Pokhara University
Nepal Engineering College
Centre for the Post Graduate Studies
ECM 521 :
Professional Ethics and Liability in Construction
4.
Law and Contract
What is law?
• "The rule of law is better than the rule of any individual.” - The
Greek philosopher Aristotle (in 350 BC)
• John Austin (English jurist born 1790)
– "A rule laid down for the guidance of an intelligent being by an
intelligent being having power over him.“
– "A body of rules fixed and enforced by a sovereign political
authority.“
• Max Weber (German Sociologist born 1954)
– "Law…exist if it is externally guaranteed by the probability of
coercion (physical or psychological) to bring about conformity
or avenge violation, and is applied by a staff of people holding
themselves specially ready for that purpose.“
•
Thomas Hobbes (English philosopher born 1588)
– "Law is the formal glue that holds fundamentally disorganised
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societies together."
What is law?
 Definition of law - Marxist theory
– a tool of oppression (Burden, Impose) used by capitalists to
control the proletariat (Workers, Laborers).
• Law may be defined as
– the system of rules which a particular country or community
recognizes as regulating the actions of its members and which
it may enforce by the imposition of penalties.
– is a system of rules, usually enforced through a set of
institutions. It shapes politics, economics and society in
numerous ways and serves as a primary social mediator of
relations between people.
3
Definition of law
• Law is a term which does not have a universally accepted
definition, but one definition is that law is a system of rules and
guidelines which are enforced through social institutions to govern
behavior.
• Laws can be made by legislatures through legislation (resulting
in statutes), the executive through decrees and regulations, or
judges through binding precedents (normally in common
law jurisdictions).
• Private individuals can create legally binding contracts, including
(in some jurisdictions) arbitration agreements that exclude the
normal court process.
• The formation of laws themselves may be influenced by
a constitution (written or unwritten) and the rights encoded
therein.
4
Principles of Law
• As part of the law, general principles of law do not
represent binding normative circumstances in the way
that explicit legal norms do, but can be seen as rules of
law which should be followed as far as possible.
• Since they do not carry such rigid binding force as norms
of the legal order proper, these principles are called
"optimization precepts". For example, the principle
deriving from Roman law which holds that agreements are
to be kept (pacta sunt servanda) is a general judicial
starting-point to which there are many exceptions.
• Hence it is possible to be released from excessively harsh
and inequitable contractual obligations on the basis
of, inter alia, the principle of reasonableness.
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Principles of Law
• Principle - a rule or standard especially of good behavior; "a man of
principle"; "he will not violate his principles"
• Jus sanguinis - the principle that a person's nationality at birth is the
same as that of his natural parents
• Jus soli - the principle that a person's nationality at birth is determined by
the place of birth
• Pre-emption, preemption - the judicial principle asserting the supremacy
of federal over state legislation on the same subject
• Relation back, relation - (law) the principle that an act done at a later
time is deemed by law to have occurred at an earlier time; "his attorney
argued for the relation back of the amended complaint to the time the
initial complaint was filed"
• Law, jurisprudence - the collection of rules imposed by authority;
"civilization presupposes respect for the law"; "the great problem for
jurisprudence to allow freedom while enforcing order"
6
•
Principles of Law
The Solicitor's Regulation Authority's (SRA) Handbook outlines ten mandatory principles
which apply to everyone that the SRA regulates and to all aspects of practice.
1.
2.
3.
4.
5.
6.
uphold the rule of law and the proper administration of justice
act with integrity
not allow your independence to be compromised
act in the best interests of each client
provide a proper standard of service to your clients
behave in a way that maintains the trust the public places in you and in the
provision of legal services
7. comply with your legal and regulatory obligations and deal with your
regulators and ombudsman in an open, timely and co-operative manner
8. run your business or carry out your role in the business effectively and in
accordance with proper governance and sound financial and risk
management principles
9. run your business or carry out your role in the business in a way that
encourages equality of opportunity and respect for diversity
10. protect client money and assets
•
It may be the case that two or more of these principles come into conflict. If this is
occurs then the principle that takes precedence is the one which best serves the public
interest in the particular circumstance, especially the public interest in the proper
administration of justice.
7
Scope of Law
• The law shapes politics, economics, and society in various
ways and serves as a social mediator of relations
between people.
• Law provides a rich source of scholarly inquiry, into
– legal history,
– philosophy,
– economic analysis or sociology.
• Law also raises important and complex issues concerning
equality, fairness and justice
• In a typical democracy, the central institutions for
interpreting and creating law are the three main branches of
government,
– impartial judiciary,
– democratic legislature, and
– accountable executive.
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Scope of law in Engineering Activities
• Constitutional law
– provides a framework for the creation of law, the protection of human
rights.
• Contract law
– regulates everything from buying a bus ticket to trading on derivatives
markets.
• Tort law
– allows claims for compensation if a person's rights or property are
harmed. If the harm is criminalized in a statute, criminal law offers
means by which the state can prosecute the perpetrator.
• Administrative law
– is used to review the decisions of government agencies
• international law governs affairs between sovereign nation states in
activities ranging from trade to environmental regulation or military
action.
