Construction Contracts - Essay Example

Construction Contracts Introduction Contracts may be written or unwritten. What is important is that there is a meeting of the minds between the parties. Nevertheless, since the memory of man cannot be trusted or relied upon at all times, there are instances when contracts have to be in writing in order for the same to be binding or enforceable. Hence, as early as in 1677, the Statute of Frauds was enacted supposedly in order to prevent fraud, perjury and other falsehoods that may attach in an agreement if this is not reduced in written form. (Statute of Frauds 1677. An Act for prevention of Frauds and Perjuryes. [internet]). The compulsion for contracts to be in documented properly s more imperative in construction agreements because these usually involve significant or huge amounts of money, not to mention the usually lengthy period of construction and the efforts of all those involved in the project. Furthermore, construction covenants normally have a lot of regularly common details that include specifications on materials, labor, time-frame from commencement to completion to turn-over or delivery, penalties in case of delay, stipulations regarding defects in construction or inferior quality in the works undertaken and on so many other aspects for which the terms and conditions must be meticulously addressed and monitored. It will be disastrous if the mistakes or flaws are discovered when the building has already started to rise and the concrete elements have already dried. It may be noted though that even if no contract yet has been finalized for a building project, the builder and the client normally do some preparatory and preliminary transactions which already entail some jobs and some funds. While these initial steps do not yet constitute the whole terms and conditions of the entire formality, the petty inter-actions are enough evidence of the business relation between and among all the persons and entities concerned. Necessarily and as a matter of course, once the ultimate contract is perfected and consummated, these small pieces of complements can be incorporated therein or can be construed as being so incorporated. There are also incidents in which a letter of intent is first transmitted by one party to the other which serves as a proposal. Certain types of letters of intent have an accompanying acceptance or approval caption and blank space where the addressee may affix his signature which act is deemed as a badge of absolute and unconditional approval to everything that is set forth. The offer made in a letter of intent may also be impliedly accepted if the receiving party does something or things to manifest consent. For instance, Architect X writes to Customer A saying that he intends to offer his architectural and design services according to the stated stipulations. Customer A, without replying with his express consent or acceptance, remits to Architect X a certain amount for drafting of plans, instructs his management staff to meet Architect X on building specifications and other matters related to or connected with the letter of intent sent by Architect X. Under those circumstances, Customer A is presumed to have acquiesced to the proposals of Architect X either in partial or total acceptance depending on further evidence. It may also happen that the owner and the contractor enter into an agreement to negotiate. This is not yet the final covenant; instead, it is the stage where the parties agree to negotiate on the terms and conditions of the final construction contract. In short, it is still the agreement to agree, so to speak. The main purpose of this pre-contract negotiation is to see if the contractor has the capacity, manpower and the necessary tools and equipment which can meet the requirements of the owner of the building or edifice to be erected. Pre-contract negotiation also serves as an information source on the part of the contractor to determine if its job, project or work pre-requisites are within the capability or affordability of the prospective client. There will be no sense on the part of a construction company offering its services to a client who or which cannot afford a budget that must include the standards and minimum requirements provided for by the applicable laws, rules and regulations. It is a fact that there are owners who may want to make short cuts in order to save on money while not totally complying with the specifications which the law mandates of a building construction. In such a case, the contractor or architect has the legal and moral obligation to refuse the offer of service engagement considering that any building provision that is below acceptable or required particulars can mean danger or hazard which can cause possible injury to the public. In sum, before a construction contract can be perfected or consented to by the parties, introductory matters have to be agreed upon which will become the basis for the drafting and final preparation of the main agreement. All these can start off from a letter of intent or an agreement to negotiate. In view of the importance of a letter of intent or of an agreement to negotiate in the construction business, especially anent the inherent legal intricacies, it is wise and proper to analyze and assess the implications of these documents through the following guide questions. First, what really is the meaning of a letter of intent and of an agreement to negotiate in a construction agreement? Second, does a letter of intent or an agreement to negotiate become part of a construction contract? Third, what are the essential parts and elements of a letter of intent or of an agreement to negotiate? And fourth, what kind of a construction agreement can be drafted out of a well-prepared letter of intent or a thoroughly studied and mutually consented agreement to negotiate? This paper will endeavor to explain the implications of a letter of intent or of an agreement to negotiate that will lead to the final drafting and preparation of the construction contract proper. Where applicable and relevant, case laws may be cited. Discussion and arguments Meaning of letter of intent and of agreement to negotiate In construction agreements, a letter of intent is simply a proposal or an offer to render professional services as an architect, a civil engineer or a contractor in a project for the construction of a building or structure. If accepted by the party to whom it is