Contracts, Claims

Contracts and Agreements
In
Construction Industry
10/17/08 1
Contents
Definitions of Contract
Legality of Contract
Key elements of Contract
Contents of Contract
Types of Contracts
Standard forms of Contracts
10/17/08 2
Contracts and Agreements
A contract is a bargain agreed between two or more parties

such as an employer and a contractor regarding the execution
of certain works
Experts who will prepare the contracts :-
Legal , Taxation , environment ,Engineering ….etc
10/17/08 3
 To be legal
 The contract must fulfill certain requirements :-
 1-An intention : both parties must be wise and

intend their bargain to be enforceable at law.
 2-A genuine consent : must not be procured by
mistake , force ….undue influence ,
misrepresentation…
 3-Legality of the object : the parties must not agree
to something illegal or to break the law.
 4-Legal capacity of the parties to act : according to
the applicable law.
10/17/08 4
Contracts in Construction Industry
 Key elements of contract :-
 1- An offer and an acceptance.

 2- An intention by both parties to the contract to create legal
relations.
 3- Considerations.
 4- The parties must have the capacity to contract.
 Capacity is concerned with legality.
 Authority is concerned with permission.
 5- The contract must be legal and possible.

10/17/08 5
Contents of the Contracts
 An international contracts may contain

 the following :
 Dates ; Parties ; Preamble ; Definitions ;
Interpretations ; Warranties ; Obligations ; Price or
other considerations ; Payments terms ; Risks ;
insurance ; Responsibilities ; Liquidated damages ;
Disputes settlements and governing law ….etc
10/17/08 6
Different Names of Contracts
 Supply Contracts.
 1-Construction contracts
 2-Commercial agency contracts.
 3- Sale of goods contracts
10/17/08 7
 Management Contracts.
 1-Employment contracts
 2-Insurance contracts.
 3- Facility contracts
10/17/08 8
 Service Contracts.
 1-Works and material contracts

 2-Transport contracts.
 3- Arbitration contracts
10/17/08 9
Type of Contracts
 A variety of contractual arrangements are available

and the engineer will often need to carefully select
the form of contract which is best suited for the
particular project.
10/17/08 10
Type of Contracts
Lump Sum Contract
The simplest type of civil engineering contract .

Without quantities , the the contractor will have to assess the
amount of works , the employer has essentially assigned all
risks to the contractor, then the contractor will give an offer
with high Price to allow himself a sufficient margin to cover
for any items that may have missed. Furthermore, there is
no satisfactory method of assessing the cost of variations.
10/17/08 11
Type of Contracts
Bill of quantities Contracts / Re-measured

or unit Price contracts
• The most commonly used form of contract for works of civil

engineering.
• The quantities of the works can be computed with
reasonable accuracy from the drawings and associated
documents.
• The contractor is paid for the actual amount of worked
done.
• There is facility for dealing with varied or additional works.
• Most of contractor are familiar with this type of contract.
10/17/08 12
Type of Contracts
Cost Reimbursement Contracts
• The employer pays to the contractor

actual costs of works plus a management fee
which will include the overhead charges ,
supervision costs and profit.
10/17/08 13
Type of Contracts
Cost Plus fixed percentage fee contract
• For certain type of construction or extremely

pressing needs, the employer is sometimes forced
to assume all risks overrun.
Actual costs + fixed percentage an little incentive to

reduce job cost.
10/17/08 14
Type of Contracts
Cost Plus fixed fee contract
Actual costs + fixed fee and will have Some

incentive to complete the job regardless the
duration of the project and the employer will
assume all risks overrun incentive to complete the
job quickly since its fee is fixed
10/17/08 15
Type of Contracts
Cost Plus variable percentage contracts
 The contractor agrees to a penalty if the actual cost

exceeds the estimated job cost or a reward if the actual
cost below the estimated job cost.
 For taking the risks on its own estimate , the contractor is
allowed a variable percentage of direct job cost for its fee.
 The project duration is specified .
 This type of contract allocates considerable risks for cost
overrun to the owner .
 Provide incentives to contractor to reduce costs as much as
possible
10/17/08 16
Type of Contracts
Target Estimate contracts
 Specifies penalty or reward to a contractor .