• Corporate law
• Environmental law
• International law etc etc
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Sources of Law
•
•
•
•
•
Precedents
Customs
Legislation
Statutory interpretation
Preparatory works
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Sources of Law
• Precedents
– The judgments passed by some of the learned jurists became another significant
source of law. When there is no legislature on particular point which arises in
changing conditions, the judges depend on their own sense of right and wrong and
decide the disputes. Such decisions become authority or guide for subsequent cases
of a similar nature and they are called precedents.
•
Customs
– A custom is a rule which in a particular family or in a particular district or in a
particular section, classes or tribes, has from long usage obtained the force of law.
The dictionary of English law defines custom as a law not written, which being
established by long use and consent of our ancestors has been and daily is put into
practice. Custom as a source of law got recognition since the emergence of
sovereignty on the horizon of jurisprudence.
• Legislation
– that source of law which consists in the declaration of legal rules by a competent
authority. Legislature is the direct source of law. Legislature frames new laws,
amends the old laws and cancels existing laws in all countries. In modern times this
is the most important source of law making. The term legislature means any form of
law making.
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Sources of Law
•
Statutory interpretation
– Statutory interpretation is the process by which courts interpret and
apply legislation. Some amount of interpretation is often necessary when a
case involves a statute. Sometimes the words of a statute have a plain and
straightforward meaning.
– It is a very important function of the court, the process of ascertaining the
meaning of letters and expressions by the court is either interpretation or
construction. Interpretation is the process of which the court seeks to
ascertain the Meaning of a particular legislature. It is through interpretation,
the judiciary evolves the law and brings the changes in it and thus keeps the
law abreast of law
• Preparatory works
– In some legal cultures some of the documents produced in the process
leading up to legislation are subsequently used as guidelines on how to
interpret and understand an act of legislation.
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Contract: Definition
(v.) To make an agreement; to covenant; to
agree; to bargain;
(n.) To enter into, with mutual obligations; to
make a bargain or covenant for.
(a.) Contracted; affianced; betrothed.
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Contract: Definition
• A contract intends to formalize an agreement between
two or more parties, in relation to a particular subject
• "A contract is a promise or a set of promises for the breach
of which the law recognizes duty". This amounts to saying
that a contract is a legally enforceable promise (Jackson
1973).
• A contract is a legally binding agreement. It is a bargain
and each side, or party to the contract, must contribute
something to it for it to be valid (Gahlot et al, 1996)
• A Contract is “an agreement concluded between two
or more parties for performing or not performing any
act which could be executed according to law.” (Nepal
Contract Act,1999, Section-2)
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Contract: Definition
• The simplest definition of a contract is that it is a promise
enforceable at law. The promise may be to do something or
not to do something. By extension, the term "contract" has
also come to refer to the written document in which terms of
the promise are written down.
• In a commercial sense, a contract is a mutual agreement
enforceable at law between two or more parties that
something shall be done or not done by either or both parties.
By implication, both parties thereby accept certain
responsibilities and in return receive certain benefits.
• A contract is an agreement, based on consensus between legal
subjects with contractual capacity, which is legal, physically
possible and complies with the prescribed formalities and
which is reached with the intention of creating a legal
obligation with resultant rights and duties.
15
Law of Contract
• Law of Obligation:
– A legal obligation is a legal tie between legal subjects,
recognised by law, which is created as a result of a
certain legal fact and which creates rights and duties
that are recognised by law.
• A legal obligation consists of two elements– the Right of the Creditor to claim performance and
– the Duty of the Debtor to perform accordingly.
• The creditor’s right is known as a personal right, which corresponds to the
legal object of performance (i.e. a specific action or inaction, delivery of a
specific thing or payment of a specific amount of money).
16
Law of Contract
• Sources of obligations: Legal obligations arise out of legal
facts, which can be categorised as follows:
• Events without human intervention:- Forces of nature, animal
behaviour, lapse of time, etc.
• Human conduct:
– Non-juristic acts:- Acts to which the law gives effect irrespective of the
intentions of the parties (e.g. delicts).
– Juristic acts:- Acts to which the law gives effect according to the
intentions of the party or parties.
– Unilateral juristic acts:- Acts conducted individually by single parties
(e.g. wills).
– Multilateral juristic acts:- Acts conducted collectively by two or more
co-operating parties (e.g. contracts).
• The most important sources of obligations are acts of contract, delict
and unjust enrichment. Hence, a contract is not a legal obligation in
itself but rather a legal fact that gives rise to a legal obligation.
17
Law of Contract
• The law of contract is the body of legal rules governing the
conclusion and consequences of contracts.
• It defines the basis and requirements of contractual
liability, as well as the rights and duties of the parties.
Moreover, it regulates the breach of contract and provides
remedies for such breach. Finally, it governs the
termination of contractual obligations.
• These rules, along with the law of delict and law of
enrichment, fall under the law of obligations, which is a
category of the law of patrimony, forming part of private
law, which is fundamentally concerned with defining,
protecting and balancing legitimate individual interests.
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Essential Elements of a Valid Contract
• Agreement (Offer and Acceptance):
when an offer capable of immediate acceptance is
met with a "mirror image" acceptance (i.e., an
unqualified acceptance).
• Consideration:
the parties to a contract must exchange something of
value.