addressed, the letter of intent becomes a temporary or provisional pact or understanding between the builder and the owner of the edifice to be constructed. It defines or delineates the major aspects of the construction deal or transaction. It does not ordinarily become the final contract or agreement between the parties except when it sets forth every necessary component and there is total acceptance on the part of the addressee. (letter of intent. Definition. BusinessDictionary.com. [internet]). Without the said acceptance, the offer remains as such, unilaterally coming from the builder or contractor. The foregoing characteristics of a letter of intent explain that there is necessarily no meeting or discussion had beforehand. It is basically upon the initiative of the contractor to relay to the building owner the desire of the former to offer the rendering of his services to the latter. In short, the offer can just be simply disregarded by the owner or the client. In a way, it can even be considered an advertisement. A letter of intent is sometimes called a memorandum of understanding although this has to be understood that there is acceptance. Pre-contract is likewise another word for the document which seems to be more fitting. Upon the other hand, an agreement to negotiate has a similar function or office as that of a letter of content. However, an agreement to negotiate is immediately bilateral which means that the builder and the owner sit down and discuss and deliberate on the matters that they believe have to be taken up and included in the final construction agreement. An agreement to negotiate fares better to be called a memorandum of understanding. Does a letter of intent or an agreement to negotiate become part of a construction contract? A letter of intent or an agreement to negotiate does not necessarily become part of a construction contract at once. Matter-of-factly, both are considered only as a prelude to the main or principal covenant. However, if a letter of intent is accepted, in part or in whole, those provisions or propositions so accepted become binding upon the parties. That is the logical effect of accepting. In the same manner that stipulations concurred in by the contracting persons or entities in an agreement to negotiate bind all concerned. In one case, a property owner asked a refurbishing outfit to undertake some white washing and face lifting jobs on certain buildings in London. They agreed to execute a specific contract. In the meantime that the said specific agreement was not yet executed, the parties agreed on some general terms and signed a letter of intent accordingly. The refurbishing company did not send back to the property owner the signed copy of the supposed specific contract which stated a certain amount for reimbursement under certain circumstances. On another note, the letter of intent mentioned a smaller amount for that kind or reimbursement. The white washing and face lifting jobs commenced and went on and yet the refurbishing entity never returned the signed principal contract. Having been dismayed by the job accomplishment, the property owner stopped the works. The refurbishing company demanded for the bigger amount of reimbursement under the purported specific agreement which it did not return to the property owner. The latter insisted on the smaller sum as indicated in the letter of intent. A litigation ensued and the case reached the High Court which ruled in favor of the property owner. It was passed upon by the tribunal that the letter of intent created a simple contract between the parties and that the works proceeded under it in view of the fact that the purported contract was not signed and returned by the refurbishing company to the realty proprietor. In short, the said purported contract was not a contract at all and what prevailed between the parties was the letter of intent which provided for the major terms and conditions of their principal agreement. The High Court further adjudged that the letter of intent contained an undertaking pending execution of a formal contract that never came into existence due to the fault, lapses or negligence of the refurbishing company. In view of that, whatever undertaking contained in the said letter of intent would be the one to be followed. The High Court therefore ultimately pronounced that the payment for reimbursement to the refurbishing company would be based on what the letter of intent stated and not on what was indicated in the supposed principal agreement that never was. Here is one instance where the letter of intent is more overriding than the main agreement itself precisely because the latter was never made binding due to the neglect of one party. It is important to observe here that the court also resolved that the formal contract was required to be executed as a deed. Absent that, the letter of intent should continue in full force and effect. In another case, the final draft of the formal agreement was made and written already but was never executed by the parties who instead kept on extending the terms of the letter of intent. In that litigation, the High Court ruled that the terms in the letter of intent should be made to apply and operate and not the terms of the formal contract which was not actually executed anyway. (Contract - Letters of Intent. citing Diamond Build Ltd v Clapham Park Homes [2008] EWHC 1439 (TCC) and RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co Kg (UK Productions) [2008] EWHC 1087. Newsletter. Baker & McKenzie. London. July/August 2008. [internet]) A query may be posed. What if the letter of intent is silent on an issue? This is resolved by the declaration that such an issue is a non-issue at all. Otherwise stated, there is no issue in the first place. In a controversy before an adjudicator, a discount was being claimed even if this was neither in the main contract nor in any letter of intent. The adjudicator ruled that if there was no contractual basis for claiming for the discounts, it was improper for the defendant to withhold the money representing those discounts which considered as improperly withheld. The defendant was further order to pay reasonable interests for the cost of money during the period that the discounts were then unreasonably withheld. (Arnott, David and Julie Hamilton. United Kingdom: A Clear-Cut Case (Construction Law Update) 09 May 2008. Real Estate. mondaq. [internet]) In essence, a contract is what its contents