Identification and Appraisal of Contract Liability - Case Study Example

Projects Economics and Law Student name Institution Date Outline I Introduction II The Contract A). Case study B). Facts of the case III Identification and Appraisal of Contract Liability IV Critical Discussion of NEC Contract Application V Conclusion References Introduction Construction contract are in a steady growth due to demand for new and affordable houses. This has prompted stakeholders in the industry to come up with ways that ensure that the project is completed in a manner that has been specified in the contract. In the past, parties to the contract have engaged themselves in court battles because either party failed to perform his part of bargain or he negligently performed his duty. In this case we are looking at a contract of refurbishment which failed and its implications. The facts of the case are highlighted below and their implications are discussed in conjunction with NEC application form. A contract of a construction failure occurs when the client is not satisfied with the work done which s viewed by the project manager as executed. Therefore it is important for parties in the contract to identify possible construction failures before they occur. This is handled by the application of new engineering contracts application form which avoids ambiguity in contracts. Failure of construction contract comes with many allegations ranging from substandard materials, poor workmanship, failure to complete on time and many others. This is possible regardless the size of the contract or the place of the construction. However, claims are usually based on the value of the project in question. This means claims made by the client or a contractor for economic loss will depend on loss of profits, in carrying extra cost or loss of business. New Engineering Contract helps to avoid possible construction defects which may lead to claims of damages from the contractor by the client for either use of defective or substandard raw materials, poor workmanship, failure to complete or failure to perform the contract at all. In such situations NEC contract application helps to reduce claims of failure to complete the contract to specification by breaching the warranty. Case study John who owns flats for rental contracted Raymond orally to refurbish them in a months’ time. To enable tenants occupy the units. The work was to be completed on 30th June while it was scheduled to start on the 2nd June. The contractual terms were that John pay Raymond $5,000 at the beginning of the contract then the remainder of $6,000 be paid at the end of the contract. It also stated that, materials that were to be used during refurbishment were to be provided by John excluding non-exhaustible tools. This meant that expendable tools were considered materials that could have been supplied by John. Raymond was to use frosted glass and breached wood in the refurbishment where he was required to use intricate patterns upon the woods which was to take any form except human murals. They agreed that the murals were to be painted by a third party who was to be contracted by Raymond but on recommendation of John. John recommended James as a good contractor when it comes to murals. Raymond went ahead and recommended and contracted James for the murals on 31st May for the work to begin on the 2nd of June. The agreement was that John should provide materials on site three days before the contract commencement. The aim of this was to ensure that the contract was completed within the specified time without any delay. John provided materials as agreed in the contract and made the initial payment on time. However after the completion time had elapsed Raymond had not completed the work thus delaying the planned letting out of the flats to tenants. The completion was done on the 15th of July and upon inspection the murals included human murals and the painting was poorly done. This meant that the contractor Raymond had failed in executing his responsibilities effectively. Raymond apportioned blame on John because John recommended James for the murals. Facts of this Case The materials used in construction have been provided by the client. The contractor has extended the completion time by 15 days causing a loss of revenue by 1 month There is poor workmanship by the contractor and the subcontractor. Identification and Appraisal of Contract Liability Raymond had a responsibility of ensuring that the contract was completed on time and to the specification of the client. He has allowed a subcontractor who was his agent to use human murals which were prohibited by the client. The painting was also not up to standard. This requires identification of the liability on part of the contractor. A contractor and a client have a fiduciary relationship which has to be discharged. The prohibition to use human murals constituted express warranty in the contract and its subsequent use implied that Raymond had breached express warranty in the contract. There was a condition that the work was to be completed on 30th June but it failed. The other factor is that there was poor workmanship. This means, three warranties to the contract had been breached. In this case, Raymond