• Capacity to contract:
A person is competent to contract if, at the time of
making, he is of sound mind, major and not
disqualified from contracting under law
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Essential Elements of a Valid Contract
• Legal purpose:
The contract must be legal and may not contradict any statutory
or common law rule.
• Legality of form:
The contract must abide by any formalities set by law or by the
parties themselves.
• Intention to create legal relations:
parties intended to make legally enforceable contract
• Consent to contract:
the parties to the contract have a mutual understanding of what
the contract covers
Vitiating
factors:
Misstates,
Undue
influence,
Misrepresentation, Duress
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Different Kinds of Contract:
• Void, Voidable and Unenforceable contracts (defective contracts)
• Bilateral contracts and Unilateral contracts
(Sales contract, Rewards)
• Executed Contract and Executory Contract
(both the parties have performed their obligation, both the parties have
yet to perform their promises)
• Express Contract and Implied Contract:
(the terms of a contract are reduced in writing or are agreed upon by
spoken words at the time of its formation, proposal or acceptance of
any promise is made otherwise than in words)
• Quasi-Contract and Contingent Contract
(Certain obligations which are not contracts in fact but are so in the
contemplation of law, a promise is conditional and the contract shall be
performed only on the happening of some future uncertain event)
21
Engineering/ Construction Contract
• Construction is a services activity with business
side as one of its dimension
• The construction industry is almost unique
amongst commercial endeavors where the
"Project is sold before it is made"
• The facility is purchased before it is
"manufactured" based on a set of drawings and
work descriptors.
22
Engineering/ Construction Contract
• Project delivery systems have been developed to
provide the construction buyer (i.e., the client)
with a single point of contact or source of
purchase.
• An engineering contract is a mutual agreement
negotiated between two (or more) parties for
the purpose of undertaking, on a commercial
basis, certain clearly specified engineering work.
23
Classification of Contracts
• Depending upon the magnitude and nature of the work,
its special design needs, funding requirements,
complexities of the job and owner's own preference,
different types of contracts are entered into.
• Contracts for any particular engineering project can be
classified in the first instance as either Main Contract
(sometimes referred to as Head Contracts) or
Subcontracts.
• The essential difference is that a Main Contract is
directly between the Principle and Main Contractor,
where as a Subcontract is between a Main contractor and
another contractor referred to as a Subcontractor.
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Classification of Contracts
• Engineering contracts, whether Main Contracts or
Subcontracts, can further be classified in a number or
ways, each of which depends upon a particular
characteristic or feature.
• The three most commonly used characteristics for this
purpose are:
1. The method by which payment for the work under the contract
is evaluated.
2. The method by which the contractor is selected.
3. The method by which the responsibility for the technical and
administrative aspects of the work is allocated.
There are number of options under each of these headings, which can apply to any
contract, and the contract can be defined by selecting the appropriate option from
each. Each has its advantages and disadvantages for a particular application, and
each has developed a certain degree of flexibility so that, in reality, many of the
individual alternatives overlap one project's contractual agreement precisely.
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Classification of Contracts
1. Classifications by the method of payment.
• Lump sum or fixed price contracts
contractor is paid the amount nominated in the contract for the work as
agreed with the principal when negotiating the contract
• Schedule of rates or unit-price contracts
The total price is completed by multiplying the unit price by guided
quantity and summing up the cost of whole the items
• Cost plus contracts
actual costs incurred in carrying out the work under the contract plus a
fixed or variable fee to cover overhead costs and profit.
•
•
•
•
cost + percent of cost
cost + fixed fee
cost + fixed fee + Profit sharing
cost + sliding fee
• Sometimes, Part Lump sum and part Unit-Price Contract is also adopted in a
single project as a fourth type
Advantages and Disadvantages of all types
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Classification of Contracts
2.
Classifications by the method of selecting the Contractor
• Competitively Tendered Contracts
the award of contract is generally made to the lowest responsible
bidder and an agreement is reached between the Principle and the
Contractor
Single Fixed Price or Lump Sum Contracts and Unit Price
Contracts
• Negotiated Contracts with the selected contractors
the principal negotiates directly with a contractor to arrive at a
mutually satisfactory agreement to undertake the work.
fixed-price, unit-rate and cost plus fee can be adopted
• Selective Competition
Competition among few selected contractors
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Classification of Contracts
3.Classifications by Technical and Administrative
Responsibility
Engineering contracts can be classified by the manner in which
project implementation responsibilities are allocated. There are a
number of classifications under this method, the principal ones
being;
•
•
•
•
Traditional Approached Contract
Design-Build or Design-Manage (Turn Key)
Build-Own-Operate Transfer (BOOT)
Management Contracts
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Classification of Contracts
Traditional Approach
Employer
Consultancy contract
Consultant
Construction contract
Contractor
•The owner employs a designer who first prepares the plans and
specifications, then exercise some degree of inspection, monitoring or
control during construction.