 The percentage of saving or overrun to be shared
by the owner and contractor.
10/17/08 17
Type of Contracts
Guaranteed maximum Cost contracts
 As turnkey contract
10/17/08 18
Type of Contracts
Procurement Forms
 Traditional Forms.
 Responsibility for the design lie with the employer (

consultant) , thus the contractor is only responsible
for construction only
10/17/08 19
Type of Contracts
Procurement Forms
 Design - Build Forms.
 Package deal Between the employer and the

contractor whereby the contractor also undertake
all of or a proportion of the design of the works
10/17/08 20
Type of Contracts
Procurement Forms
Design - Build Forms.
 Develop contract ( employer led design)
 Design – Build ( 1- stage) ( employer led design)
 Design – Build ( 2- Stage ) ( contractor led design)
 Turnkey .
10/17/08 21
Type of Contracts
Standard Forms
British Forms
 GC – Government contract.
 ICE- Conditions
 FIDIC - Conditions
10/17/08 22
Type of Contracts
Standard Forms
FIDIC Forms
 New Red Book (1999) Design works by employer
 New Orange Book (1999) Plant and Design – Build ,
Design works by contractor Conditions

 The Silver Book (1999) – EPC – Turnkey.
 The Green Book - Short form of contract.

 The White Book ( 3 rd 1998) for pre- investment , feasibility
studies, design and administration of construction and

project management
10/17/08 23
Type of Contracts
Standard Forms
American Forms
 AIA – American Institution of Architect.
 AGC – Associated General Contractors.
10/17/08 24
Claims & Disputes
In
Construction Industry
10/17/08 25
Claims & Disputes
“ The means available to the parties to adjust the

contractual and economic relationship between
them to meet changing conditions”
10/17/08 26
Contents
Introduction
 Definitions.
 Classification and legal basis of claims.
10/17/08 27
Contents
Section 1 - Classification by subject.
 Existence of contract.
 Documentation.
 Execution of works.
 Payments.
 Prolongation.
 Default……etc.
Notification.
Presentation.
Establishment.
Examination.
10/17/08 28
Contents
Section 2 – Claims concerning the existence of a contract.
 General.
 Recognition of a valid contract.
 Capacity.
 Agency.
 Intention to create legal relations.
 Consideration.
 Agreement.
10/17/08 29
Contents
 Offer and acceptance.
 Offers.
 Revocation.
 Acceptance.
 Counter-offers.
 Acceptance subject to conditions.
 Letter of intent.
10/17/08 30
Contents
Section 3 – Claims arising from documentation.
 General.
 Contract / Policy.
 Errors and discrepancy.
 AD-HOC Conditions.
 Counter-offers.
10/17/08 31
Contents
Section 4 – Claims in connection with execution of works.
 Contractor to satisfy himself.
 Work to be the satisfaction of engineer.
 Damages to the works.
 Issue of further drawings , Instructions.
 Nominated Subcontractor.
 Defects.
10/17/08 32
Contents
Section 5 – Claims concerning payment Provisions.
 General.
 Valuation of contract works.
 Valuation of Varied works.
10/17/08 33
Contents
Section 6 – Claims concerning Time.
 General.
 Evaluation of delay claim.
 Disruption..
Case : Claim in respect of acceleration of works.
10/17/08 34
Contents
Section 7 – Claims arising from default, determination.
 Liquidated damages.
 Determination.
 Frustration.
 War Clauses
10/17/08 35
Contents
Section 8 – Presentation and Payments
 Presentation of a claim.
 Format of a claim.
 Negotiations.
 War Clauses
10/17/08 36
Contents
Section 9 – Alternative Dispute Resolutions ( ADR).
 Mediation.
 Conciliation.
 Disadvantages of ADR.
 Adjudication.
10/17/08 37
Details for the Course
10/17/08 38
Contents
Introduction
 Definitions.
 Classification and legal basis of claims.
10/17/08 39
Introduction
Impact of Claims
3) Cause budgetary difficulties to employer
5) Cause financial difficulties and restrictions of Cash flow ,

loss of liquidity to the contractor
So , it would be to the benefit of the whole industry if the

impact of claims was reduced”
10/17/08 40
Introduction
“Claims are a fact of life”
“ Claims are here to stay “
How we can reduce the impact of claims
Coordination between the Engineer and contractor to mitigate

the effects of claims
10/17/08 41
Definition
A Claim
• A demand , a request , for something presumed

entitlement to which.
• A contractor consider ( Rightly or Wrongly) he is entitled to

which.
• Agreement has not yet been reached.
10/17/08 42
Classification and legal
basis of claims
Four legal and one non-legal concepts
3) Under Contract – there is a remedy in particular conditions for that

claim as issuing drawings in certain date and the employer fails to
meet it in its time ( remedy designed in contract).
4) Out of contract – a term of the contract had been breached But
where the remedy is not designed in the contract. If the claim is valid
then it may be settled by amicably or by applicable law stated in the
contract.
5) Where no contract exists then legal system called “ Quantum meruit”
Actual Cost + Part of profit.
10/17/08 43
basis of claims
Four legal and one non-legal concepts
4) Claims under the law of tort of the applicable law.
5) Ex-gratia Claims – no legal basis but rather some

commercial sense in making a settlement
The scope of study is concerning with :-
• Claims under contract have remedy.

