MDA Law
The Cycle of a Construction Contract
The construction industry is built on various contractual relationships between contractors, subcontractors and employers. Contract terms differ but at their core, the principles governing the law of contract are the same.
It all begins when you hear about this new project and you see that invitation to tender come through. The excitement is real! And you eagerly start preparing your tender. In order for a contract to come into being there needs to be an offer and an acceptance. Please remember that the call for tender is a mere invitation (usually from the employer or contractor) to generate offers and proposals (usually from the contractor or subcontractor) from competing companies for the specified works. Do not get confused, this is not an offer for you to accept the works. Offers lead to a contract while invitation or call for tenders lead to offers which are still subject to acceptance.
Slow down, contain your excitement, there are risks associated with tendering. The greatest risk in a tender process is a lack of clarity that can lead to uncertainties misunderstandings and eventually to disagreements and disputes. So make sure that the tender process is fully and clearly documented and that your tender meets all the requirements to conform with the invitation.
A works contract is created upon the acceptance of a tender.
Once the parties are satisfied, the employer will award the contract to the desired bidder and produce the letter of award which confirms that the employer has accepted the bidder’s proposal and agrees to proceed to the next step and sign a formal contract. This letter is promising but is often not legally binding as it just falls short of a formal contract and there are no legal requirement for a contact to be signed. An agreement to agree is not binding.
If you could not contain your excitement and commenced with the works without signing the contract, it does not mean that there is no contract in place at all. A contract does not need to be in writing and signed for it to be binding on the parties as acceptance of its terms can be either verbal or implied through conduct. You are however now subject to the common laws governing these types of contracts as opposed to the specified clauses in the standard contracts which are often clearer and provide for simpler remedies.
In this unfortunate instance, not all hope is lost. The common laws have you covered but the fight is messier, tougher and longer as the fight (eventually) ends up in a court room (instead of a luxurious board room for an alternative dispute resolution). If you did your work but you are not getting paid, normally the contract is clear on your remedies and rights but now, a concept known as unjustified enrichment comes into play. If you are able to prove that the employer had been enriched, that you had been impoverished, that there is a causal link between the enrichment and the impoverishment, and that the enrichment was at the expense of the person who was impoverished, then you have yourself a successful unjustified enrichment claim. If you found this paragraph confusing, read it again and let that be a reminder to always sign your contract before you start working.
Ok so we know that you are the one who put in the offer, you have been awarded the contract, we understand that acceptance of the offer does not have to be in writing (but it should) and that your offer was in fact accepted. Let’s take a look at the terms of the contract.
You will often have the standard terms of contract and the particular terms of the contract. The standard form of contract will usually be one of the generic standard form construction contracts, stipulated by the employer. The particular terms, which are unique to the specified project, amend the main, standard form of contract and should therefore always be considered very carefully. The latest revision of the particular terms and conditions should always prevail and take precedence over the terms of the standard form of contract, unless specifically told otherwise.
The key to a successful contract is a proper understanding of its terms and conditions so it is always a good idea to have a dedicated team that knows the contract well, is able to answer questions and ensure compliance throughout the project.
Now that you have considered all the terms of the contract, you understand the project specifications and exactly what you have to do, go ahead and get signing.
There will often be a requirement to provide a guarantee as a form of security for the parties. The most common forms of a guarantees is a performance guarantee that ensures the contractor executes the works.
Another form of security is the retention guarantees where a percentage of your payment is deducted every month and only released on completion of the works – a release of a portion of the sum held at practical completion / taking over of the works by the employer and the balance being released upon the expiry of the defects liability period.
There is a lot of money on the line here and it is therefore a good idea to always engage, make sure the progress is smooth and understand any mistakes or issues early on.
When you run into problems, don’t be afraid to speak up. Your contract tells you that you must notify and claim for the delays within a stipulated time and if you don’t, you could find yourself in trouble as time bars are difficult, sometimes impossible, to overcome. If you are time barred from notifying/claiming a delay, after the contractual end date of the project, you will be charged hefty penalties. Please! Notify every single delay on time and consider each one carefully thereafter. You might realise that you do not need to put in a claim at the end (and decide to withdraw it) and that’s fine but you do not want to miss out on your chance to claim.
Throughout the project, on a monthly basis, you will be submitting documents for payment for works done and the payments will then be certified in payment certificates. These certificates are not final and get adjusted throughout the project. At the end of the project, all the payments certified and paid get reconsidered, the works get remeasured, the amounts are adjusted and a final payment certificate is then issued.
A payment certificate is a liquid document which means that the amount certified does not have to be proven, that amount is due and owing. If that amount is not paid on time, you would be able to approach the court for summary relief known as provisional sentence or summary judgement. The only defences that may be raised to a payment certificate are fraud or the lack of authority of the signatory to the payment certificate.
So you are continuing with your works, you get that payment certificate but you do not get paid. You suspend the works, still nothing so you terminate the agreement in terms of the provisions of the contract. Please do not rush to terminate without considering your position first. Will your attempt to terminate result in repudiation? A party to a contract can be said to have repudiated it when they show that they are unwilling or unable to fulfil their obligations. The other party’s remedy for this is to accept the repudiation and terminate the contract. If you terminate without valid grounds to do so, the other party may claim that you have repudiated the contract, accept that repudiation and terminate the contract themselves.
When the contract is terminated, the agreement ends and most of the obligations are discharged. Now you have a claim for damages. The contract will tell you whether some clauses of the contract survive termination, such as the dispute resolution clauses and the latent defects clauses.
Approaching the end of the contract, you can breathe again, the works are complete! But the employer is not fully satisfied, you have reached practical completion but there are still minor issues that need attention.. the defects liability period has now commenced where the obvious, apparent or patent defects require fixing. Once that period expires or on the date on which the defects have all been corrected (or after the contractually specified time), the employer is satisfied, the project is finally complete, the securities are released, the final payment certificate is issued where all the mistakes (we spoke about earlier) are corrected, you get paid the final amount and the contract has come to an end.
Sho, what a ride! But..
Hold on, don’t go anywhere, you still need to hang around for the hidden or latent defects liability period which has now commenced. This is when all the unseen defects start to come up, which you, as the contractor responsible for the works, are still under an obligation to fix. There is no time limit on this period under the common law but most standard form contracts cap the latent defects liability period at 5 or 10 years.
Don’t worry though, the employer will certainly let you know if anything comes up so in the meantime, you are done. Go find another tender and lets start again!