•Construction itself is the responsibility of single general contractor
under contract to the owner
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Classification of Contracts
Design-Build or Design-Manage (Turn Key)
Employer
Construction contract
Consultancy contract
Consultant
Contractor
•employer prepares the employer’s documents,
•transfer the majority of the risk onto the contractor,
•employer needs to enter into one contract that is with the contractor, who in
turn appoints their own design consultants
30
Classification of Contracts
Build-Own-Operate Transfer (BOOT)
"A project based on the granting of a concession by a principle, usually a
government to a promoter, sometimes known as the concessionaire, who is
responsible for the construction, financing, operation and maintenance of a
facility over the period of the concession, before finally transferring the
facility, at no cost to the principal, as a fully operational facility, “ (Smith
and Merna, 1992)
Similar contractual relations as in Turnkey contracts
BOOT projects are contractor financed turnkey contracts
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Classification of Contracts
Management Contracts
Employer
Consultancy contract
Consultants
Managing contract
Management Contractor
Construction contract
Construction Contractors
• one form is retained to coordinate all activities from concept design
through acceptance of the facility.
• the firm represents the owner in all construction management activities.
32
Risks Allocation in Types of Contract
The allocation of risks depends on the types of contract where risks
would shift from client to contractor and vice versa
Contractual Approach
Client
Contractor
Lump sum fixed price
Lump sum fluctuating price
Schedule of rates, re-measured upon completion
Cost reimbursement – guaranteed maximum price
with a fixed management fee
Cost reimbursement - target price with a fixed
management fee
Cost reimbursement - target price with a
fluctuating management fee
Cost reimbursement – day work basis
33
Sub-Contracting
•Subcontracts are widely used
in construction industry.
•In principle there is no legal
difference
between
a
subcontract and a main
contract.
E
E
C
C
SC
SC
SSC
(a)
SSC
(b)
Chains on Contracts
• Designated subcontracts
• Selected subcontracts
• Nominated subcontracts
34
Formation of Contract
•
Almost everyone makes contracts every day
• Sometimes written contracts are required, e.g., when buying a
house. However the vast majority of contracts can be and are
made orally, like buying a book, or a coffee at a shop.
• A verbal exchange of promises may be binding and be as
legally valid as a written contract. An unwritten, unspoken
contract, also known as "a contract implied by the acts of the
parties", which can be either implied in fact or implied in law,
may also be legally binding.
• The most important feature of a contract is that one party
makes an offer for an arrangement that another accepts. This
can be called a concurrence of wills or ad idem (meeting of the
minds) of two or more parties.
35
Formation of Contract:
Mutual Consent (Meeting of Mind)
• Consent in contract means: to agree in opinion or sentiment;
to be of the same mind.
• The parties to the contract have a mutual understanding of
what the contract covers, e.g.
- in a contract for the sale of a "mustang", the buyer thinks he will
obtain a car and the seller believes he is contracting to sell a
horse, there is no meeting of the minds and the contract will likely
be held unenforceable.
• When two parties mutually agree to a transaction, a contract
is formed.
• “The mutual agreement” must apply to all significant or
material aspect of the agreement.
• The expressed written terms of contract will govern the
relationship regardless of any misunderstanding on the part
of any parties.
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3. Formation of Contract:
Essential ElementsTypically, in order to be enforceable, a contract must
involve the following elements:
Offer
Acceptance
Consideration
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Offer
•
•
•
•
•
•
•
The offer is considered to be concerned with the making of a written or oral
proposal to give or do something as part of an agreement that may be deemed
to be a legally binding contract in certain circumstances
may be express or implied from the conduct of the parties in any given case.
An offer is simply a statement or other indication that the individual is
prepared to enter into a contract with another on certain terms. The offer must
be expressed in a manner capable of acceptance without anything further
required of the person receiving the offer other than to indicate acceptance. It
must also be clear that the person making the offer is prepared to be bound by
the terms if the offer is accepted
any given offer must adhere to the following rules –
(i) it must be made to a definite person, class or person, or even the world at
large;
(ii) it must be effectively communicated to the offeree before acceptance; but
(iii) the offer is only considered to have been made when it actually reaches the
offeree
a counter-offer is not an acceptance, and will typically be treated as a rejection
of the offer
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Offer
Fearing bankruptcy, Carbolic argued
the advert was not to be taken as a
serious, legally binding offer. It was
an invitation to treat, mere puff, a
gimmick.
a medical firm advertised that its
new wonder drug, the smokeball,
would cure people's flu, and if it did
not, the buyers would get £100.
Many people sued for their £100
when the drug did not work.
But the court of appeal held that to a
reasonable man Carbolic had made a
serious offer. People had given good
consideration for it by going to the
"distinct inconvenience" of using a
faulty
product.
"Read
the
advertisement how you will, and twist
it about as you will", said Lord Justice
Lindley, "here is a distinct promise
expressed in language which is
perfectly unmistakable"
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Acceptance
• Acceptance is simply some indication by the person receiving
the offer that the offer is accepted. The acceptance must be
clear and absolute and without conditions attached. The
objective bystander must be able to determine that the offer
has been accepted
• acceptance relates to the idea of where an offer is made by
one party that is considered to be acceptable to another
without qualification in words or through conduct to the
offeror in conformation with the indicated or prescribe terms
of the offer that has been made
• An acceptance can be made orally or in writing. Mere silence
will not create an acceptance. The acceptor has a right to
withdraw his acceptance before it comes to the knowledge of
the offeror. The effective acceptance must be communicated.40
Acceptance
• The acceptance must be made before the offer has expired.
