BASIC CONTRACT LAW

1. A contract is a promise that the law will enforce. A contract can be a simple oral agreement in which one person promises to work for another in return for payment. Or, a contract can be a complicated document incorporating a variety of supplementary materials and running hundreds of pages in length. Construction projects usually involve several parties and require several different contracts. On a traditionally structured project, for example, there are separate contracts between the owner and the design professional, the owner and the general contractor, and the general contractor and the subcontractors. These contracts establish the relationships between the parties and define their rights and responsibilities. BASIC CONTRACT LAW

2. ContractRequirements Legallyenforceable contract results from the following elements: • • Mutualassent • • Consideration • • Legalcapacity to contract • • A legallypermissibleobjective

3. MutualAssent A contract is not legally enforceable unless two or more parties haveagreed to be bound to its terms. This is called mutual assent. Partiesmanifest their mutual assent to contract when one party makes an offerand the other party accepts that offer. An example of an offer in theconstruction industry is a bid. In the bid, the contractor essentiallystates, "I offer to build the project described in the contract documents, according to their terms, for 'x' dollars." The owner accepts the offer byawarding the contract to the selected bidder.

4. An offer has been made if the party who received it (in legal terms, the offeree) has reason to believe from the surrounding circumstances, and from the words and actions of the party who made the offer (called the offeror), that the offeror intended to invite the offeree's assent to a contract. An offer creates in the offeree the capability to accept it and make a contract. Once the offeree accepts the offer, a contract has beenformed. A contract cannot be formed unless the offer is accepted exactly as offered. Sometimes the response to an offer is neither to accept it as offered nor to reject it completely, but to propose modifications to the original offer. An offer that is modified by the offeree and proposed to the offeror is called a counteroffer

5. CASE : Assume, for example, that an architect offers to design a new home for apotential homeowner. The terms of the architect's offer are that he willperform basic services up to the time when a building permit is issued fora fixed fee of $10,000. In response to that offer, the homeowner saysthat he will hire the architect if the architect performs servicesthrough the actual construction period, and for a fee of $9,500. Thehomeowner's response is the counteroffer because it contains termsdifferent from those in the architect's original offer. The counterofferterminates the architect's original offer. That is, the homeowner cannotchange his mind and accept the original offer unless the architect agreesto allow it. The counteroffer is, effectively, a new offer that the architectis free to accept or reject. • A series of offers and counteroffers are often part of the preliminary contract negotiations. This process narrows the disputed terms of a potential contract and may eventually bring the parties to agreement and the formation of a legally binding (enforceable) contract

6. Consideration • A contract is not legally enforceable without consideration. Considerationis the price, motive, or benefit that induces the parties to form acontract. For consideration to exist, both parties to the contract mustintend to enter into the contract and must be willing to take on theobligations associated with it. Each party furnishes consideration tosupport his or her part of the deal. In a typical construction contract, forinstance, consideration is a promise to pay money in exchange for apromise to perform work. Consideration involves a bargained-forexchange of something of legal value. • Assume, for example, that apainter promises to paint the house of someone to whom he is notrelated and to whom he owes no obligations. If that person promises topay him $3,000 (which is not otherwise owed), the promises have legalvalue. The parties bargained and undertook to exchange promises to dosomething that they otherwise had no obligation to do.

7. LegalCapacity to Contract A contract is not enforceable if one or more of the parties who enteredinto it did not have the legal capacity to do so. Incapacity arises if a party,at the time the contract was made, was either: • Under age (less than 18 or 21 years old, depending on state law) • Intoxicated so as to be incapable of understanding the nature of his orher action • Mentallyill • Underlegalguardianship

8. LegallyPermissibleObjective Finally, the law will not enforce a contract whose objective violates a statute (a law enacted by the local, state, or federal government) or the common law (law derived from the law of England and developed through court decisions). A contract that requires one or more of theparties to perform an illegal act, therefore, is not enforceable. Anexample of an illegal contract is one which requires an architect to disregard fire codes or other building safety regulations.

