Elements of a Contract

Elements of a Contract

A construction contract is an agreement between two parties

for performance by one party and payment by the other

The law recognizes performance and payment as duties and

provides a remedy if one party fails to perform (i.e. breaches)
the terms of the agreement

The contract should state the work to be performed, the price,

and when the contractor will be paid

The contract determines what has to be done and how to

compute time and compensation for work beyond the contract.

The contract terms are critical in determining the rights and

obligations of the parties in the event of a dispute

If the issues are not spelled out, you must rely on provisions of
applicable common laws or statutes

Elements of a Contract
1. An offer

Must be clear, complete, and communicated

It is valid for a reasonable duration

Can be revoked prior to acceptance unless otherwise
specified
2. An acceptance

Must be absolute and unambiguous

3. Agreement
There must be a meeting of mind
A mutual mistake can allow either party to void a contract, but,
unilateral error does not

Ambiguities are usually construed against the drafter of the
document

Fraud or misrepresentation may enable the victim to void the
contract

Elements of a Contract
4. Valid Consideration

Is the actual or promised exchange of money, goods, services, or

some action or inaction

5. Between Competent Parties

The parties must have valid authority to contract for their organization

A contract signed by either a minor or someone who is mentally
impaired can be voided

Unlicensed contractors usually cannot enforce payment even if they
have fully performed their obligations

6. Legal Form and Content

Contract must conform to legal requirements. Contracts for actions

that are illegal or against public policy are unenforceable

Oral contracts and oral modifications to contracts are generally

enforceable, but difficult to prove

Most construction contracts require written authorization to perform

extra work, which would generally negate an oral agreement or

contract modification

Elements of Construction Contract Documents

Part I: Bidding Requirements

Advertisement/Invitation to Bid
Instruction to Bidders
Proposal Form
Bid Bond Form
State and Federal Requirements

Part II: Contract Forms

Usually on a standard form, prepared by a design professional

association or by the owner who frequently construct projects.

Performance and payment bond forms are usually included

Part III: Conditions of the Contract

Include the general and special conditions

Elements of Construction Contract Documents

Part IV: Technical Specifications
Describing material required, quality of workmanship, required
procedures or techniques. Usually organized in two levels:

Level 1: Organization into divisions

Level 2: Organization of divisions into sections:

Scope: defines the work covered

Materials: standards, brands, types, strengths, etc.
Workmanship: means and methods, testing
Measurement and payment:, on unit price contracts

Part V: Plans & Drawings

Elements of Construction Contract Documents

Other elements of the contract documents
Soil reports and any special studies or tests included or referenced in
the contract documents

Addenda and Contract Modifications (approved C.O.s)

Addenda and pre-bid changes to the contract are issued after the

bid docs are released to bidders but before bids

Record approved changes on the plans and specifications and
schedule of values Scope: defines the work covered

Rules of Contract Interpretation

Contract interpretation begins with a careful reading of the Contract.
Only if ambiguous will a contract be interpreted outside the contract
(i.e., from other documents, legal precedents, or conduct of the
parties)

The rule of contract interpretation include:

1. The expressed intent of the parties in the written agreement is the
most important factor. If this is unclear, the intent of the parties may be
inferred from the documents of from their conduct. (Example: a history
of paying for a certain type of changed work on other projects may be
used to require payment for that same work on this contract
2. The interpretation of ambiguities must be reasonable, as made by an
experienced contractor
3. The ordinary meaning of the words is used, with technical or industryspecific terms given their normal interpretation

Rules of Contract Interpretation

4. The implied terms necessary to comply with the explicit terms
become part of the contract (e.g. forming concrete is implicitly required
by a contract to place concrete)
5. Words and phrases must be interpreted within the context, with all
parts given equal weight
6. Special conditions prevail over general conditions
Handwritten terms prevail over printed terms
Words prevail over numbers
7. Absent any other reasonable interpretation, ambiguities are
construed against the drafter of the document. However, the other
party must demonstrate reliance on the contrary interpretation and
prove their interpretation was reasonable
8. Clerical errors are discounted or ignored, unless reasonably relied
upon.
A mutual mistake (i.e., both parties misunderstand the true facts of an
issue) can be a reason for reforming a contract to reflect both parties
intent.

Rules of Contract Interpretation

9. Oral or superseded written agreements may be used to interpret an
ambiguous written contract. Prior negotiations are assumed to be
merged into the document and cannot modify unambiguous clauses.
They can be used to clarify ambiguous terms.
10. The conduct of the parties helps to interpret a contract or to imply a
contract, and can modify or supersede portions of an agreement.
11. Separately negotiated, or added, terms and conditions supersede
originally included material or materials that were not separately
negotiated. Therefore, all handwritten changes should be initiated and
dated by both parties

Example of Contract Interpretation

A contract that requires excavation to a reasonable depth before

backfilling is ambiguous.