Most offers contain a time limit within which the offer can
be accepted. Once the offer has expired, it can not be
accepted unless the person making the offer has renewed
it.
• No conditions can be attached to the acceptance and the
terms of the offer can not be changed. If conditions are
attached or terms are changed, the parties are merely
negotiating and may ultimately reach agreement on the
terms of the contract
• The offer must be accepted before it is withdrawn. An offer
can be withdrawn before acceptance unless one of the
terms of the offer is that it will remain open for acceptance
until a specified time
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Consideration
• Consideration is known as 'the price of a promise' and is a
requirement for contracts under common law.
• The idea behind consideration is that both parties to a contract must
bring something to the bargain. This means that each side must
promise to give or to do something for the other.
• The element of exchange is known as ‘Consideration’ and is an
essential element of every valid contract.
• A party seeking to enforce a contract must show that it conferred some
benefit or suffered some that is recognized by law.
• Consideration is some benefit or advantage to the person making the
offer and a corresponding cost or prejudice to the person accepting the
offer.
42
Consideration
• Money is often recognized as consideration, but in some cases money
will not suffice as consideration (for example, when one party agrees to
make partial payment of a debt in exchange for being released from
the full amount).
• Some common-law and Civil law systems do not require consideration,
and some commentators consider it unnecessary—the requirement of
intent by both parties to create legal relations by both parties performs
the same function under contract.
• The law only requires that there be sufficient consideration; something
of value must be given. The consideration can not be something given
or promised in the past. To be valid, the consideration must be a new
promise or some fresh benefit exchanged for the offer.
• In general then, as long as the basic elements of an offer and
acceptance with consideration are present, the parties have a valid and
binding contract. There is no requirement that the contract be in
writing except in certain special situations
43
Rules Governing Consideration
• Consideration must be "sufficient" (i.e., recognizable by the law), but
need not be "adequate" (i.e., need not be a fair and reasonable exchange
for the benefit of the promise).
• Consideration must not be from the past.
• Consideration must move from the promisee.
• The promise to do something one is already contractually obliged to do
is not, regarded as good consideration,
• The promise must not be to do something one is already obliged by the
general law to do - e.g., to give refrain from crime or to give evidence in
court
• A number of commentators have suggested that consideration be
abandoned, and estoppel be used to replace it as a basis for contracts
• Estoppel is an equitable doctrine that provides for the creation of legal
obligations if a party has given another an assurance
44
Online Contracts
• Online contracts, which are easily made, are usually valid on a smaller
scale for a period of one to three months, while on a larger scale can
last about five years.
• As with all things legal, especially in regards to the ever-evolving
internet, general rules like length of validity have many exceptions.
• All cases are evaluated on their own merits, and those merits are
defined by the facts presented in each instance.
• It is up to the owner of the site to do what it can to guarantee
enforceability of its contracts.
• Though 90% of people sign online contracts before reading the
content, E-signature laws have made the electronic contract and
signature as legally valid as a paper contract.
• It has been estimated that roughly one hundred and ten electronic
contracts are signed every second.
45
Unilateral Contracts
•
•
•
•
•
•
•
•
In a unilateral contract, only one party
to the contract makes a promise.
A typical example is the reward
contract:
A promises to pay a reward to B if B
finds A's dog. B is not obliged to find A's
dog, but A is obliged to pay the reward
to B if B finds the dog
Condition precedents can also be attached to unilateral contracts
An offer of a unilateral contract may often be made to many people (or 'to the
world') by means of an advertisement
In that situation, acceptance will only occur on satisfaction of the condition
If the condition is something that only one party can perform, both the offeror
and offeree are protected
unilateral contracts, the requirement that acceptance be communicated to the
offeror is waived. The offeree accepts by performing the condition
46
Implied Contract
• Offer and acceptance does not always need to be expressed orally or in
writing. An implied contract is one in which some of the terms are not
expressed in words. This can take two forms. A contract which is
implied in fact is one in which the circumstances imply that parties
have reached an agreement even though they have not done so
expressly. For example, by going to a doctor for a checkup, a patient
agrees that he will pay a fair price for the service. If one refuses to pay
after being examined, the patient has breached a contract implied in
fact.
• A contract which is implied in law is also called a quasi-contract,
because it is not in fact a contract; rather, it is a means for the courts to
remedy situations in which one party would be unjustly enriched were
he or she not required to compensate the other.
47
Defective Contracts
• Void contract:
One of the requirements for a valid contract is absent - no
contract is concluded.
• Voidable contract:
A contract is indeed concluded but it can be set aside on
account of a defect that existed at the time of conclusion
(e.g. consensus improperly obtained).
• Unenforceable contract:
A contract is indeed concluded but it creates only a natural
obligation, which is recognized but not enforced by law
(e.g. a wager).
48
Contract Practices in Nepal
• Modern Approaches of Contract Management like Professional
Construction Management Approach are still to be flourished in
Nepali Contract Environment.
• Mostly Traditional Approach especially in Public Sector-Negotiated
contract is limited up to only Rs. 1.5 lakhs
• In private sectors, other modalities like lump sum contracts cost plus
contracts are also in use.