can claim damages relating to failure to complete the contract on time, breach of express and implied warranty. This will arise from the fact that there was failure to complete the flats in a workmanship that is acceptable to the owner; there is also damage from the failure to perform the contract to the specification of the owner. The contractor, Raymond, will not defend himself on ground that some of the work was done by James, the subcontractor because he is responsible for the contract regardless of the approval of the contractor by John. Any negligent conduct by a subcontractor should be shouldered by the contractor since he is responsible for the contract. The facts relating to responsibility of the contractor and subcontractor were made in a case of Lindstorm v Chestnut, where the contractor was held responsible for poor workmanship of the subcontractor (Kelly, Holmes and Hayward, 2005). The rule is when a contractor has substantially completed a contract of construction but there are minor defects such as poor workmanship which can be rectified. He can recover the contractual price less the cost of rectifying the defects. This was determined in the following two cases Dakin v Lee, 1916—in this case Dakin, a builder, substantially completed his contract but some of workmanship proved not in accordance with the specification. Lee refused to pay anything on this ground. Held that the plaintiff could recover the contractual price less the amount required to rectify the defects in the building (Macdonald and Koffman, 2007). Hoening v Isaacs, 1952—Hoening decorated the defendant’s flat for the agreed price of 750. On completion of the work, some of the workmanship was not up to the agreed standard and the defendant refused to pay anything. Held that the plaintiff could recover the agreed price less 290 required to eliminate the defects in the work done (Kelly, Holmes and Hayward, 2005). In this first case, the contractor was allowed to recover the contractual price less the cost required to rectify the defects. In the second case, it was also held that the contractor was entitled to recover the contractual price less the amount incurred to rectify the loss or the defects. However in this case there was loss of revenue because there was a breach of a condition which will attract damages. When a contractor breaches a contract of construction by extending the time of completion, the client loses revenue. Where profits have been lost to the plaintiff by the fault of the defendant in delaying delivery, and if the other party knew at the time of forming the contract that the special loss was likely to result from the breach of contract, he will be liable for such loss (Kelly, Holmes and Hayward, 2005). The client will make claims for the loss of revenue that is deemed to have incurred. In this case John will only manage to recover one month rent but it should be assessed to determine the demand rate of houses in the area. The aim of awarding damages is to restore the plaintiff to the position he could have been if the contract was not breached. This was decided in the case of Hadley v Baxendale of 1854 where judge B. Alderman said damages for breach of contract should be such as may fairly and reasonably be considered either arising naturally i.e. according to usual course of things, from such breach of contract itself or such as may reasonably be supposed to have been in contemplation of both parties at the time they made the contract as the probable result of the breach of it (Macdonald and Koffman, 2007). There are a number of defences that can be put forward by Raymond to counter allegations of breach of contract, and breach of warranty. The defences available to the contractor for allegations of breaching the contractor will include frustration. The contractor can defend himself that the contract was frustrated that’s the reason why it was not completed on time. He may also argue that the material supplied by John required some modification something that was not taken into account during the period the contract was entered into (Gillies, 2004). For breach of implied and express warranty, the contractor will defend himself that the materials were defective which were supplied by the owner thus the reasons why there was poor workmanship. Critical Discussion of NEC Contract Application New engineering contract involves different approaches that deal with the issues arising from variability circumstances such as management, control, evaluation and identification of susceptible variables. Additionally, in circumstances where uncertainty is high, there are possibilities of transforming quantifiable risks by adopting the use of subjective probability (Weddell, 2006). The objective is to determine and evaluate uncertainty that is necessary in establishing the insights required for changing the applicable risks through efficient and effective decision making. Risk analysis is used in risk engineering for efficient risk management, whereby the entire processes of dealing with risks are embraced (Haimes, 2001). New engineering contract ensures formation, execution, and retention of standard construction contract controls, risk management reduces the severity of loss resulting from