Law and Contract Strategy - Essay Example

Law and Contract Strategy In law, a contract has only three elements: consent or agreement, consideration and object. Consent refers to the intent to sell on the part of the seller and intent to buy on the part of the buyer. Consideration is the value or price of thing intended to be sold while the object is the thing to be sold in exchange for some payment. When any one of the elements is absent, no contract is formed. For Larson (2003), the elements of a contract are: a) meeting of the minds, b) offer and acceptance, c) and mutual consideration. Another classification of elements are: offer, acceptance and consideration (Binder 2001) (Texas n.d.) (Spitz 2006). However, for a valid contract to be valid, the elements must be: a) capacity, b) mutual assent (which includes offer, acceptance, and meeting of minds), c) consideration, d) lawful purpose, e) certainty of terms, and f) form provided by law (Essential 2006). On the other hand, Wikipedia (2007) cited the three key elements of a contract under common law jurisdictions as: a) offer and acceptance, b) consideration, and c) intent to create a legal relation. In sum, while the law considers three essential elements (consent, consideration and object), a valid contract requires other elements (e.g. capacity of parties, lawfulness of object, etc.). A contract is an agreement of parties (two or more) arrived at after adequately considering to do or refrain from doing an action (Contract Law. n.d.). It is also defined as a promise(s) which provide(s) a remedy for its breach or which the law recognises its performance as a duty (Contract Formation n.d.) (Essential 2006). It covers a wide array of subjects and transactions from sale of real or personal property, or terms of employment (Larson 2003). It defines the rights and obligations of a party, provides the means to enforce the rights, and allocates risks between the parties (Lewis-Elements n.d.). Contracts vary according to its usage. A construction contract is complex because it involves numerous parties (e.g. engineer, quantity surveyor, etc.), long period of execution, and a series of subcontracts (Lewis-Elements n.d.). In the construction sector, all details necessary to reflect the intents, timetable, insurance, or dispute settlements are considered essential elements. To ease this complexity, industry professional and organisations created forms that will cover every detail of their particular needs, such as: building contracts (JCT series), engineering contracts (ICE series), government contracts (GC Works series), etc. (Lewis-Elements n.d.), with corresponding changes in elements. Lewis (Elements n.d.) mentioned that a construction contract must contain at least the following elements: a) general obligations of the employer and contractor, b) obligations pertaining to time, which include programmes, work completion, etc. c) matters pertaining to costs (e.g. payment, insurance, loss, expense), d) scope of work and variations, e) title which include site conditions, plant, material, and possession of site, f) instructions, which includes its status, who issues them, manner they are recorded, and certificates, and g) termination of contract, and dispute resolution. The terms Greenwood and Walker (n.d.) mentioned as necessary inclusions in a construction contract are as follows: a) details of the parties and work description, b) employers representative and his powers of instruction, c) obligations of contractor and employer, and sanctions for non-fulfillment, d) time, payment and claims and payment for extra time, e) liabilities and insurance f) quality of materials and workmanship, as well as design, g) health and safety, and h) disputes and termination. Other clauses such as ownership of materials, bonds, subcontracting and responsibilities to third parties can be included in the contract (Greenwood & Walker n.d.). A consultancy contract (included in the NEC format) underwent changes in accordance with the demand of the construction procurement system, can cover the following: a) parties, b) consultants obligations with undertaking to discharge duties using reasonable skill and care, c) fees with details on payment periods, variations, rights of set-off, deductions, additional payments, d) intellectual property (consultant retains the copyright and merely grants the client a license to use it for defined purposes, e) insurance (consultant undertakes to provide a defined level of professional indemnity cover), f) assignment (prohibiting consultant to assign and restriction to rights of employer, g) dispute resolution (statutory right to adjudication), h) deleterious materials (undertaking not to specify or approve it), i) suspension and determination (circumstances, procedures and payment), and j) jurisdiction (legal system) (Greenwood & Walker n.d.). Consultancy fees and appropriate mode of payments (e.g. reimbursable, percentage fees, contingency fees) (Greenwood & Walker n.d.) as well as above-enumerated criteria are elements necessary for