• Claims under contract have no remedy then applicable
law will be applied.
10/17/08 44
basis of claims
We can divide the claims into three types :-
• Contractual claims : which have a basis in the contract it

self.
• Extra – contractual claims : which have no basis in the

contract but where entitlement Stems from the law then
will be settlement in arbitration or in litigation.
• Ex-gratia claims : which the contractor has no contractual

provision to rely on and No breach or tort by the employer.
10/17/08 45
Contents
Section 1 - Classification of Claims by subject.
 Existence of contract.
 Documentation.
 Execution of works.
 Payments.
 Prolongation.
 Default……etc.
Notification.
Presentation.
Establishment.
Examination.
10/17/08 46
Section 1 : Classification of claims
by subject
Existence of Contract
“ the contract must be binding ( offer , acceptance,

consideration) “
If not the contract will be void by a court.
Economic duress make the new rates imposed by any parties

during execution of the contract are void
the dispute is which is right the contract is binding or void
10/17/08 47
by subject
Documentation
 Shortcomings of documents as important information may

not have been referred in tender.
 Correspondences passing between tender and
acceptance may not have included in the contract.
 Ambiguity and discrepancies between documents
This may lead to Claims
10/17/08 48
by subject
Execution of Works
 Supply of information / delay in giving

 Variation
 Risks / responsibility for .
 Defects
10/17/08 49
by subject
Payments
 Valuation of contract works ( Progress of works)

 Valuation of varied works( under which item it is executed.
10/17/08 50
by subject
Prolongation
Delay for which the employer is responsible
 Delays in giving drawings and information in consequence

the contractor incurs extra cost, the works will be slowed
down as if it was stopped, this reduce the productivity of
contractor.
10/17/08 51
by subject
Prolongation
Delay for which the employer is not responsible
 Exceptionally inclement weather , Strikes …. Then

according to FIDIC the contractor is entitlement to an
extension of time but not to Compensation.
10/17/08 52
by subject
Default
 Failure to complete within the stipulated time for which

provision is made for liquidated damages
10/17/08 53
by subject
General Terms
Presentation
 The contractor must clear the “ merit of the claim”
10/17/08 54
by subject
General Terms
Establishment
 For the contractor to state the reasons why he considers

himself entitled
10/17/08 55
by subject
General Terms
Examination
 The technique to be employed in examining claims ,

check the facts ( documents which constitute the contract)
The end of section
10/17/08 56
Contents
 General.
 Recognition of a valid contract.
 Capacity.
 Agency.
 Intention to create legal relations.
 Consideration.
 Agreement.
10/17/08 57
Contents
 Offer and acceptance.
 Offers.
 Revocation.
 Acceptance.
 Counter-offers.
 Acceptance subject to conditions.
 Letter of intent.
10/17/08 58
Section 2 – Claims concerning the
existence of a contract.
General
Claims are mostly concerned with “ entitlements and

liabilities “ , for such claims the contract must be come into
existence and legally valid, but the existence of a valid
contract may be disputed as :
 An employer issues a letter of intent and denies that a

binding contract exists.
 A contractor denies that a variation or a supplementary
contract is binding.
10/17/08 59
Example :- British Steel Corporation v Cleveland bridge
 Cleveland bridge were contractors for building with space

frames roof in Dammam.
 They contacted BSC Company to supply Steel nodes
required and issued a letter of intent.
 As the work is urgent , BSC started immediately and in the
fact completed all 137 nodes.
 The negotiations on the terms of a contact were still
continuing , agreement on terms was never reached.
10/17/08 60
 BSC Sued for 200,000 Pounds as value of nodes.

