Construction Contract Law: Kodex Atlantic Ltd and Texas Engineering Corporation - Essay Example

Construction Contract Law Assignment 5a) In order to advise Kodex Atlantic Ltd (K.A.) with regard to Texas Engineering Corporation’s (TC) claim it is necessary to evaluate the following: 1) Whether there was in fact a legally enforceable contract between KA, KFC, GID and TC 2) If there was a legally enforceable contract, whether KA was entitled to revoke the contract thereby negating any claim for breach of contract or specific performance; and 3) Alternatively, the legal implications for KA, KFC and GID if failure to accept TC’s tender constitute breach of contract. The law of contract stipulates three fundamental requirements for the formation of a legally enforceable contract; namely; offer, acceptance and consideration (it is important to note that contracting parties must have legal capacity to enter into a contract and it is presumed from the facts given that capacity is not an issue in this case). Lord Wilberforce presiding in the case of New Zealand Shipping Co Limited v A M Satterhwaite, The Eurymedon {1975]AC 154.] asserted the rule for contract formation thus: “English law having committed itself to a rather technical…… doctrine of contract, in application takes a practical approach… Into the market slots of offer, acceptance and consideration (at 164). An “offer” in the context of contract law has been described as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the “offeree” (Treitel., G.H. 2007). The “expression” may take different forms and the published advertisement in the China Morning News and New York Times Herald will satisfy this requirement (Chitty, 2007). The intention element is an objective consideration and the case of Smith v Hughes ((1871) LR 6 QB) emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. Furthermore, the law distinguishes between an offer and an invitation to treat, which is not an offer but an indication of willingness to negotiate a contract (Chitty, 2007). For example, in the case of Gibson v Manchester City Council ([1978] 1 WLR 520), the words “may be prepared to sell” constituted an invitation to treat and not a distinct offer. However the facts of the current scenario suggest that the tender was distinctly intended to be legally binding if the parties bidding satisfied the express terms of the tender requirements. The central issue of contention here is the timing of acceptance and whether failure to accept TC’s tender was valid and not in breach of contract. There are three ways in which a procurement decision can be challenged under the Regulations. Firstly, the mistake which led to TC’s tender not being considered could be regarded as a fault in the tendering procedure, however it will have to act immediately and seek legal advice to challenge this (Chitty, 2007). Another ground would be judicial review however it is unlikely that KA will be subject to judicial review, and procurement decisions are generally not subject to judicial review unless there has been bad faith or a special public law element (Murdoch, 2000). Moreover, procurement decisions are regarded as the exercise of contractual powers and therefore KA will be given a degree of flexibility and freedom in deciding who to award the contract to within the Regulations (Hackett & Robinson., 2002). With regard to KA, the failure was due to the technical IT problems obstructing receipt of the first four bids by the requisite deadline and not related to the decision making process and therefore it is unlikely to succeed in a claim for judicial review. Similarly, provided that in reaching its decision KA complied with the requirements of Regulation 30, which asserts that “a contracting authority shall award the public contract on the basis of the offer which – (a) is the most economically advantageous from the point of view of the contracting authority; or (b) offers the lowest price”; it will be difficult for TC to challenge the procurement decision to award the contract to Ducos Francais & Arbeitflugzeug Fahren A.G. However, on the other hand, TC may be able to challenge the decision if it can establish that the decision was discriminatory and non-transparent or alternatively based on contract principles. If we consider the acceptance rule TC may argue that whilst the technical error prevented the email arriving by the requisite deadline, it was accepted as soon as it had been sent in accordance with the “postal rule” (Chitty, 2007). The general presumption as illustrated in the case of Adams v Lindsall (1818) IB ALD 681; 106 ALL ER 250) is that if post was the normal and anticipated method of acceptance, then the contract will be formed when the letter is posted and not when it is received by the offeror. However, in the current scenario the communication was by email and the leading case of Entores Ltd v Miles Far East Corporation ([1955] 2 KB 327) highlights the difference between acceptance of offer by post and “instantaneous” communication. With regard to instantaneous communication it was held that such methods of communication could only be accepted once they had been heard or received by the offeror. The House of Lords asserted that it would be illogical for an instantaneous reply to an offer to be deemed accepted at the place of origin as a fault in communication could lead to communication being uncertain. If we apply this to the current scenario, TC’s email would therefore only be capable of constituting valid acceptance at law upon receipt by KA and by the deadline as required by the terms of the