expected and unexpected occurrences (Sun and Oza 2008). Disgruntled parties initiate the process by filing a claim as required by arbitration standards, and in accordance with the arbitration clause in the construction contract (Weddell, 2006). To be effective in solving potential disputes amicably, the parties to a construction contract should draft an agreement that guarantees a fair resolution process New engineering contract application is very important to contracts of construction because they provide avenues for dispute resolution; provide necessary procedure and items to be included in a contract. This NEC requires the wording of a contract to be simple and clear which means the contract under consideration should be clear so that every stakeholder to the contract should be in a position to understand it. It also encourages good management by encouraging the stakeholders in the contract to understand their responsibilities before their contractual obligations become enforceable. This will eliminate future excuses as reasons for failure. It is flexible since it provides stakeholders with many options to use when the contract is being negotiated. There are nine core clauses, two dispute resolutions mechanism proposed and six options. The core clauses in the form are mentioned as 1. Definitions of terms, communication to be used, interpretation and ambiguities. 2. Defines responsibilities of the contractor. 3. Provides a program for the contract that is, start time of the contract, handover time, inspection of the progress and many other program activities. 4. It provides a mode of inspecting and testing the contract. Defining acceptable defects, how it should be reported and correctional measure to be employed. 5. It provides mode of payments and how it should be paid. 6. It provides a procedure to be followed to determine the progress of the contract for payment to be effected. 7. It gives titles such as materials, equipments and plant. 8. It provides insurance liability responsibilities. 9. It gives grounds for termination contract in terms of breach of condition warranty. (Out-law.com, 2011) NEC has achieved its objectives in many areas because it anchors its objectives on good management, clarity and flexibility in any contract as compare to other contracts forms. By ensuring that there is clarity in a contract gives parties to the contract, no ground to avoid contractual ability in future. Other forms to the contract were not clear on all matters to the contract something that gave them grounds for complaining in the future. In case there is something that is not clear to the contract then it should be sorted out before the contract is signed (Weddell, 2006). NEC contract application has achieved its objectives of flexibility by providing secondary and main options which can be adapted and merged to make the contract workable. These options do not specify the type of contract which they intend to serve. This means it is upon the contracting parties to plan, design and allocate the contract activities to them. The objective of flexibility allows the party to decide the method they will use to price the contract either through the use of bill of quantities, activities schedules, target costing or to cost reimbursement (Out-law.com, 2011). Secondary options which are provided in NEC contract application also provide flexibility by enabling parties to the contract to make a contract that is fit to their needs. This means it is easier for the parties to identify a risk to the contract and how it should be transferred. This means NEC application ensures risk transfer and retention is properly spelled in the contract before its execution. It is important to understand who undertakes a risk in case it arises and remedies available to them. Since risk can be costly, it is important for the parties to state methods of eliminating or reducing its effects in case it occurs (Haimes, 2001). There is a clause which provides for compensation in case the contractor encounters conditions which makes the contract impossible to complete. Like in our case the contractor was unable to complete the contract because John failed to provide materials for completion of the contract. It is very important for project managers to take efficient care of work and material specifications that are significant features of facility design. Specifications in the context of components and required quality are important elements of documentation that describe a facility. Usually, such documentations include specific stipulations about construction design while referring to the commonly accepted specifications that are used in construction. The project manager has to formalize separate specifications for different construction activities such as transport, testing and welding. He is also expected to modify the specifications in reflecting local policies, circumstances, local regulations, availability of materials and any other specific circumstances. In fact, performance specifications have been developed recently in the context of the ways in which operations at constructions have to be carried out. Instead of outlining the required construction procedures, they specify the required quality and