracts
Terms
Definitions
Bona fide
In good faith. Usually implies an amount of trust that the parties are acting
without any hidden motives. The opposite is mala fides - in bad faith.
Caveat emptor -
Buyer beware. This is a general rule that it is up to the buyer to find out if what
they are buying is what they want. Consumer regulations require certain
information to be disclosed to consumers and insurance contracts are covered
by the uberrimae fides - but many types of business contracts are covered by
the caveat emptor rule.
Ex gratia
Out of grace. A gift made without any obligation on the part of the giver or any
return from the receiver.
Ex parte
On behalf of. An action, usually a legal action, taken by a party on someone
else's behalf.
Ex post facto
Because of some later event. Where a later event or occurrence
interferes with an earlier agreement.
Inter alia
Among other things. This is often used in contracts to indicate that what is being
specifically referred to is part of a larger group without having to name all the
elements.
Mala fides
Bad faith, opposite of bona fide.
Nemo dat quod non
habet
No one can give what they do not have. The principle that a seller cannot pass
on a better right to the property than they actually have. So, if goods are stolen,
the buyer does not get ownership even if there was no indication that they were
stolen.
Non compos mentis
Not of sound mind. A person who is not of sound mind will not have full
capacity to enter into a contract.
Non est factum
Not my act. This is a denial by a person that they were actually involved in some
action or dealings. In a contract, it can occur if a party denies that they signed
the contract - that someone else forged their signature.
Prima facie
At first sight. A prima facie fact is one that seems to be correct but may
subsequently be proved wrong by other evidence.
Pro rata
For the rate. Divided in proportion to some existing split. For example, a pro
rata share issue is offered in proportion to the number of shares each
shareholder already has.
Quid pro quo
Something for something. The usual definition of consideration (see the general
contracts terms above) in a contract, on the basis that each party should offer
something to the other.
Uberrima fides
Utmost good faith. The concept that a party to certain types of contract must act
in good faith and declare all relevant facts to the other side even if they do not
ask. This only usually applies to insurance contracts where the insured person
must declare all known risks. It is an exemption to the general contract rule of
caveat emptor.
Resource ID: IEC_18_005_SW_1of1_20200521
© NSW TAFE Commission
Page 66 of 66