The judge or arbitrator first reads the contract as a whole to see if

there is any explanation within the contract for reasonable depth

If another part of the contract requires excavation for a similar

condition to at least 10', then 10' may be interpreted as reasonable

If the contract is silent, the judge then goes outside the contract, i.e., to
extrinsic evidence (not essential part of the contract)

Negotiation & communication prior to contract award are reviewed

Prior dealings between the parties are examined. Example, a
comment during a pre-bid conference that poor soil conditions may
extend to 6' down would indicate that 6' was reasonable

Or, 8' was required on a previous contract might be considered
reasonable

If negotiations or prior communication shed no light on the issue, the

judge will look at local and national practice

Patent versus latent Ambiguity

If an ambiguity is patent (obvious), a contractor has a duty to alert the
owner. Failure to alert the owner may make the contractor
responsible for the increased cost.

It is difficult to see how an error can be patently obvious to the
contractor during the 2 - 4 weeks bid period, when it was not obvious
to the designer and the owner during the 6 - 12 months design
process.

Industry Practice & Standard

Can be crucial to interpreting the contract, if the contract is unclear or
does not address an issue. (Example: tolerances)

Modification and Clarification of the

Contract - Outside the Contract
Contract provisions can be supplemented or superseded
by state or federal statue and common law.
Statutes: State Statutes (laws) and common law may
supersede certain contract provisions.

No damage for delay clauses have been declared void on public
work projects by the legislature in some states

State prompt payment acts governing retainage and the time of
payment may apply

Pay when/if paid clauses may be declared unenforceable

State statutes will dictate licensing or registration requirements and
construction lien proceedings.
You should consult with an attorney to determine what statutes may
modify the contract or otherwise affect recovery

Modification and Clarification of the

Contract - Outside the Contract
Common Law: Legal precedent, also called case law,
consists of previously decided cases or court
opinions.

Is used to interpret contracts and provides guidance for
conditions not contemplated by the contract

Example: Industry Practice is a common law principle

Example: the actions of the parties (on this or prior projects)
may be used as evidence of how a contract should be
interpreted. The parties actions may modify or waive a
contract provision or be used to interpret the intent of the
parties. (Owners history of paying for verbally directed extra
work can supersede a clause requiring a singed CO before the
contractor perform the extra work).

Modification and Clarification of the

Contract - Outside the Contract
Equity: Equity means fairness.
Quantum Meruit (one equitable theory of Recovery)
[Latin: As much as is deserved]
A doctrine by which the law infers a promise to pay a reasonable
amount of labor & materials furnished, even in the absence of a
specifically enforceable agreement between the parties.
Although seldom used as a legal theory, equity can be invoked as
a theory of recovery when the contract and case law are unclear
or an issue is not addressed by the Contract

Privity of a Contract visvis-a-vis the Designer

Damages to the contract due to actions/inactions by the
designer ordinarily must be claimed against the owner.

The owner may seek recovery from the designer in a
separate action

Under AIA document A201 and case law, the designer
assumes certain legally enforceable contractual duties to
the contractor:

No-interference

Reasonable contract administration

Impartiality in the resolution of disputes

The owner implicitly warrants the accuracy and sufficiency
of the contract documents, and therefore liable for the
contractors costs resulting from inadequate design

Privity of a Contract visvis-a-vis the Designer

In most states, the Economic Loss Rule, which prevents the
recovery of purely economic losses from a party absent a
contract, prohibits a tort (wrongdoing) action by a
contractor against the designer.

In some states, however, contractors may pursue a tort
action against the designer. This litigation is outside the
contract and is based on the common law principle that the
designer has a duty of reasonable care to third parties
(contractor) who either build or use the project.

Third parties injured on the project after completion of
construction, or subsequent owners of the project who
discover construction deficiencies can also pursue a tort
action against the designer or contractor for alleged design
or construction errors.

Subcontracts
Flow-down provisions from the prime contract

Nearly every subcontract provides that applicable provisions
of the prime contract flow-down to the subcontract

Subs need to understand the prime provisions and have a
copy before signing a subcontract

Subcontracts
Privity of Contract

Means having a direct contractual relationship with another

Although most subcontracts bind the S/C to applicable
terms of the prime contract, this provision does not create a
direct contractual relationship between the subcontractor and
the owner.

Subcontractors cannot pursue claims directly against the
owner but must pass through their claim the general
contractor who submits the claim to the owner.

If unable to obtain a pass-through agreement with the GC.,
subcontractors can file a lien on private projects which forces
the owner to respond through the general contractor.

Subcontracts
The Severin Doctrine
The owner is not liable for damages to the subcontractor,
unless the GC is obligated to pay the subcontractor (for
damages caused by the Owner)
Subcontractor Claims against the GC or other Subs
Are becoming more common, especially for scheduling
delays.
GC claims against subcontractors and suppliers
Collect damages by back charges

10

Subcontracts
Construction Lien


Subs and suppliers have lien rights or bond claim rights to

obtain payment even without Privity of contract

Liens apply tremendous pressure on the Owner and GC to

resolve subs issues

Construction loan agreements typically require that the

project be free of liens, leaving the owner the choice of
paying or bonding around the lien to avoid termination of
the loan or interest increase.

11