bid. With regard to TC, the alternative method to challenge the procurement decision would be to claim for breach of contract. It has been argued that a procurement process may give rise to an “implied contract” between the local authority and the tenderers (Murdoch, 2000). On this basis, KA may potentially be liable for breach of implied contract if it had excluded a tenderer from a process, when there was a right to have its tender (submitted on time) considered (Murdoch, 2000). This will include an obligation of KA to evaluate the bids in accordance with the tender documentation or an obligation to act fairly during the process. TC would have to prove actual loss had incurred from the breach (Treitel, 2007). However, it is highly unlikely in the current scenario as the IT error affected three other bidders for the tender and it will be very difficult to prove discrimination in consideration of the bids. In summary, although generally difficult to challenge procurement decisions, TC may be able to challenge the decision on the grounds that the effect of acceptance and the problem prejudiced their bid and should have been accepted, however it will be very unlikely. Alternatively, its main recourse would be to challenge the decision under the doctrine of implied contract however it would have to prove actual loss caused from KA’s decision. (B) With regard to DFA’s claim that the contract was with them, the nature of correspondence and the fact that work was carried out on the basis of correspondence by DFA clearly points to a contract (D., Cracknell, 2003). Valid acceptance in law follows a valid offer and the formation of a contract follows immediately (D, Cracknell., 2003). Furthermore, valid acceptance is final and unqualified acceptance of an offer as demonstrated in the case of Peter Lind Limited v Mersey Docks & Harbour Boar ([1972] 2 Lloyds Rep 234), highlighting the “mirror image” rule, where acceptance must be unequivocal and unconditional, therefore acceptance must “mirror” the offer. Moreover, acceptance is a “final and unqualified expression of assent to the terms of an offer” (Treitel, 2007). As DFA wrote to KA to communicate acceptance of the offer, the general presumption is that there is a concluded contract (D, Cracknell, 2003). The central issue of contention is the fact that correspondence and variation agreements create ambiguity as to payments and the exact contractual terms. According to original agreement the price was £5.5 BN. However, the difficulty is in knowing what the exact terms are. Whilst, DFA estimate the works going over the tender price by £2bn, KA argues that only £500,000 extra has been agreed in respect of variations. Contractual negotiations particularly in the context of bids for construction work, will often involve several exchanges between the commercial parties involving offers and counter offers (J. Uff., 2005). The case of Hyde v Wrench (1840) 49 E.R. 132) established that a counter offer brings an end to the original offer. With construction tenders, the parties will negotiate through exchanging correspondence, with a series of counter offers as to price and the contract terms, which has been referred to as the “Battle of the Forms” (Chitty., 2007). The difficulty with this as evidenced with the current situation is determining the exact terms of the eventual contract. Indeed “Chitty on Contracts” underlines this problem and concludes: “Thus it is possible by careful draftsmanship to avoid losing the battle of the forms, but not…….. to win it. The most that the draftsman can be certain of achieving is the stalemate situation where there is no contract at all” (Chitty, 2007). Despite the possibility of conflict in the current situation as to the exact terms of the contract, there is clearly a contract between KA and DFA by virtue of course of conduct as determined in the case of G. Percy Trentham Ltd v Archital Luxfer Limited ([1993] 1 Lloyd’s Rep. 25). However, to clarify the issue of whose terms are applicable, the courts have adopted the “last shot principle”, which was established in the case of Butler Machine Tool Co –v- Ex Cell-O-Corp (1979) 1 ALL ER 965) . According to this principle, the presumption is that the last offer which has been accepted without qualification will be determined as covering the conditions of the contract. If we apply this reasoning by analogy to KA’s legal position, there has been no further correspondence between the parties however £500,000 in respect of variations has been agreed. With regard to the £2bn surplus, if DFA have regularly been communicating the extra costs to KA and work has continued and accepted, it is arguable that there could be acceptance of these extra costs on grounds of implied variation of contract (Cracknell, 2003). The burden would be on DFA to prove this. c) If no dispute mechanism has been agreed with regard to the outstanding issues with DFA, I would recommend that due to the significant nature of works being completed and the delays involved that KA, KFC AND GID should attempt to negotiate with DFA preferably through alternative dispute resolution. Lord Woolf’s review of the civil litigation system highlighted growing concerns regarding extensive delay and expense of litigation (1996). Lord Woolf’s report resulted in the implementation of the Civil Procedure Rules (the CPR) with a shifting emphasis towards judicial case management in an attempt to alleviate the delay and expense of litigation. Lord Woolf’s report also proposed that litigation should be seen as a last resort, embracing alternative dispute resolution (ADR) as a substitute to be encouraged by the courts. It was felt that such an approach would reduce delay and expense and the courts, leading to a more effective system of court administration. There are many forms of ADR and Roney defines it as a “form of structured negotiation into which there is introduced a third party” (Roney, 1999). Furthermore, Roney refers to Cowan Erwin’s definition of ADR as “any means of providing a resolution of a dispute between two or more parties which does not involve traditional adversarial procedures” (1999). As such, ADR has been viewed as a response to litigation, which is costly and sacrifices privacy in bringing the dispute into the public domain. Arguably the most important justification for recourse to ADR is the preference of the solution being based on fairness and equity rather than the rule of law (Tannen, 1998). This in itself supports the statement that ADR can resolve issues that litigation cannot. Furthermore, the growing acceptance and support for ADR led to the creation and rise of organisations such as the Centre for Effective Dispute Resolution (CEDR) and the International Dispute Resolution Centre, which offers a wide range of mediation and conciliation services. The pre-CPR Latham Report in 1994 entitled “Constructing the Team” reviewed procurement and contractual practices within the construction industry and highlighted the importance and merits of resolving disputes at origin or as close to origin as possible. The Latham report further propounded that a multi-tiered approach to dispute resolution involving ADR would reduce litigation costs in the increasingly adversarial nature of the construction industry. The report also contended that this would promote co-operation between the parties to a dispute, thereby preserving productivity. These recommendations were formally incorporated in amendments to the New Engineering Contract (1993 prior to completion of the report). On this basis, I would recommend the appointment of an independent professional arbitrator in the first instance in the current scenario. Through arbitration whilst by no means a panacea, both parties can seek to agree the outstanding issues in dispute, address payment issues whilst ensuring commercial continuity of the contract (Uff, 2005). ADR encompasses a broad range of voluntary informal processes which are alternatives to litigation for parties in dispute, namely, arbitration, negotiation, conciliation and mediation (Waring, 2008). Arbitration and Expert determinations are both formal methods of ADR whereby nominated “expert” third party determines the outcome regarding the dispute. This “award” is legally binding on the parties to arbitration and may be enforced in court. The process of arbitration and expert determination includes involvement of the Ombudsman and Regulators and as such, has been termed “alternative adjudication” (Lord Chancellors Department, 2002). It has been commented that the flexibility of arbitration as a method of ADR in permitting the parties to choose arbitrators, the law governing arbitration and the ability to decide upon the rules relating to arbitration renders it a viable alternative to litigation (J. Tackaberry., A.Marriot, & R. Bernstein., 2003). Another advantage of arbitration is confidentiality compared with litigated court proceedings. Indeed the popularity of arbitration is demonstrated by the inclusion of arbitration clauses in many contracts including commercial contracts, in particular the construction industry where many JCT contracts and other forms have incorporated arbitration clauses to avoid litigation. Moreover, as stated above arbitration determinations are binding on the parties. The negative side of arbitration is that there is often an imbalance in power between parties to a dispute, which clearly prejudices the weaker party in achieving a fair settlement (Waring, 2008). This is particularly evident in international commercial arbitration, which is compounded by the diverging national approaches to jurisdiction and interpretation of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), which since adoption has 130 countries as signatories (Contracting States). Alternatively, it has been argued that conciliation and mediation are the two most popular forms of ADR (O’Connell, 2006). Both are similar in format, yet incorporate important differences in practice. Both forms of ADR require the involvement of a third party, however conciliation involves a lay person, whereas mediation involves an expert (Waring, 2006). Conciliation is primarily utilised in marriage and customer complaints and may not therefore be the most appropriate course of action in the current scenario. Mediation on the other hand is a process involving a “neutral” third party who aids the disputing parties in a joint session, in coming to an agreement which they both find acceptable (O’Connell, 2006). It has been said that “mediation is the simplest and most popular form of ADR” (Goldberg, 2003). Unlike a conciliator, the mediator will have expert knowledge solely in relation to the subject matter of the dispute and in some cases the parties to mediation may be represented by a lawyer. Mediation can be evaluative or facilitative (O’Connell, 2006), however the inherent limitation is that any agreement reached through mediation is not automatically binding on the parties and they have to apply to the courts to have it enforced (Waring, 2008). Conciliation however, goes further and is more interventionist by suggesting potential resolutions to help bring about an acceptable agreement (Waring, 2006). Alternatively, negotiation is the most common form of ADR and generally takes place through lawyers and doesn’t involve the use of a neutral (Roney, 1999). Some have criticised negotiation for being adversarial contradicting the essential purpose of ADR (Roney, 1998). In practice, many lawyers proceed with negotiation as though it were going to trial, with no intention of getting that far and using it as a tactical measure to force a “late” settlement payment (Palmer & Roberts, 1998). In summary, the most appropriate and commercially viable option for both parties would be to pursue independent arbitration. 