CA II - QS - Tutorial 1 - May 2013 - Proposed Answers

8/13/2019 CA II - QS - Tutorial 1 - May 2013 - Proposed Answers

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May 2013 - Contract Administration II

General guidelines on how to attempt questions related to ‘prolem type! on

contractual matters

1" Citation o# authorities $ %n o# the &most important requirements #or answering

question on contract is that you must e ale to ac' up the points you ma'e with

authority& usually a case or a statute" It is not good enough to state the current status is

such and such& without stating case or statute which says that that is the law" (hat

you need to do is to rememer the name o# the case& a rie# description o# the #acts&

and the legal principle which the case estalished" )ou need to 'now the #acts o# a caseto *udge whether it applies to the situation in a prolem question" +ong descriptions o#

#acts waste time and earn #ew mar's"

2" ,here is no right answer $ ,here is not usually a right or wrong answer" (hat

matters is that you show you 'now what type o# issues you are eing as'ed aout"

ssay questions are li'ely to as' you to discuss& criticise or e.aluate and you need to

produce a good range o# #actual and critical material in order to do this" ,he answer

you produce might loo' completely di##erent #rom your #riend!s ut oth answers

could e worth the same mar's"

3" /reath and depth o# content $ (here a question seems to raise a numer o# issues&

you will achie.e etter mar's y addressing all or most o# those issues than writing at

great length on *ust one or two"

Alternati.ely&

1" )ou need to identi#y which category this question elongs"

2" A good way to start is to pro.ide a de#inition andor eplain the general

principle in.ol.ed"

3" )ou need to identi#y the issues raised y the questions"

4" )ou may ha.e to use rele.ant clauses& case laws or reputale pro#essional

and or legal writer!s opinion i# applicale to support your answer"

5" )ou may ha.e to pro.ide a conclusion ased upon your argument ao.e #or

questions"

Tutorial No. 1 – Proposed answers

Q1. Discuss whether a contract is made in the following situations:

i) XY ad!ertises in "The #tar$ newspaper that there is a !acanc% for the

position of &onstruction 'anager.

ii) (& saw the ad!ertisement and mailed his application to XY compan% for

the position

iii) *hen contractor YTY su+mit a tender document with complete details at the

time and place as stated.

i!) *hen contractor YTY was in!ited to an inter!iew and was as,ed to re!ise

and resu+mit the tender.

!) *hen a letter of intent was gi!en to the contractor YTY.

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!i) *hen a letter of award was gi!en to the contractor YTY.

!ii) *hen the final contract document was prepared +% the consultant for signing

+% the -mplo%er and contractor YTY one 1) month later.

Proposed answers

,his question is under o##er and acceptance category and related issues"

i) (n offer or proposal is necessar% for the formation of an agreement. (n offer can

+e unilateral to the world at large or +ilateral to designated person. (n ad!ertisementis usuall% +ilateral in nature +ut can +e unilateral as in the case of Carlill . Carolic

6mo'eall. ( similar situation in the construction industr% is where an

ad!ertisement is placed for potential contractor to collect tender documents is

definitel% an in!itation to treat or +ilateral offer and calling them to su+mit their

offers. Therefore/ the current ad!ertisement +% XY is not an offer +ut merel% anattempt to induce offer. Case +aw - 7artridge . Crittenden 189: Therefore/

there is no contract

ii) 0enerall%/ if (& is responding to a unilateral offer +% XY/ a contract is form

the moment heshe mails it and compl%ing with all the terms of the unilateral offer

as in the case of postal acceptance. 2nder the current situation/ +% mailing hisapplication (& can +e considered as ma,ing an en3uir% or ma,ing an offer.