• Turnkey and BOOT Contracts are also in Practice these dayslimited number of power projects
• It is vital to involve the private sector for the construction of Public
Infrastructures- Kathmandu-Terai Express way
• “Public Infrastructure Build Operate and Transfer Policy, 2000”
49
Performance and Discharge of Contracts
• Performance of a contract (when the parties do what
they agreed to do) discharges it.
• Discharging a contract terminates it.
• Discharge usually results from performance. Most
contracts are discharged by the parties doing what
they promised to do.
• But some times discharge can occur in other ways:
1. the occurrence or failure of a condition on which a contract
is based,
2. agreement of the parties,
3. operation of law, and
4. breach of the contract
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Performance of Contract: Definition
• Execution of a contract by which the
contracting parties are automatically
discharged of their obligations under it.
Although contracts usually call for full and precise
performance, a substantial performance may be acceptable
under certain circumstances, on a pro-rata basis, or on
payment of damages for the unfinished or defective
performance.
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Discharge/ Termination of Contract:
• The act of making a contract or agreement null.
• A contract becomes discharged once both parties have
fully performed their contractual obligations.
• If one party does not fully perform the contract this will
amount to breach and the other party may have a claim for
damages unless the contract has been frustrated.
• If the non performance amounts to a repudiatory breach
(breach of condition) the other party will be released from
their obligations.
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Discharge of Contracts
by Performance
• DISCHARGE BY PERFORMANCE
Most contracts are discharged by the parties doing what they
promised to do.
• TENDER OF PERFORMANCE
Discharge can be accomplished by tender (an unconditional offer
to perform by one who is ready, willing, and able to do so). If
performance has been tendered and the other party refuses to
perform, the party making the tender can sue for breach
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Discharge of Contracts
by Performance
1. Complete versus Substantial Performance
a. Complete Performance: Express conditions fully occur in all aspects.
b. Substantial Performance: Performance that does not vary greatly from
the performance promised in the contract.
2. Performance to the Satisfaction of Another
a. Personal Satisfaction of One of the Parties
When the subject matter of the contract is personal, performance must
actually satisfy the party (a condition precedent).
b. Satisfaction of a Reasonable Person
Contracts involving mechanical fitness, utility, or marketability need
only be performed to the satisfaction of a reasonable person.
c. Satisfaction of a Third Party
When the satisfaction of a third party is required, most courts require
the work to be satisfactory to a reasonable person
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Discharge of Contracts
by the occurrence or failure of a condition
A condition is a possible future event, occurrence or nonoccurrence
of which triggers performance of an obligation or terminates an
obligation. If performance is contingent on a condition that is not
satisfied, neither party has to perform.
1. CONDITION PRECEDENT
A condition that must be fulfilled before a party’s performance can be required.
2. CONDITION SUBSEQUENT
A condition that operates to terminate an obligation to perform. The condition
follows a duty to perform. Such conditions are rare.
3. CONCURRENT CONDITION
When each party’s duty to perform is conditioned on the other party’s duty to
perform.
4. EXPRESS AND IMPLIED CONDITIONS
1. Express Condition: provided for by the parties agreement. Usually prefaced
by the word if, provided, after, or when.
2. Implied-in-Fact Condition: Understood to be part of the agreement but not
found in the express language of the agreement.
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Discharge of Contracts
by the Agreement of the parties
A. DISCHARGE BY RESCISSION
Rescission is the process by which a contract is canceled and the
parties are returned to the positions they occupied prior to
forming it.
B. DISCHARGE BY SUBSTITUTED AGREEMENT
1. Novation
2. Compromise, or Settlement Agreement
C. DISCHARGE BY ACCORD AND SATISFACTION
1. Accord
2. Satisfaction
3. If the Obligor Refuses to Perform
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Discharge of Contracts
by the Operation of Law
A. ALTERATION OF THE CONTRACT
An innocent party can treat a contract as discharged if the other party
materially alters a term (such as quantity or price) without consent.
B. STATUTES OF LIMITATIONS
Statutes of limitations limit the period during which a party can sue based on a
breach of contract.
C. BANKRUPTCY
A discharge in bankruptcy will ordinarily bar enforcement of most of a debtors
contracts.
D. DISCHARGE BY IMPOSSIBILITY OR IMPRACTICABILITY
OF PERFORMANCE
1. Objective Impossibility of Performance
2. Commercial Impracticability
3. Frustration of Purpose
4. Temporary Impossibility
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Discharge of Contracts
by the Breach of Contract
Breach of contract: A failure to honor one’s obligation under a contract.
• Breach of contract is a legal cause of action in which a binding agreement or
bargained-for exchange is not honored by one or more of the parties to the
contract by non-performance or interference with the other party's
performance.
• If the party does not fulfill his contractual promise, or has given information to
the other party that he will not perform his duty as mentioned in the contract or
if by his action and conduct he seems to be unable to perform the contract, he
is said to breach the contract.
• Material Versus Immaterial Breach
• Fundamental breach
• Anticipatory breach
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Types of Breach of Contracts
Immaterial breaches
• A minor breach, a partial breach or an immaterial breach, occurs when the nonbreaching party is un entitled to an order for performance of its obligations, but
only to collect the actual amount of their damages.