9. ModifyingContracts A modification is a change to a contract which is made after the contract has been executed (signed by both parties). A change order is an example of a modification to a construction contract whereby the parties agree to a different price, different services, or perhaps a different quantity of materials. The parties are free to modify the agreement, but all theelements necessary for contract formation must be present in order forthe contract to be enforceable as modified.Theonly element that is likely to be missing from a modified contract isconsideration. For example, a contractor could claim that certain workwas not required under the original contract, and subsequently refuse toperform such work unless a modification is agreed upon which wouldprovide him with additional money. The owner may agree to pay the • contractor to perform the work. If the owner does not pay, however, the • contractor may not be able to enforce the modification, due to lack of • consideration. If the work was, in fact, required by the original contract, • the contractor already had a duty to perform it. By promising it again, • he gave nothing of legal value in exchange for the owner's promise to • pay. The contractor had a prior existing duty to do the work and provided • no new consideration for the modification.

10. to pay thecontractor to perform the work. If the owner does not pay, however, thecontractor may not be able to enforce the modification, due to lack ofconsideration. If the work was, in fact, required by the original contract,the contractor already had a duty to perform it. By promising it again,he gave nothing of legal value in exchange for the owner's promise topay. The contractor had a prior existing duty to do the work and providedno new consideration for the modification.

11. InterpretingContracts • One of the reasons for reducing a contract to writing is to document what the parties have agreed to should questions or disputes arise. Whenthis happens, it is necessary to look to the contract to interpret its meaning. Therefore, it is important when preparing contracts to makethe contract language as explicit as possible. Parties can then avertor resolve most disputes simply by referring back to the terms oftheircontracts. • There are two basic ways to interpret written contracts: Look to the contract's intent and Apply standard rules of interpretation

12. Intent A fundamental rule of contract law is that parties are generally free to contract on terms to which they can agree. For this reason, when ajudge or arbitrator interprets a contract, he or she first attempts todetermine the parties' intent. To determine intent, judges and arbitratorslook to the wording of the contract, to customs in the industry, tocommon usage of terms, to the parties' conduct, and to surroundingcircumstances. If a judge or arbitrator cannot discern the parties' intent,then he or she will apply other standard rules of interpretation to thecontract, or fill in any incomplete portions as deemed proper

13. Standard Rulesofinterpretation

14. ImplicitTerms and Conditions There are certain terms, however, that are frequently omitted from theexpress language of most construction contracts. Regardless, courtsregularly infer promises on the part of the owner, design professional,and contractor. Owners implicitly promise contractors: • Cooperation and noninterference • Access to the construction site • Fair interpretation of the contract documents • Accuracy in the information provided • Adequacy of drawings and specifications Conversely, contractors implicitly promise owners: • Qualityworkmanship and materials • Timelypaymentofbills • Compliance with building codes and applicable laws• Adherence to the progress schedule Design professionals implicitly promise to exercise that degree of skill and • care which can reasonably be expected from similar professionals • practicing in thecommunity.

15. Implicitterms (2) Conversely, contractors implicitly promise owners: • Qualityworkmanship and materials • Timelypaymentofbills • Compliance with building codes and applicable laws• Adherence to the progress schedule Design professionals implicitly promise to exercise that degree of skill andcare which can reasonably be expected from similar professionals practicing in thecommunity.

16. CONTRACT PROVISIONS THAT MUST BE REVIEWEDFOR CLARIFICATION 1. Owner’s responsibility • Drawings and specifications (construction documents) • Site layout • Soil borings and site conditions • Environmental reports and approvals • Abatement of any hazardous material • Special studies (traffic, water, utilities) • Permits clarification • Utilities • Disputes with adjacent owners or municipality • Testing responsibility • Other areas where the owner has control and must submit the information

17. 2.Schedule • Type that has to be prepared • Updates required • Penalty clauses • Substantial completion provisions • Delays (not covered by force majeure) • Extensions • Delays caused by owner or owner’s subcontractors or vendors

18. 3. Costs • As defined in the contract • Allowances and how to be used • Definition of allowance items • How will GMP be impacted by actual cost vs. allowances allocated? • Contingency and how is it to be used and who controls it? • General condition’s clarifications (what is included and what is excluded?) • Inflation clause • Costs covered by the owner • Value engineering • New regulations by municipal and government agencies • Auditing of project by the owner

19. 4. Change orders • How defined• Method for developing costs• Approval process• Who signs off on any change orders?• Will labor rate