inclusion in the contract. ECC contracts obligate contractors to cooperate with employer and those involved in the work, and allow access to employer and his/her agents (Lewis – Obligations n.d.). A JCT contract requires the contractor to enter into a contract with the subcontractors on the transfer of ownership of unfixed goods and materials to employer when the latter has paid the contractor (Lewis – Obligations n.d.). In UK, the Acts of Parliament (e.g. Defective Premises Act 1972, Building Act 1984, Latent Damage Act 1986) impose duties and obligations that must be included in the contract (concerns on planning, health and safety, late payment entitles one to interest, etc.) (Lewis – Obligations n.d.). Since risk liability must be known, the contract must include: a) a contract sum (in terms of quantity and nature), b) mechanism for contract sum adjustment, c) allocate the risks surrounding the cost of performance, and d) method to monitor performance and its payment, compensation of contractor for increased costs, and providing incentive to contractor to minimise risks (The Contract n.d.). Greenwood and Walker (2004) proposed two modes of setting the contract sum, price-based (risk is with the supplier) and cost-based (risk is with the purchaser) (The Contract n.d.). Certification and who will certify can likewise be included in the contract (Lewis-Certification n.d.). Analysing the PPC2000 ACA Project Partnering Contract (PPC2000 n.d.) revealed the following elements: a) parties to the partnering team, those who can become parties through a Joining Agreement, and treatment of one another (Subtitle 1); b) the roles, expertise and responsibilities of members, their relationships with regard to project implementation, contents of the Partnership documents (timetable, project brief and proposals, price framework, consultant schedules and payment terms), limitation (creation/amendment to Partnering Document must not create/amend the role, experience, or obligations of a member who does not sign it), liability of team member who caused error or omission to Partnering Documents, procedure to settle discrepancies (Subtitle 2); c) relationship of members, undertaking of members according to role, expertise, and responsibilities (Subtitle 4); d) Project Timetable consisting of date of possession, completion, and detailed arrangements for timing implementation of each phase, timetable submission by the Constructor, procedure for review and approval of timetable, Client Representative’s authority to suggest changes (acceleration, postponement, re-sequencing), Constructor’s duty to regularly update the Timetable (Subtitle 6); e) responsible person over design, how each member contributes according to one’s role or expertise, procedure for design submission, period of design preparation and factors to consider (e.g. budget), responsibility of each with regard to site surveys and investigations, duty of Lead Designer to give cost updates at each phase, assessment of design by planning supervisor of health and safety implications and advice the Client and Design Team of the assessment, procedure for modifying designs with objections incorporated, etc. (Subtitle 8), f) inclusion of a Specialist, and its role, expertise, responsibilities and payment terms as prepared by Constructor for approval, Business Case (constructor’s proposal pursuant to Partnering Terms) the Constructor will present to Client, procedure for its approval, confidentiality of Business Case documentation, attendance of Client Representative to meetings with Specialist, terms for Specialist selection and contract preparation, etc., (Subtitle 10); g) duty of a Partnering Team member who entered into a Volume Supply Agreement to notify the Client Representative with brief particulars, review of VSA by Client Representative and Core Group for appropriateness, VSA prices and terms shall be adopted into the contract entered into by Constructor and Specialist (Subtitle 11); h) prices, payment to Constructor, proposal regarding Direct Labour Packages and Preferred Specialist and its approval by Client, discounts and other benefits, investigation of potential cost savings by Core Group, factors that affect cost (e.g. risk) (Subtitle 12); i) incentives (Subtitle 13); j) pre-conditions to start on site (Subtitle 14); k) Project on site discusses the preparation of Commencement Agreement once the pre-conditions have been met, access by authorised persons, liability of Constructor as to risk of loss or damage to Project, materials, goods and equipment (Subtitle 15); l) terms regarding quality and environment (Subtitle 16); m) changes or modification which may come from any Partnering Team member, the client, etc., the process of notification, readjustments, and other matters affected by the change (Subtitle 17); n) risk management discusses risk identification, reduction, etc., and the parties involved, antique relics found, threat of terrorism, damage or obstruction by any Specialist, weather conditions (Subtitle 18); o) insurance and security (Subtitle 19); p) payment, conditions and schedule of payments, VAT invoice (Subtitle 20); q) project completion and support (Subtitle 21); r) duty of care and warranties (Subtitle 22); s) key performance indicators and continuous improvement (Subtitle 23); t) joint initiative and strategic alliancing (subtitle 24); u) general subtitle states that the Partnering Documents does not create a partnership among team members (Subtitle 25); v) termination considers the causes (breach) and effects of termination, as well as parties involved (Subtitle 26); w) problem solving and dispute avoidance or resolution (Subtitle 27); and x) special terms which refer to supplemental or amendatory terms that should be attached to the Partnering Agreement or the Commencement Agreement (Subtitle 28). However, omitted contents of some Subtitles, disabling examination of terms, are as follows: Communication and Organisation (Subtitle 3), Client Representative and Partnering Adviser (Subtitle 5), Health and Safety, Site Welfare and Employees (Subtitle 7), Intellectual Property (Subtitle 9). Specifics cannot be had from mere subtitles (e.g. who retains ownership over design under Intellectual Property). The Partnering Contract has five Appendices: definition of terms used in the Contract (Appendix 1), form of Joining Agreement (Appendix 2), form of Pre-Possession Agreement (Part 1 of Appendix 3), form of Commencement Agreement (Part 2 of Appendix 3) which also refers to the Partnering Terms on matters such as timetable, date of possession, health and safety, project brief and proposals, risk sharing arrangement (Part 1 of Appendix 4), third party liability insurance (Part 2 of Appendix 4), professional indemnity or product liability insurance (Part 3 of Appendix 4), insurance in general (Part 4 of Appendix 4), conciliation (Part 1 of Appendix 5), adjudication (Part 2 of Appendix 5), and arbitration (if applicable) (Part 3 of Appendix 5). SUBCONTRACTING SERVICE CONTRACT This Contract, made and entered into this 20th day of April, 2007, by and between Speedy Construction, Inc., herein referred to as the Lead Contractor, represented by John Ritts, with address as 123 ABC Ave., Central London, authorised by the Client to subcontract any portion or phase of the construction plan pursuant to the Partnering Contract, and Ultra Subcon LLC, herein referred to as the Subcontractor, represented by Ken Morgan, with address as 654 LMN Ave., Central London. The Lead Contractor obligates itself to pay for the services rendered by the Subcontractor subject to Section 5 of this Contract. The Subcontractor binds itself to accomplish the phase of the construction work it obligated itself under this Contract in accordance with the plans and specifications approved by the Partnering Contract on the target date and warrant that it possesses the necessary expertise and skills to accomplish this phase of the construction. SECTION 1. THE PROJECT. The project involves the building and construction of a fifty-storey Sky High Building in the east portion of Central London for the Client who owns the land and commissioned the Lead Contractor to construct the building. This contract relates specifically to the execution phase of the construction plan where all the preliminary preparations have been made and the designs and specification of the building have been finalized. SECTION 2. NATURE/SCOPE OF THE WORK. This phase of the construction relates to the installation of the air-conditioning system of the building, the electrical system, the heating system, and the installation of the water system. SECTION 3. TIMETABLE AND COMMENCEMENT OF WORK. The general plan envisions completion of the building within five (5) years. The Subcontractor shall begin its undertaking on the third year of the construction and finish it three (3) months before the end of the fifth year. The Subcontractor shall furnish a timetable containing a detailed plan, commencement and target dates for the accomplishment of the different aspects of the work. SECTION 4. DUTY OF THE SUBCONTRACTOR. The Subcontractor must assure that it will render work on weekends and holidays to accelerate the task completion. It may also hire additional workers in order to meet the deadline. The Subcontractor will provide work updates, progress reports and accomplishments to the Lead Contractor/Client every month or oftener as may be required by the Lead Contractor/Client. SECTION 5. COMPENSATION AND INCENTIVES. The Subcontractor shall receive from the Lead Contractor two (2 %) percent of the total expenditure allocated for the construction which cover the services rendered, and the supplies and materials. The Subcontractor shall receive £100,000 upon the commencement of the project and the balance shall be paid upon the completion of the work. Completion of the work without any issue or modification on the target date entitles the Subcontractor to an incentive equivalent to one (1 %) percent and an additional one (1 %) percent if the work is completed three (3) months earlier from the target