Contract Administration 341

opic 1

Introduction & Contract Law

Topic 01 (Introduction & Contract Law).doc

Table of Contents
TABLE OF CONTENTS ........................................................................................................................... 2
CONTRACT LAW.....................................................................................................................................3
LECTURE OBJECTIVES ..............................................................................................................................3
INTRODUCTION .......................................................................................................................................3
TYPES OF CONTRACT............................................................................................................................... 4
LAW OF CONTRACT.................................................................................................................................4
CONTRACTS FROM IMPLIED ACTIONS ................................................................................................ 7
SELF ASSESSMENT QUESTIONS ........................................................................................................9
BIBLIOGRAPHY ....................................................................................................................................10

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Topic 01 (Introduction & Contract Law).doc

Contract Law
Lecture Objectives

Familiarise students with workload requirements for the semester in terms of

content, required reading, additional reading and assessments;

Provide a clear understanding of Offer and Acceptance in the context of

construction and be able to cite examples;

Provide an understanding of Offers, Counter Offers and cite examples;

Facilitate discussion on common shortcomings of Letters of Intent; and,

Describe the legal concept of Privity of Contract and how it affects subcontractors in the construction Industry.

Introduction
The lectures for Contract Administration 341 will be based generally on AS 4000 1997
but reference will be made to its predecessor AS 2124, AS 4300, JCC-C and other
standard forms of contract in use in the construction industry in Australia. Where
appropriate, and generally for comparison, reference will also be made to standard
forms of contract in use in the United States, United Kingdom and Asia.

Different forms use different terminology that will be addressed in the unit but it is
important to recognise at the outset that the two main parties to the contract are
referred to by different names but mean the same entity, eg:

Builder is known as the Builder (JCC), Contractor (AS2124 & AS 4000); and
Client is known as the Proprietor (JCC), Principal (AS 2124 & AS4000).

Throughout this unit we will refer to the standard terminology of AS4000.

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Topic 01 (Introduction & Contract Law).doc

Finally, Contract Administration is not aimed at teaching Construction Law or any

other form of law, its primary purpose is to make you aware of your role, duties and
obligations as a potential administrator of contracts on behalf of Contractors, Principals
or Superintendents within the construction industry. Many of these roles, duties and
obligations are founded in decisions in law or are determined by legally enforceable
agreements (contracts). Hence reference may be made to legal cases in law to aid your
understanding.

Types of Contract
There are two types of contract:

Formal so called because of the way in which they are entered into but also because
they do not require any consideration (value). These are rarely used in the context of
construction contracts and will not form part of this unit. They have to be signed by all
parties, all signatures witnessed and signed either under deed or company seal, hence
signed, sealed and delivered.

Simple most commonly used in our situation and is a result of parties identifying
their required elements and then performing their duties under the contract to deliver
those elements.

Law of Contract
The primary definition you need to make in relation to Contract Administration is
What is a Contract? and initially we will concern ourselves only with Simple
contracts:

1. Offer and Acceptance

2. A contract is an agreement between the parties to it and the parties must give
their genuine consent to the contract;

3. The parties to the contract must have an intention to create a contract;

4. There must be consideration to all parties;

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5. The objective of a contract must be legal;

6. All parties must be legally capable of entering into the contract.

A contract has therefore been defined as:

a legally binding agreement between at least two parties when one party makes a
request for service and the other party agrees to perform that service for an agreed
consideration.

Offer and Acceptance

A contract comes into existence when one party makes an offer that is unconditionally
accepted by another party. Therefore if the offer is not accepted unconditionally, it
may be a counter offer. So, if X asks Y to build a house for $60,000 and Y says that
she/he will but for $70,000 Y has not made an unconditional acceptance she/he has in
fact made a counter offer to the effect of I will build you a house for $70,000. It is
now up to X to accept unconditionally.

Alternatively the apparent offer may not be an offer at all it may be an Invitation to
Treat. Shop window displays showing items of clothing for sale and showing a price
tag are Invitations to Treat. The offer is only made when the potential purchaser
actually offers to buy it for the displayed sum of money (or another amount) and the
purchasers offer is unconditionally accepted. Purchasing of building materials from a
materials price list is in this category.