Material breach
• A material breach is any failure to perform that permits the other party to the
contract to either compel performance, or collect damages because of the
breach
Fundamental breach
• A fundamental breach (or repudiatory breach) is a breach so fundamental that it
permits the aggrieved party to terminate performance of the contract, in
addition to entitling that party to sue for damages.
Anticipatory breach
• A breach by anticipatory repudiation (or simply anticipatory breach) is an
unequivocal indication that the party will not perform when performance is
due, or a situation in which future non-performance is inevitable.
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Remedies for Breach of Contract
A non-breaching party has three basic choices when faced with a
breach of contract1. Excuse the Breach,
2. Rescind the Contract, or
3. Terminate the contract
Excuse the Breach: risk of having waived the particular contract
requirement.
Rescission: the contract is canceled and both sides are excused from
further performance and any money advanced is returned, trap
for non breaching party which looses the right to sue for
damages under contract
Termination: common remedy for non-breaching party.
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Remedies for Breach of Contract
Termination of a Contract
• Termination is the contractually established right to end the
contractual relationship
under
certain
specified
circumstances
• In an effort to impose some order and predictability on the
breach of contract issue, most construction contracts
contain a termination clause which typically defines• Those short comings of the employer which would justify the
contractor’s work stoppage,
• The employer be given written notice of the alleged breach and a
certain period of time to cure the breach,
• Employer’s right to terminate the contract (Owner’s termination of a
contractor for default and termination for convenience)
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Damages for Breach of Contract
• The general rule for compensation for breach of contract is
to put the plaintiff in the same position he or she would have
been in had the contract been performed as agreed. In other
words, in any breach of contract lawsuit, the court will try
to fashion a remedy that makes the plaintiff "whole."
• Compensation for breach of contract may include
compensatory damages, consequential (also called special)
damages, liquidated damages, specific performance and
nominal damages.
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Damages for Breach of Contract
Compensatory
Damages
Nominal
Damages
Consequential
Damages
Liquidated
Damages
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Compensatory Damages
• Award of money intended to compensate a non-breaching
party for the loss of the bargain.
• They place the non-breaching party in the same position as
if the contract had been fully performed by restoring the
“benefit of the bargain.”
• The amount of that will be awarded for breach of contract
depends on:
– The type of contract involved (Sale of Goods, Construction
Contracts, Employment contracts)
– Which party breached the contract.
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Liquidated Damages
• Damages to which parties to a contract agree in advance if
the contract is breached.
• To be lawful,
– The actual damages must be difficult or impracticable to
determine, and
– The liquidated amount must be reasonable in the circumstances.
• Many businesses include liquidated damages in their
commercial contracts, which help to:
– Provide certainty,
– Avoid lawsuits, and
– Provide an incentive to enter into contracts
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Consequential Damages
• Foreseeable damages that arise
circumstances outside the contract.
from
• Consequential damages may include the value of lost profit
or revenue, but only if such loss was caused by the breach
of contract and was foreseeable at the time the contract
was entered into
• To be liable for these damages,
– The breaching party must know or have reason to
know that the breach will cause special damages to
the other party.
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Nominal Damages
• Damages awarded when the non-breaching
party sues the breaching party even though no
financial loss has resulted from the breach.
• Usually awarded in a small amount such as $1.
• Cases involving nominal damages are usually
brought on “principle.”
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Rules of Contract Interpretation
• "Plaintiff says ‘chicken’ means a young chicken, suitable for broiling
and frying. Defendant says ‘chicken’ means any bird of that genus that
meets contract specifications on weight and quality, including what it
calls ‘stewing chicken’ and plaintiff pejoratively terms ‘fowl’.”
-(Frigaliment Importing Co. v. B.N.S. International Sales Corp., 190 F.
Supp. 116 (S.D.N.Y. 1960) at 116.)
• Issues of contract interpretation are pervasive – a civil litigator does not
find it surprising that (parties might litigate the meaning of the word
“chicken”)
• Issues of contract interpretation have enormous commercial implications
for the parties themselves (the meaning of the word “chicken” can
involve large sums of money)
• At the same time, for the most part, issues of contract interpretation have
no greater social implication (courts are simply concerned to get the
intended meaning right)
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Rules of Contract Interpretation
• Many construction disputes arise out of terms set forth in the
contract.
• Unfortunately, many construction contracts were never
reviewed by a construction attorney and are not models of
clarity.
• Because many disputes are won or lost depending on the
interpretation of the contract terms, it is imperative that those
in the construction industry have in their skill set at least a
basic knowledge of the rules and law governing contract
interpretation.
• One key issue in any contractual dispute is whether the court
will allow the parties to introduce extrinsic evidence regarding
how the subject contract should be interpreted.
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Rules of Contract Interpretation
• While the law varies from jurisdiction to jurisdiction, generally
two competing philosophies exist with respect to when extrinsic
evidence may be admitted to explain or interpret the contract.
• The “four corners” philosophy (also known as the “plain
language” approach) typically requires a court or trier of fact to
discover an ambiguity before allowing the introduction of
extrinsic or parol evidence to supplement or explain contractual
terms.