date. SECTION 6. SUBCONTRACTING. The Subcontractor may further subcontract any portion of the work only with the approval of the Lead Contractor. Subcontracting without the approval of the Lead Contractor shall terminate this contract. Any damage, additional expense or delay as a result of such unauthorised subcontracting shall subject the Subcontractor to penalties. SECTION 7. MATERIALS AND SUPPLIES. The Subcontractor may purchase supplies and materials from the established suppliers of the Lead Contractor or from its own suppliers provided they pass industry standard and quality and approved by the Lead Contractor. The cost of materials and supplies is included in the two (2 %) percent payment mentioned in Section 5. SECTION 8. CHANGE IN CONTRACT COST. An increase in contract cost due to market shifts, inflation, government laws, calamities or wars will be on the Client’s account. In this event, the Subcontractor shall submit to the Lead Contractor the revised list of prices for evaluation and approval. The Subcontractor shall be entitled to increase payment as a result of these changes. SECTION 9. DELAYS AND SETBACKS. Delay in the work schedule due to force majeure, calamity, disaster, earthquake, war, or through changes in the plans and designs initiated by the Client shall free the Subcontractor from liability. The Subcontractor shall submit new detailed plans and target dates. SECTION 10. DISPUTE RESOLUTION AND VENUE. Any dispute or conflict arising from this contract and the execution of the terms thereof, as well as the actual performance of the work shall be resolved in the following order: internally by members of the Partnering Contract, reconciliatory procedure through arbitration and mediation, and lastly to the courts. The courts of the United Kingdom shall have jurisdiction even for Subcontractors registered as a foreign entity. SECTION 11. LIABILITY FOR INJURIES. The Subcontractor shall be liable for any injury sustained by its workers or the workers it subcontracted the work while in the construction premises. The Subcontractor must take the necessary insurance coverage for the workers. SECTION 12. RISK MANAGEMENT: The Subcontractor shall collaborate with the Lead Contractor to minimise the risks associated with building constructions by analysing and managing the risks involved, which include identifying the risks and their approximate costs, eliminating or reducing the risks and their costs, and insuring the risks if appropriate. SECTION 13. INSURANCE. The Subcontractor may insure any or all its insurable interests in the project that would greatly affect its capacity to accomplish or perform in case of any calamity, disaster or man-made activities or would negatively affect its assets, tools, or equipment. SECTION 14. BREACH OF CONTRACT. Failure of the Lead Contractor to issue updates, instructions, or approvals on time is considered as a breach of contract and entitles the Subcontractor to avail of the legal remedies and damages. It shall not be held accountable for any delay or damages caused by such failure of the Lead Contractor. Non-performance or failure of the Subcontractor to accomplish a specific task on a target date shall be construed as a breach of contract and shall be liable to pay pro-rated penalties. SECTION 15. TERMINATION. The Subcontractor may terminate this contract on any ground provided notification is given to the Lead Contractor three (3) months in advance. Termination due to force majeure or act of God or war shall free the Subcontractor for any penalty, provided the Subcontractor must give at least a one-month notice. The Subcontractor shall be entitled to payment for the services rendered or reimburse the Lead Contractor for the advance payment received. SECTION 16. AMBIGUITY AND INTERPRETATION. Any ambiguity shall be interpreted for the common benefit of the Parties. Failure to resolve the issue among themselves entitles anyone to refer it to mediation, arbitration or the courts of law, as may be applicable. SECTION 17. EFFECTIVITY: This Contract shall become effective and executory upon the signing of the parties herein. The parties hereby attest that they have read and fully understand the terms and conditions of this Contract. ___________________________ ____________________________ John Ritts Ken Morgan For Lead Contractor For Subcontractor References Binder, P.Z. Binder on contracts. [Online] (2001) Available from: http://www2.gsu.edu/~rmipzb/contracts.htm. [Accessed 17 April 2007]. Contract formation and commercial law. [Online] (n.d.) Available from: http://cob.jmu.edu/thomasds/contract_formation_and_commercia.htm. [Accessed 19 April 2007]. Contract law. [Online] (n.d.) Available from: http://www.otto-graph.com/samples/3/contractlaw.html. [Accessed 17 April 2007]. Essential contract elements. [Online] (6 March 2006) Available from: http://www.almc.army.mil/hsv/3816-DL.pdf. [Accessed 19 April 2007]. Greenwood, D. and Walker, P. (n.d.). Procurement, contracts and conditions of engagement. 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