 Cleveland Bridges Claimed 800,000 Pounds for damages
due to late of delivery nodes.
What is held ?
10/17/08 61
 It was held there was no contract .BSC were entitled to

200,000 Pounds as value of nodes.
 The above case on the basis of quasi- contract and is
called “ Inchoate contract”
“ Inchoate contract “ is one where the process leading

to agreement has been started but not completed . And
it is accordingly not binding in law
10/17/08 62
Recognition of a valid contract
For binding contract there are three essential requirements :
 Intention to Create legal relations

 Consideration ( terms of payments).
 Agreement.
10/17/08 63
Capacity
For a contract to be binding , the parties must each have the

capacity to contract.
“ The capacity “ is fundamental and is concerned with

legality. “ The Authority “ is concerned with permission.
In business an individual may have the legal capacity to
contract but not the authority of his employer
10/17/08 64
Agency
An agent is a person with the power to change the legal

position of another person known as his “ Principle”.
in short an agent has the authority to change
Types of agency
 Actual agency or authority

He has written permission to act.
 Apparent agency or authority

He has the authority by conduct to act .
10/17/08 65
Intention to create legal relations
 An intention by parties to contract to create legal relations,

and to be legally bound by the contents of the contract.
 Contents of a contract must be clearly apparent.
 A contract can be enforced be a court.
 If the parties intended their promises to be binding as a
natural of consequence of this , the court will provide
remedies for the breaking of binding known as breach of
contract.
10/17/08 66
Consideration
 The legal word for the money that is paid for the supply of
the goods or services which is called :-
“Terms of payments”
10/17/08 67
Agreement
 The final essential requirement for a valid contract is

agreement.
 The agreement must be on all material points.
10/17/08 68
Offer and Acceptance
 Agreement is normally analyzed in terms of “offer and

acceptance” , due to the communication between parties
it called legally “ Bilateral Contract”.
 The other is called “ Unilateral Contract” does not need

communication ,or negotiations for acceptance.
10/17/08 69
Offer
An offer , in order to be capable of acceptance must indicate

an intention to be bound.
Invitation to treat does not necessary constitute an offer.
10/17/08 70
Revocation
An offer may generally be revoked at any time before it is

accepted.
Example , “ Tender Bond ” will be loss in case of

withdrawal the offer
10/17/08 71
Acceptance
 For acceptance of an offer to lead to a binding contract ,

the acceptance must state which offer is accepted.
 The acceptance of an offer must be unconditional.
10/17/08 72
Counter -offer
Counter offer Kills off the original offer.
Example :
 The contractor sent an offer to the employer.
 The employer reply and change the terms of payments for
the offer, then the last is called counter offer and kills the
first.
 The contractor sent another offer in replying , then it is
called “ counter –counter offer” an kills the “counter –
offer”
10/17/08 73
Acceptance Subject to Conditions
 If an acceptance is made “ Subject to conditions “ as

receiving certain information being received.
 Then the contract would arise on the receipt of such

information
10/17/08 74
Letter of intent
 It is important to emphasize that the effect of a letter of

intent depends on the wording of the letter rather than its
heading.
It may lead to “ mini contract “
The End of Section
10/17/08 75
Contents
Section 3 – Claims arising from documentation.
 General.
 Contract / Policy.
 Errors and discrepancy.
 AD-HOC Conditions.
 Counter-offers.
10/17/08 76
Section 3 – Claims arising from
documentation
General
In preparing and examining claims it is essential to bear in

mind that one is concerned with what the documents say
and what provide, not with what on thinks they should
have said or what must been intended.
10/17/08 77
documentation
Contract / Policy
For employer and according to his policy to provide for “

Price fluctuation “ in contract .
10/17/08 78
documentation
Errors and discrepancies
Discrepancies between different documents “ Drawings

and Specifications …. ) , generally
 Drawings should be regarded as stating what is required.
 The Specifications stating the quality of workmanships
and materials.
 The Conditions of Contract stating the obligations of the
parties and the allocation of risks between them .
 The Bill of Quantities determining the amount to be paid.
10/17/08 79
documentation
AD-HOC Conditions
 Conditions of Contract are usually one of the “ Standard

Forms” as “ FIDIC, ICE, JCT….. ”
 In most cases some ad-hoc conditions are needed to
drafted to the particular requirements of a given job.
 Great care is needed in drafting such ad-hoc conditions
and must ensure that they are contractually do not conflict
with the Standard Clauses.
The End Of Section
10/17/08 80
Contents
Section 4 – Claims in connection with execution of works.
 Contractor to satisfy himself.
 Work to be the satisfaction of engineer.
 Damages to the works.
 Nominated Subcontractor.
 Defects.
10/17/08 81
Section 4 – Claims in connection with
Execution of the Works
Contractor to satisfy himself
 It is requirement that the contractor satisfies himself about