• On the other hand, the “intent of the parties” philosophy (also
often referred to as the “Corbin” approach) typically allows the
introduction of extrinsic and/or parol evidence regardless of
whether the underlying contract is determined to be ambiguous.
The “four corners” method has been, and continues to be, the
most widely accepted method of contract interpretation in the
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United States.
Rules of Contract Interpretation
• courts and tribunals utilize various well-known rules of
contractual interpretation in testing the reasonableness of
proffered contractual interpretations.
• General Rules of Contract Interpretation :• The “Whole Agreement” Rule: Simply put, the “whole
agreement” or “harmonize” rule expresses the preference that
the interpretation of the contract that renders all portions of the
contract valid and enforceable, or in harmony, as opposed to
rendering any portion of the contract superfluous, inoperative,
or void, is preferred. In the majority of cases, the invocation of
the “whole agreement” rule benefits owners over contractors
because the rule typically operates to place upon contractors the
obligation to perform work when any part or portion of the
contract can be construed to require the work.
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Rules of Contract Interpretation
• General Rules of Contract Interpretation :• Specific Versus General Contract Terms: This well-known and
often used rule holds that specific terms and exact terms are
given greater weight than general contract language.
• Ordinary and Normal Meanings of Contract Language: Pursuant
to this rule, contractual language is to be given its normal and
ordinary usage unless circumstances exist to consider alternative
meanings.
• Technical Meaning Governs Over Ordinary Meaning: While
contractual language is to be given its normal and ordinary
meaning, some words have both an ordinary and technical
meaning. This rule holds that courts interpreting contracts that
contain words that have both ordinary and technical meanings
should utilize the technical meaning unless evidence suggests
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that the parties intended otherwise.
Rules of Contract Interpretation
• General Rules of Contract Interpretation :• Expressio Unius Est Exclusio Alterius: This rule, translated as
“inclusion of one is exclusion of the others,” typically applies
when lists of items or services are included in construction
contracts. When disputes arise regarding scopes of work or
materials to be provided, this rule can be invoked to demonstrate
that the specific inclusion of lists of work and/or materials that
are included in the scope of work demonstrates that the parties
did not intend for work or materials that were not listed to be
included in the scope of work.
• Course of Dealing: If the disputing parties have acted a certain
way in interpreting similar language in the past, this “course of
dealing” may be used to demonstrate that the parties intended
to treat the disputed language in the same way.
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Rules of Contract Interpretation
• General Rules of Contract Interpretation :• Construing Ambiguities Against the Drafter: Finally, many
jurisdictions hold that contract ambiguities are construed against
the drafter of the document, especially if the application of other
rules of construction fails to resolve the issue.
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Rules of Contract Interpretation
• The Nine Fundamental Precepts(Law, Directives)
1. Words and their context -The courts have increasingly recognized
that context is central to interpretive accuracy. Context has two
aspects 1. The context of the document , 2. The surrounding
circumstances
2. A contract is to be construed as a whole with meaning given to
all of its provisions- “The normal rules of construction of a contract
require that the various clauses of a contract cannot be considered in
isolation but must be given an interpretation that takes the entire
agreement into account.”
3. The factual matrix- In a commercial contract it is certainly right that
the court should know the commercial purpose of the contract and
this in turn presupposes knowledge of the genesis of the transaction,
the background, the context, the market in which the parties are
operating.
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Rules of Contract Interpretation
• The Nine Fundamental Precepts(Law, Directives)
4. Interpretation is an objective exercise- The contractual intent of
the parties is to be determined by reference to the words they used in
drafting the document, possibly read in light of the surrounding
circumstances which were prevalent at the time. Evidence of one
party’s subjective intention has no independent place in this
determination
5. Commercial efficacy- Commercial contracts must be interpreted in
accordance with sound commercial principles and good business
sense
6. Every effort should be made to find a meaning - “[E]very effort
should be made by a Court to find a meaning, looking at substance
and not mere form, and that difficulties in interpretation do not make
a clause bad as not being capable of interpretation, so long as a
definite meaning can properly be extracted.”
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Rules of Contract Interpretation
• The Nine Fundamental Precepts(Law, Directives)
7. A contract is to be interpreted as of the date it was made -It is a
fundamental rule of contractual interpretation that the intention of the
parties is to be determined as of the time when the contract is made
8. The parol (stated or declared) evidence rule -It basically only
applies to preclude evidence of subjective intention and to preclude
evidence which contradicts the written agreement
9. The contra proferentem rule- There are some judicial statements
that it should only be applied as a last resort or where the party
seeking to rely on it did not have an opportunity to modify the terms
of the contract.
Its only real effect in interpretation of guarantees and insurance
policies
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Nepal Contract Act
• Read Nepal Contract Act, 1999
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Assessment -3
• A plumber accidentally installs a sprinkler system in the lawn of the
wrong house. The owner of the house had learned the previous day
that his neighbor was getting new sprinklers. That morning, he sees the
plumber installing them in his lawn. Pleased at the mistake, he says
nothing, and then refuses to pay when the plumber delivers the bill.
Will the man be held liable for payment? If yes, Why? If no, Why?
•Thank You
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