20. 5. Disputeresolution • Records that have to be kept • Type of daily reports that have to be maintained • Owner and CM/GC executive review • Independent review board • Mini trials • Mediation • Arbitration • Other legal means, including litigation • Notice provisions

21. Major parties in realizationofcontract

22. Communication Matrix in TraditionalContract

23. General Conditions • The plans and specifications are the legally binding description of what is to be constructed. (SCOPE OF CONTRACT) • The proposal form is where the contractor offers to perform the project for a certain price. Additional documentation must be added to the bid package that describes the contractual relationships between the owner and the contractor. • The general conditions are the portions of the bid package where these duties and obligations are defined. Although the language may seem legalistic, a construction contractor must understand all items in the general conditions for any project he or she • bids on. Requirements in the general conditions have a direct bearing on contract bid prices

24. There are many differenttopicsthatare includedin thegeneralconditions.Theyincludewordingthatdescribes: • The duties of the owner and contractor. The general conditions provide explanations of what is to be provided by the contractor and owner. • General project requirements. Definitions of the project scope and definitions for the meaning of terms used in the contract, plans, and specifications are given in this section of general conditions • Frequency of payments to the contractor dur ing construction. Periodic payments to the contractor during construction are typically ca lled progress payments. • Method of measuring progress and calculating the amount of the progress payment. • How a contractor will be paid and the methods for calculating project progress are described in the general conditions.

25. For example, if the project is done on a lump sum basis, some method will be described that will allow determination of how much progress has been made in a particular billing period so that the payment the contractor is entitled to can be calculated. • Damages for late project completion. Damages or penalties for late completion of a project are described. Contractors are often assessed monetary liquidated damages on a per diem basis for completing a project later than the completion date specified in the construction contract. • Mechanisms for extending the project duration. Projects are often delayed. Often additional time, called a time extension, is given to a contractor to complete work if problems beyond his or her control have occurred that delayed the project. The method for requesting a time extension is described, as well as the reasons for which a time extension may be requested.

26. Mechanism for modifying the original design during construction. Construction projects must often be modified during construction. These modifications often involve a change of cost. These modifications to the project cost are called change orders and are negotiated between the owner and contractor. The contractual arrangements governing requests for changes to the original contract are described in the general conditions. • Inspection of the contractor's work. How and by whom the contractor's work will be inspected for compliance with the specifications and quality is defined in the general conditions. • Quality requirements. In the general conditions, sections are typically inserted that give the owner the right to reject work that he or she believes to be of substandard quality.

27. Owner's right to stop or suspend work. General conditions have clauses that allow the owner to stop or suspend work. This allows an owner's organization to stop a project if it runs out of money. • Responsibilities for permits. The general conditions define who is responsible for obtaining building and environmental permits. • Handling of claims. Claims are unresolved conflicts between the owner and the contractor. General conditions often contain clauses that define how claims are to be handled.

28. Insurance requirements. General conditions define liability and property damage insurance that must be obtained by the contractor to protect the owner. • Bonding requirements. Several bonds are usually required for a construction project. As we have discussed ea rlier, a bid bond must be submitted with the bid. • The contractor awarded the contract will typically be required to also obtain performance and payment bonds.

29. General Conditions – last slide • Definition of retainage requirements. Retainage is funds withheld from progress payments until the end of the project as an incentive for project completion. • The amount withheld is usually 10%. In a large project, this is a substantial amount and provides an incentive for the contractor to finish all work. Retainage is returned with the contractor's last payment. This requirement will be defined in the general conditions. • Reasons for contractor termination. The general conditions define the reasons a contract with a contractor may be terminated before the completion of the project.

30. There are many differenttopicsthatare includedin thegeneralconditions.Theyincludewordingthatdescribes: • The duties of the owner and contractor. The general conditions provide explanations of what is to be provided by the contractor and owner. • General project requirements. Definitions of the project scope and definitions for the meaning of terms used in the contract, plans, and specifications are given in this section of general conditions • Frequency of payments to the contractor dur ing construction. Periodic payments to the contractor during construction are typically ca lled progress payments. • Method of measuring progress and calculating the amount of the progress payment. • How a contractor will be paid and the methods for calculating project progress are described in the general conditions. For example, if the project • is done on a lump sum basis, some method will be described that will allow • determination of how much progress has been made in a particular billing period • • so that the payment the contractor is entitled to can be calculated.