Offers may be withdrawn at any time up until the point at which they are
unconditionally accepted UNLESS (as is often the case in construction) there is a
separate contract requiring the offeror to keep the offer open for a certain period of
time. The point in time when an offer is said to be withdrawn is the point at which the
communication of its withdrawal is received not transmitted. If acceptance of the offer
is made prior to receipt of its withdrawal then a contract may be in force.
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Agreement & Genuine Consent

When all the terms of the contract have been detailed by the offerer and
unconditionally accepted by the offeree there is said to be a meeting of the minds and
where the parties are said to have considered all the terms and conditions and to have
agreed to them. The consent to the contract must be genuine and not forced.

Intention to Create a Contract

There must be an intention by all parties to the contract to create a contract and they
must show that intention EXPRESSLY. Day to day events and occurrences by all
people have many of the elements of a contract but there is no expressed intention to
create a contract.

An invitation to dinner at your friends house where you are

expected to bring the bottle of wine would not become the subject of a court order if
you failed to turn up.

Consideration

Consideration is value meaning that the parties to the contract must both get some
value or consideration from the contract. The typical construction scenario is that one
party will get a building fit for a certain purpose and as documented whilst the other
will be remunerated for their efforts in delivering that building.

5. Legal Objective
The objective of the contract, usually in our case a building, must be legal.

The

circumstances in the construction industry of having an objective that is not legal

would be highly unusual but concrete boots would be an example.

Legal Capacity

It is not always possible to precisely define whether a party has the capacity to enter
into a contract. In the case of a person being under age it is clear and you often see
advertisements requiring parental permission for people under the age of 18.

It

becomes vague when the question of drunkenness and lunacy is considered. In these
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circumstances it depend on the capacity of the person at the time and how affected by
the condition the person was as to whether the contract would be ruled as binding or
not.

Contracts from Implied Actions

Implied elements of a contract have been found to exist as a result of the performance
by the parties to it. Where one party acts as if they believe a contract exists and
undertakes the work it may be said that by their action they implicitly accepted the
offer and a contract could be found to exist. A contractor who starts work building a
house following a counter offer from you may be doing so under an implied
acceptance.

Privity of Contract
The rule of privity of contract is a common law rule; ie it has come about as a result of
case law judgements. In essence privity of contract describes the relationship between
the parties to the contract and states that they are the only parties who can acquire
rights or incur liabilities under the contract. In construction contracts it becomes an
important element because sub-contractors often find themselves in a position where
they may be part of a contractual requirement but are not able to enforce it because
they are not a party to it. A contract may for example enable the Principal to pay a
sub-contractor directly for work done under the contract. However the sub-contractor
who is not party to the contract cannot enforce the term of contract. In other words
there is no privity of contract between the Principal and the Sub-Contractor.

Letter of Intent
Often in construction contracts, there are delays in signing of a contract or preparing
contract documentation in time for the commencement of work. In such circumstances
contractors may ask or Principal may provide a Letter of Intent. The purpose of such a
letter is to confirm the intention of the Principal to enter into a contract. It appears they
can be of little consequence because if the contract is not formally signed it is likely that
a contract would exist since the actions of the parties would imply their intentions. In
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such an event and if the dispute soured relations to the extent that the work ceased and
was taken over by another contractor then the first contractor would be reimbursed for
their work on what is known as a Quantum Meruit basis. This is reimbursement of
the work for as much as it is worth.

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SELF ASSESSMENT QUESTIONS

Contracts

1. Explain how a contract may exist because one of the essential criteria is said to be
implied.[A1].

2. A road bridge over a river collapses sending the cars on the bridge into the water
below. One of the drivers in one of the cars is seriously injured as a result of the
fall. Is the injured driver of the vehicle prevented from claiming compensation for
his injuries as a result of not being privy to the contract for the design and
construction of the bridge[A2]?

3. Under what circumstance should consideration be given to the use of a Letter of

Intent[A3]?

4.

A contractor builds a house for his mother which he sells 5 years later when his
mother dies.

The purchaser subsequently sells the house after 4 years to a

purchaser who has various inspections undertaken to ensure the house is in sound
and good condition. Two years later the house develops serious and substantial
cracks. To what degree do you consider the contractor to be liable?

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School of Architecture, Construction and Planning

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Bibliography
Bailey, I. H. Construction law in Australia 2nd edition, North Ryde, N.S.W. LBC
Information Services, 1998.

Cremean, D. J.,Brooking on Building Contracts: the law and practice relating to

building and engineering agreements, 3rd edition, Sydney: Butterworths, 1995.

James, J. F. 1998, Contract Management in Australia, Longman, Melbourne.

Standen, D,. Construction Industry Terminology 3rd edition Melbourne RAIA Practice
Services. 1993.

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School of Architecture, Construction and Planning

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