6a) With regard to the right to terminate DFA’s contract, the main grounds would be for time of performance and delay. In failing to meet the original completion date as specified in the contract, DFA are technically in breach of contract and therefore KA, KFC and GID are entitled to bring a claim for damages for breach of contract. However, the fact that the contract has been overrun by 18 months (which is a significant period of time) and the fact that no steps have been taken to impose contractual sanctions no DFA for this breach, in line with the reasoning in the case of Vitol SA v Norelf Ltd ([1996] AC 800) there are strong grounds for arguing that KA, KFC and GID have in fact accepted the breach and affirmed the contract in which case DFA cannot be held liable for breach of contract. However, whilst failure to take action may negate a claim for breach of contract retrospectively, one option would be for KA to negotiate a new completion date with DFA clearly stating that time for completion is “of the essence”. In expressly stating that the obligations regarding completion are fundamental, a further breach of this by DFA would then entitle KA to terminate the contract on grounds of repudiatory breach (due to the delay being beyond what was reasonably expected and agreed after affirmation of the original breach) and bring a claim to recover direct loss suffered as a result of the breach. The requirement for damages is to prove that the breach caused the loss and that the loss was not too remote (Cracknell, 2003). When considering breach of contract claims a relevant consideration is allocation of risk in commercial contracts. Like other contracts, construction contracts are about prior allocation of risk time is a central issue in construction contract and the following non-exhaustive factors that can impact progress of construction work (Uff, 2005): a) unexpected ground conditions; b) problems with suppliers; c) shortage of material; and d) unexpected weather conditions. Accordingly, whether or not the agreement between DFA and KA itself addressed risk allocation will be a relevant consideration in the measure of any damages awarded. The rule governing remoteness of loss was laid down in Hadley –v- Baxendale ((1854) 9 Exch 341). Accordingly, if KA can establish breach of contract, then the loss of business for the period after completion date was clearly an expected consequence for the purpose of the remoteness. The issue to consider therefore is whether loss of the remunerative contract can also be recovered. The most common basis for compensation is to put the innocent party in the same financial position they would have been in had the contract been properly performed as highlighted by the decision in Victoria Laundry v Newman Industries. Under the second limb of the Hadley v Baxendale rule, DFA will only be held liable for an “abnormal” consequence if it had actual knowledge that the abnormal consequence might follow. DFA would have been aware that failure to complete on time would have affected GID and KFC’s contract and its ability to comply with business obligations under existing contracts and any potential business. Therefore it is very possible that DFA will be attributed with having actual knowledge of the possibility of losing business from failure to complete on time. Notwithstanding DFA’s potential liability in principle, as highlighted above, there is a positive duty on an innocent party to take reasonable steps to mitigate their loss. The case of Brace v Calder ([1895] 2 QB 253) asserts that an example of “reasonable steps” is to try and find an alternative method of performance of the contract. In order to avoid any such problems in the future, in the first instance as stated above, I would recommend that KA, KFC and GID immediately re-negotiate the completion contract terms specifying a new completion date with “time being of the essence”. This accords the completion date term fundamental term status with the immediate right to terminate and sue for breach of contract if DFA fail to comply with the new completion date. Additionally, as time for performance is essential in construction projects, many construction contracts will incorporate specific clauses dealing with the consequences of failure to meet obligations as to time and will often include a liquidated damages clause requiring a contractor to pay damages during the period of the breach (Uff, 2005). Accordingly, I would recommend the insertion of a clause providing for a weekly sum being payable for every week of delay by DFA, and under the general principles of law, DFA would be bound to pay this sum as the case of Cellulose Acetate Silk Co Limited v Widnes Foundry Limited ([1933] AC 20(HL ) asserts that such a clause constitutes an agreed contractual term. BIBLIOGRAPHY John Adriaanse (2004). Construction Contract Law: The Essentials. Palgrave Macmillan. 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