are. This means that an accepted letter of intent or an agreement to negotiate approved by both parties must be respected according to what are contained in the documents. Since both are temporary documents or instruments as already discussed earlier, whatever provisions therein become without effect upon the signing of the final construction contract. In short, once the final agreement for construction has been concurred to by the parties, the letter of intent or the covering agreement to negotiate becomes nil. However, it is possible that the parties will agree to retain certain preliminary stipulations to subsist or to incorporate these into the formal and final construction contract. In those instances, the understanding must be defined unequivocally to afford convenience and to avoid possible future conflict. The essential parts and elements of a letter of intent or of an agreement to negotiate? Just like any contract or covenant, the essential parts of a letter of intent or of an agreement to negotiate in order to be binding are that there are the offers and acceptance, there is the consideration or cause, and that there in intention on the part of the parties to have a legal relation. Again, it has to be reiterated here that a letter of intent that is not accepted is no contract or covenant at all. In the same manner, an agreement to negotiate which is not concurred to by both parties does not have any legal effect and is therefore considered as non-existent or null and void. As a matter of course and as a matter of law, a construction agreement has to meet the same requirements regarding essential elements. In particular, a construction agreement is contract that is legally binding and which is in connection with a building work. Almost always, the construction agreement is entered into by and between the contractor and the client or customer. (Construction agreement. Contact Law. A Thomson Reuters Company. [internet]) A construction agreement that can be drafted out of a well-prepared letter of intent or a thoroughly studied and mutually consented agreement to negotiate In the construction industry, written contracts are of utmost importance in the development of relationships and transactions. The most important business dealings in any construction undertaking are documented and validated in contracts which offer the needed solemnities for the relevant commercial affairs and activities. This whole caboodle and community include varied relationships such as the owner and contractor, the contractor and sub-contractor, the contractor and the materials supplier, the owner and the designer, the owner and the design builder, the owner and the construction manager, and the surety, contractor and the owner. The construction agreement or contract being the most significant deed in any construction project, it is more advisable to prepare beforehand a letter of intent or to enter into an agreement to negotiate. Under this methodology, the element of check and review will always be present all throughout the construction process and the allied duties and responsibilities. It may be worthy to note that even the modest structure like, say, an elementary school building, needs careful attention and assessment during the construction stage. In the preparation of the letter of intent or agreement to negotiate, it is suggested that a checklist be made ready in order to avoid any omission. Among others, it shall include the names, addresses, and the contact details and procedures of the contracting parties. The intended date of the agreement must be so stated. For the project, the description of the property, its specific street address and other location facts have to be clearly specified. The estimated or probable amount of the contract and the terms of payment are the financial data to be included among the enumerated items. The provisions covering the construction schedule and the manner of delivery and turn-over will specify the start date, completion period and the actual transfer of the accomplished project. The parties may also consider agreeing on the progress rates of completion at such intervals as are reasonable. The other complementary documents and papers may include (a) the plans, blueprints, perspective, illustration and sketches; (b) the materials specifications; (c) the skilled labor component; (d) allowances for labor and material cost escalations; (e) change order procedures and the pertinent re-pricing in case of post-contract modifications mutually agreed upon; (f) fines and penalties in case of lapses or deficiencies; (g) insurance coverage; (h) substitution policy; (i) arbitration clause and settlement terms; (j) allowable delay provisions; (k) inspection rights and procedures and access to the construction site; and (l) warranties and other securities. Conclusion In concluding, it is hereby expressed that the letter of intent and the agreement to negotiate are pivotal documents that need to be put in place before any final construction contract is drafted and finalized. These are the most important preliminary steps and documents before the construction agreement and which are for the purpose of minimizing errors and mistakes in the contractual relation between the owner and the builder. As a matter of fact, these preparatory steps can as well serve as a guide to all concerned for the smooth operation the construction undertaking. References Arnott, David and Julie Hamilton. United Kingdom: A Clear-Cut Case (Construction Law Update) 09 May 2008. Real Estate. mondaq. [internet] Accessed November 22, 2009. Available at: < http://www.mondaq.com/article.asp?articleid=60414> Construction agreement. Contact Law. A Thomson Reuters Company. [internet] Accessed November 22, 2009. Available at: Contract - Letters of Intent. citing Diamond Build Ltd v Clapham Park Homes [2008] EWHC 1439 (TCC) and RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co Kg (UK Productions) [2008] EWHC 1087. Newsletter. Baker & McKenzie. London. July/August 2008. [internet] Accessed November 22, 2009. Available at: letter of intent. Definition. BusinessDictionary.com. [internet] Accessed November 22, 2009. Available at: < http://www.businessdictionary.com/definition/letter-of-intent-LOI.html> Statute of Frauds 1677. An Act for prevention of Frauds and Perjuryes. [internet] Accessed November 21, 2009. Available at: < http://www.statutelaw.gov.uk/content.aspx?activeTextDocId=1518462> Read More