Chapter -1: Understanding of a contract

Modern economic life is based on contracts.

You are free to make any bargain you wish, provided that it does not conflict with the public
interest, but when you have made your bargain then carry it out or compensate the other party for
the bargain he has lost.

If there is dispute, your contracts do not mean what you think they mean, They mean what a
JUDGE would think that they mean.

Hence, standard contract documents are to be followed.

What is a contract?

According to the dictionary, a contract is "an agreement to do something, especially one that is
enforceable by law."
A Contract is a bargain
A Contract is Risk
A contract is money

Functions of a contract

It defines the normal performance required from each party, variance in certain circumstances
should be within the framework of the contract.
It definc3es the share of technical, commercial and economic risks between the parties,
It identifies most of the predictable problems, which may arise during the contract and
prescribe machinery and procedures for dealing with them it they arise.

Formation of a contract

Every contract is an agreement but not every agreement is a contract.

A contract gives rise to obligations that are enforced or recognized by law.
The following elements must present for a contract to exist.
Intention to create legal relations
Offer - specification, price and terms of payment, COC
Acceptance - in full ( in part, rejected, run out of time)
Consideration

A Letter of Intent is not a contract.

Construction contracts - key issues

 Essential requirements

Incentive - for efficient performance

Flexibility - to permit anticipated change and to provide fair method of evaluation of such
change
Risk sharing - to party best able to control the risk

Contract provides a clear division of

Responsibilities
Legal obligations
risk allocation
payment regime

Contract documents
form of agreement
general conditions
special conditions
specifications
drawings
pricing document
programs, sometime
record of post bid negotiations

Matter dealt within the documents are

Legal
Technical
Financial
Organizational
Procedural

The contract should be used like script in a theater performance. It should be designed to suit the
specific needs of the project and referred to throughout the life of project to guide the performers
through the drama. Whenever any actor is not sure of what he is supposed to do, he can refer to
the contract.

Before contract is signed and work started, both parties to the contract agree to the terms. We do
this because we understand that we act more rationally at some times than at others. In the heat
of conflict, we may see only one side of an argument. Therefore, we set up a program of
procedures in advance, which we hope will safeguard the interests of everyone involved.
It is extremely important that we prepare contracts with as much foresight as possible. We need
to use our own experience and that of others to make sure that any situation that can arise during
the life of the contract is provided for.

If a contract is prepared with this kind of foresight and care, it becomes a powerful tool in the
hands of construction manager.
Why contracts?

Why is that contracts are used in construction? What purposes do contracts serve? The following
list shows some.

1. To make an agreement law-enforceable.

2. To record the terms of an agreement.
3. To specify what the contractor must do and what the owner must pay.
4. To specify what will be done if either party fails to perform.
5. To specify the quantity and the quality of work to be done.
6. To specify the time frame within which the work is to be completed and payment made.
7. To specify the means, method, terms and time of payment
8. To identify the parties to the agreement.
9. To identify the official agents or representatives of parties to the agreement and define their
authority and responsibility.
10. To set out in advance the courses of action that will be taken in different possible situations.
11. To define words and establish common meanings.
12. To specify what is and what is not included in contract.
13. To specify how contract will be terminated.
14. To specify the responsibilities of the parties not just to each other, but to third parties such
as: the government, the community in which the work is to be done, the workers,
subcontractors, materials suppliers, unions, etc.

FACTORS TO BE CONSIDERED IN PREPARING A CONTRACT

1. THE CONTRACT MUST BE FAIR

The owner wants to have his project constructed.
&
The contractor wants a profit.
2. THE CONTRACT MUST BE CLEAR
The intention of the contract is to communicate precise information to people who must
act on it.
3. CONTRACT LANGUAGE MUST BE CONSISTENT
4. DON'T REPEAT
say it once - say it in the proper place - let it be.
5. USE EACH PART OF THE CONTRACT FOR ITS PROPER PURPOSE
6. CONTRACT INFORMATION MUST BE RETRIVABLE
7. USE FORESIGHT
Try to foresee any possible area of confusion and clear them up in advance.
8. IF YOU WANT IT, GET IT IN THE CONTRACT
Contract Law
It is a legal obligation regarding contract.