6ection 2a& Contract Act& 1850/ which states that an offer ma% +e e4pressed or

implied and mailing the application is in fact offer +% himself to the compan% to fillthe position. (t this moment/ there is still no contract as no acceptance was in place.

iii) 5n the construction industr% when an ad!ertisement is placed for potential

contractor to collect tender documents is definitel% an in!itation to treat or +ilateraloffer and calling them to su+mit their offers. % su+mitting his tender YTY can +e

considered as ma,ing an offer. Therefore/ there is no contract" Case law -

Ma*umder . AG 6arawa'

i!) *hen YTY was as,ed to attend an inter!iew is not an acceptance of his offer

+ut the commencement of a counter offer. There are clarifications or negotiations +etween +oth part% and the process of offer and counter offer are in progress during

the inter!iew stage with the final outcome is where the potential emplo%er re3uested

YTY to su+mit a re!ised offer. Therefore/ there is no contract at this stage. Case

+aw - ;yde . (rench 1:40

!) ( letter of intent is not an acceptance of his offer. 5t is a letter of comfort to YTY

with no contractual implication. 5t is 6ust to inform YTY to get read% for furtherconfirmation that a contract is to +e formali7ed. Therefore/ there is no contract.

Depending on the content of the 895/ there ma% +e monetar% implication if the

content contained additional terms for YTY to compl% and YTY did compl% and inthe e!ent that contract is not formali7ed for whate!er reasons/ pa%ment for that

special instruction must +e done +ut under 3uantum meruit +asis and not under the

contract rates. Case +aw - /ritish 6teel Corporation ." Cle.eland /ridge

ngineering Co" +td 18:1

!i) *hen a letter of award is gi!en/ a contract is formed e!en though the details %et

to +e compiled. This is good for YTY to commit to others who ma% +e part of histeam. The content of a letter of award will consists of the main terms of the future



formal contract to +e compiled +% the emplo%er through the consultant under the

traditional procurement approach. Please ta,e note of the important information anddates within the letter of award in relation to date of contract formed/ contract

duration/ site possession date and mo+ili7ation duration/

!ii) The contract documentation is a formal compilation of all the rele!ant letters/

agreements/ terms and conditions/ amendments if an%/ drawings/ specifications and

others. This document is to +e presented for stamping if this is to +e admitted ase!idence in future if there are dispute on this contract. There is no new contract

formed at this stage +ut 6ust a confirmation of all the pre!ious agreements to +e done

formall%.

Q. ;ow are %ou going to deal with < parties in a construction contract to a!oid

constructi!e claims from them=

9ne of the important elements of contract law is that which deals with what is called

pri!it% of contract. 5t is defined as the connection or relationship which e4ists

+etween two or more contracting persons.

Pri!it% of contract means simpl% that there is a direct contractual relationship

+etween two or more persons companies) to a contract. There is no pri!it% for

persons outside of the direct contractual relationship.

This is an important matter to consider +ecause man% a constructi!e claim has arisen

when an owner ultimatel% has to pa% the claim fails to understand that heshe cannot +ar, out orders to third parties without running the high ris,s of originating claims

from those parties. 5t is a wonderful position to +e third parties on a pro6ect where

the owner li,es to demonstrate that the% are in charge.

The concept of Pri!it% of &ontract is illustrated in a diagram +elow. 5n this diagram

there are three companies listed: &ompanies X/ Y/ and . &ompan% X has a contractwith &ompan% Y. There is pri!it% +etween X and Y. 5n turn/ &ompan% Y has a

separate contract with &ompan% . There is a separate pri!it% +etween &ompan% Yand . These two separate contracts ma% ha!e originated from a single pro6ect/ and

funded +% the same ultimate source.

;owe!er/ there is no contractual pri!it% +etween &ompan% X and &ompan% .

Thus/ if &ompan% X gi!es orders directl% to &ompan% / &ompan% has theopportunit% to pic, and choose what it wants to do/ and can su+mit a claim for its

ser!ices to &ompan% X through &ompan% Y or directl%.

Therefore/ if &ompan% X does not li,e what &ompan% is doing/ it must e4press its

concerns directl% to &ompan% Y/ who in turn must deal with &ompan% . To do

otherwise pro!ides opportunities for &ompan% to su+mit claims to &ompan% Y forthe interferences caused +% &ompan% X or a constructi!e claim directl% to &ompan%X.

0oing +ac, to the diagram +elow/ the ultimate pa%ing customer would +erepresented as &ompan% X/ this compan% ma% +e rel%ing on a single prime

contractor to manage the pro6ect on their +ehalf/ as represented +% &ompan% Y.