what he is undertaking .
 ICE Clause 11 stated “ he is deemed to have inspected
and examined the site and its surroundings and to have
satisfied himself before submitting his tender as to the
nature of the ground and subsoil.
 If the Contractor requires more information and considers
there is insufficient time in the period allowed for tendering
he must ask for an extension of the tendering period .
 The contractor must make his own enquiries consult,
geological survey , ask Soils experts, and if he does not ,
he carries the risk according to FIDIC , ICE
10/17/08 82
Work to be the satisfaction of engineer
 The work has to be the satisfaction of the engineer and

must be according to .
iv. Specification .
v. Drawings
vi. Employer requirements
10/17/08 83
Damages to the works
 During construction the Contractor is responsible for

making good any damage to the works and will will
depend on the actual Contract.
Issue of Further drawings and instructions
 The Engineer is required to issue Further drawings and

instructions from time to time during the course of the
work.
 In any event an Engineer who delays issuing further
drawings and instructions then he is putting his Employer
at risk.
10/17/08 84
Nominated Subcontractor
 Nominated Subcontractor Pose very considerable problems,

the machinery for their operation in both JCT and ICE.
 The alternative of separate direct Contract may overcome
some problems , but substitute others ( difficulty of coordination
and control, and the effect of delay)
Defects
 “Defects” in the sense used in maintenance clause , means

materials and / or workmanship.
 The Contractor Is therefore technically in “ Breach” and is
entitlement to remedy such breach until the end of
maintenance period or “ defects liability Period”
 The End of Section

10/17/08 85
Contents
Section 5 – Claims concerning payment Provisions.
 General.
 Valuation of contract works.
 Valuation of Varied works.
10/17/08 86
Section 5 – Claims concerning payments
Provisions
Valuation of Contract works
Two schools in respect of valuation of Contract Works.
 One considers that the rates in the B.O.Q are applying

whatever the quantities.
 Second considers that some adjustment of the rates up
or down in case of changing the quantities.
Standard Forms of Contracts ( ICE) dealt with these matters
10/17/08 87
Section 5 – Claims concerning payments
Provisions
Valuation of Varied Works
Standard Forms of Contracts ( FIDIC) make some

reference to the applicability of B.O.Q Prices to Similar
Conditions
The End of Section
10/17/08 88

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Contracts, Claims

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Contracts and Agreements

Key elements of Contract

Standard forms of Contracts

A contract is a bargain agreed between two or more parties

 1-An intention : both parties must be wise and

 1- An offer and an acceptance.

 An international contracts may contain

 1-Works and material contracts

 A variety of contractual arrangements are available

Lump Sum Contract

The simplest type of civil engineering contract .

Bill of quantities Contracts / Re-measured

• The most commonly used form of contract for works of civil

Cost Reimbursement Contracts

• The employer pays to the contractor

Cost Plus fixed percentage fee contract

• For certain type of construction or extremely

Actual costs + fixed percentage an little incentive to

Cost Plus fixed fee contract

Actual costs + fixed fee and will have Some

Cost Plus variable percentage contracts

 The contractor agrees to a penalty if the actual cost

Target Estimate contracts

 Specifies penalty or reward to a contractor .

Guaranteed maximum Cost contracts

 Responsibility for the design lie with the employer (

 Design - Build Forms.

 Package deal Between the employer and the

 Design – Build ( 1- stage) ( employer led design)

 Design – Build ( 2- Stage ) ( contractor led design)

 New Orange Book (1999) Plant and Design – Build ,

Design works by contractor Conditions

 The Green Book - Short form of contract.

studies, design and administration of construction and

 AGC – Associated General Contractors.

“ The means available to the parties to adjust the

 Classification and legal basis of claims.

 Recognition of a valid contract.

 Intention to create legal relations.

 Acceptance subject to conditions.

 Errors and discrepancy.

 Work to be the satisfaction of engineer.

 Damages to the works.

 Issue of further drawings , Instructions.

 Valuation of contract works.

 Valuation of Varied works.

 Issue of further drawings , Instructions.

 Evaluation of delay claim.

Case : Claim in respect of acceleration of works.

 Classification and legal basis of claims.

3) Cause budgetary difficulties to employer

5) Cause financial difficulties and restrictions of Cash flow ,

So , it would be to the benefit of the whole industry if the

“ Claims are here to stay “

How we can reduce the impact of claims

Coordination between the Engineer and contractor to mitigate

• A demand , a request , for something presumed

• A contractor consider ( Rightly or Wrongly) he is entitled to

• Agreement has not yet been reached.

3) Under Contract – there is a remedy in particular conditions for that

Actual Cost + Part of profit.

4) Claims under the law of tort of the applicable law.