Departure Point:
1. You are free to make any bargain you wish, provided that it does not conflict with the
public interest, but when you have made your bargain then carry it out or compensate the
other party for the bargain he has lost.
2. If there is dispute, your contract do not mean what you thing they mean, they mean what
a judge would think that they mean.
3. Hence standard documents are to be followed.

Definition: Contract is defined as an agreement concluded between two or more parties for
performing or not performing any work. If any person advances any proposal to any other person
and the latter gives his acceptance there to, they shall be deemed to have concluded a contract.
The main objective of entering into contract is to seek legal action/remedies if any party
breached the contract.

Elements of Contract:
For a contract to be legally binding and enforceable by law, the following elements must be
present.

1. Proposal and acceptance: Proposal put forward by one person to another person with
expectation and obtaining his consent for performing or not performing any work.
Acceptance is the consent given by a person in the same sense in which the proposer has
taken the substance of the proposal presented by him to the former
a. If a person advances a proposal to a person who gives his acceptance contract
exists.
b. If a person making a proposal states that he should be given notice of the
acceptance of a proposal within a specified period but doesnot receive such notice
within such period then no contract exist.
c. If no time limit is specified in the proposal, then it must be accepted within
reasonable time.
d. An offeror cannot bind the offeree by stipulation that if the offeror is not given
notice of rejection within specified time limit then he shall be deemed to have
accepted the offer.
e. If the offerer dies or becomes insane before his proposal is being accepted then no
contract exist.
f. If the offeree gives his consent with revision offeror may reject.
g. If the offeree offers proposals with conditions to be fulfilled by the offeree before
accepting the proposal and the latter doesnot do so, there is no contract.
2. The intention of creating legal relation by both the parties.
3. Considerations: It is the cause, motive, price or impelling influence that induces a
contracting party to enter into contract. Consideration can be described as something of
value that is exchanged by the contracting parties.
 4. Capacity to contract/Competence to contract: For a Contract to be legally binding and
enforceable, all parties must be capable to enter into contract. As per the contract act the
following persons are not capable of contract.
a. Age < 16 years but for labor contract < 14 years
b. Insane persons. Idiots, drunkards, frauds
However for the welfare of the persons listed above guardians can enter into contract in
his interest or on his behalf.
5. Free consent: No coercion, fraud, undue influence, deceit
6. Lawful purpose: Purpose of a contract should not be illegal immoral and against the
public policy.
7. Possibility of Performance: Impossible contracts are invalid.

Voidable Contract: As per contract act the following contracts are voidable, i.e. if the party
desire to make it void.
Forceful contract
Entered due to undue influence
Contract involving fraud or mis-statement or mis-representation.

Void Contract: As per contract act the following contracts become null and void.
Contrary to statutory law.
Ambigious, Vague and unlimited contract
Not possibility of performance
Contrary to public policy and welfare.
Signed by incompetent parties.

Discussion: All Contacts are agreement but all agreements are not contract.

Discussion
Rabi wishes to have an extension built onto his house and asks Kamal, a local contractor, to
provide a quotation. He gave Kamal a sketch plan showing where he thought there was a drain
that would have to be diverted. Kamal sent him an estimate of Rs 30,00,000 for the work and
he replied accepting quotation.

Kamal started work a week later and soon found that the drain was in much more difficult
position and would cost Rs. 300,000 more than he had though to divert. Kamal told Rabi that
because of the mistake, he was entitled to an extra payment and that it was impossible for him to
complete the work without going bankrupt unless Rabi paid him the Rs. 30,000 extra. Rabi does
not think that Kamal is entitled to the extra payment but because he is desperate to get the work
finished before his sons weeding a month later, he agrees to make the payment to Get the work
finished early. Kamal finished the work ahead of schedule but Rabi refuses to pay extra Rs.
300,000. Advise Kamal.