performance of the completed facility. The specific ways in which such performance is achieved depends upon the attitude and competence of the project manager (Fox and Cornell, 2004; Poole, J. 2010). In considering the prevalent shortcomings in this regard, recommendations have been made to make improvements in the risk analysis process in construction companies. Researchers held that incentives should be provided to workers for early completion of projects and such provisions should be made a part of the contracts in adopting new approaches towards valuing experience rather than focusing only on low prices. This would allow giving weight to the well deserved experience. From the networking perspective, it is important to make financial allocations relative to the given risks. Appropriate systems of risk sharing should be adopted in providing benefit of risk to companies where such risks do not occur. Some researchers have recommended the establishment of sharable financial reserves as safety in mitigating crisis situations as and when they occur (Jay, 2010; Poole, 2010). In case there is failure of the contract like in our case, the party to the contract have two options to follow in order to repudiate damages associated with contract failure. Any party to the contract that has used NEC contract forms will not deviate from the two options provided in the contractual terms. The aggrieved party to the contract will either go to court or seek services of an arbitrator (Out-law.com, 2011). If John and Raymond had used NEC contract, issues relating to failure of contract due to extension of time and poor workmanship could have been minimized. NEC requires constant communication and notification of the contract thus any delays or additional cost will be discovered before time is over. The client could have had prior knowledge about the progress of the work which could have helped him minimize the loss that could have incurred in case the contract failed to be completed in time (Shaw, 2008). NEC ensures there is proper management of the contract which will lead to good and quality output. Conclusion In the case there is failure by the contractor, Raymond, to complete the contract as per the specification provided by the client. He has extended the completion time and breached express and implied warranty of the contract. He’s entitled full price of the contract less the cost of removing the defects in the work done. However the client is entitled to recover damages for the loss incurred because of time extension. Although Raymond extended time, John did not terminate the contract before completion; he waited until the contract was completed. This means the extension of time did not terminate the contract. However, though the contract that is made orally does not have any documented existence, but at the same time, it receives the status of a contract. The landmark case Severson v. Elberon Elevator, Inc., [Iowa Supreme Court, (1977) 250 N.W. 2d 417], certain similarities of principles with the already provided case between Landry V. Edwards. In this case also the agreements of the oral contract between the plaintiff and the defendant have not been performed. It was the arguments of the defendant that the agreement of the transaction only had the elements of preliminary negotiations (McKendrick, 2005). The principles of contract suggest, “An oral contract may exist even though the parties intend to reduce it to writing at a later date.” (Severson v. Elberon Elevator, Inc.) The remedy of specific performance can only be claimed if the subject of the contract is unique or it contains certain special valuations. In case of the given case we see that the murals are of special value (McKendrick, 2005). Thus John can ask for the fulfilment of specific performance from the Raymond. It has also been a common theoretic approach that “specific performance will not be decreed when compensation in damages will provide adequate relief.” In this case the defendant is not at the position of offering any compensation. Thus, the plaintiff is eligible for receiving the remedies of specific performance.   References Fox, A.J. & Cornell, H.A., 2004. Quality in the Constructed Project, American Society of Civil Engineers, New York. Gillies, P. 2004. Business law. Sydney: Federation Press. P. 336-9 Haimes, H. H., 2001. Risk Modelling Assessment and Management. New York: John Wiley and Sons. Jay, F. 2010. Law 101. New York: Oxford University Press. P. 9-11 Kelly, D., Holmes, A. & Hayward, R. 2005. Business law. New York: Routledge Cavendish. Macdonald, E. & Koffman, L., 2007. The Law of Contract, Oxford: Oxford University Press. McKendrick, E., 2005.Contract Law - Text, Cases and Materials. Oxford: Oxford University Press. Out-law.com, 2011. Standard Form Contracts: NEC Available from: [Accessed 30 November 2012]. Poole, J. 2010. Textbook on Contract Law. 10th ed. Oxford: Oxford University Press. P. 91 Shaw, M. 2008. International Law. 6th Ed. New York: Cambridge University Press. P. 620 Sun , M. & Oza, T. 2008. Improving NEC Contract change Management with CCM. Available from: [Accessed 30 November 2012]. Weddell B. 2006. Choosing the right NEC Contract. Available from: [Accessed 30 November 2012]. Read More