&ompan% Y ma% ha!e in turn issued multiple ne4t lower>tier su+contracts as could +e represented +% &ompanies l/ / </ etc. &ompan% X must e4ercise restraints

on their conduct when gi!ing directions to &ompanies l/ / </ or the% in!ite

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constructi!e claims from these firms. ?or this reason man% companies in the

position of &ompan% X will refuse to meet directl% with lower>tier parties withoutha!ing &ompan% Y present in such meetings.

Q<. *hat are the main differences +etween contract and tort=

(n important emerging issue in this area is the interpla% +etween principles of

contract law and tort law. *hile there is some o!erlap +etween them/ there are

,e% differences.

( contract is a !oluntar% agreement. The parties ma% agree upon a num+er of

stringent o+ligations which each part% promises to o+ser!e. 5n the e!ent of a default/the claimant will +e entitled to sue for the +reach of contract. 5n Tort/ o+ligations are

not accepted +% !oluntar% agreement +ut are imposed upon the persons concerned

+% the state.

5n an action for +reach of contract/ the plaintiff is entitled to damages for loss of

e4pectation. 5n an action in tort/ the plaintiff is onl% entitled to damages to

compensate them for their loss.

5t is easier to pro!e that damages flow from a tort/ than it is to pro!e that damages

flow from +reach of a contract.

The time limit for +ringing an action for +reach of contract is si4 %ears from the date

of the contract and twel!e %ears if contract is under deed. 5n actions in tort/ the time

is also generall% si4 %ears/ +ut the time does not start to run until the plaintiff mightreasona+l% ha!e disco!ered their cause of action. This can +e some time after the

+reach/ allowing plaintiffs in tort cases more time in man% e4amples to +ring

proceedings in tort than contract.

Tort law does not depend on concepts of consideration or pri!it%/ which ma% limit a

plaintiff@s a+ilit% to +ring a case in contract.

A



?inall%/ contri+utor% negligence is a!aila+le to the defendant in an action fornegligence/ +ut not in the case of +reach of contract.

6pecial 'nowledge

#ince 1BCA/ the courts ha!e recogni7ed that the terms of a contract could in some

cases impact on the tortious lia+ilit% +etween the parties. 5n the case of ;edley /yrne .

;eller and 7artners <1894= AC 495/ the court found that the defendant was prima

facie lia+le to the plaintiff for gi!ing negligent in!estment ad!ice. ;owe!er/ the%

then considered the terms of the contractual relationship +etween the parties. 9neof the pro!isions contained an e4clusion clause a!oiding lia+ilit% of the defendantto the plaintiff for inaccurate ad!ice. The court applied this clause/ with the result

that the defendants were not lia+le to the plaintiff in negligence.

This is a classic e4ample of the court allowing the parties to allocate the ris,s

themsel!es through the contract/ rather than appl%ing general standard principles

of negligence to re>allocate the ris,s +etween the parties independentl% of the partiesthemsel!es.

QA. *hat are the ,e% characteristics for fi4ed price and cost reim+ursement contracts=

Proposed answer

( fi4ed price contract can +e defined as a contract in which the contractor 3uotes a price for the whole of the wor,. 5n essence/ the contractor ta,es the ris, of 6udging

how much wor, is in!ol!ed and its cost. 5n practice/ if the contract documents do

not accuratel% reflect the wor, to +e done/ the contractor is entitled to !ariation inthe contract sum. (lternati!el%/ fi4ed price contract ma% +e defined as items paid for

on the +asis of a predetermined estimate of the cost of the wor,/ an allowance for

the ris, in!ol!ed and the mar,et situation in relation to the contractor@s wor,load/the estimated price +eing paid +% the client irrespecti!e of the cost incurred +% the

contractor.

5n essence/ a fi4ed price t%pe of contract is a contract where: The contractor contracts to do the wor, at a price he has estimated in ad!anceE

The contract price is not ad6usta+le +% reason of factors such as price increases/

currenc% fluctuations/ changes in ris,s/ etc. ;ence/ if the contractor is incorrect inhis estimation/ he ta,es the ris, of +eing wrongE and

The price ma%/ howe!er/ +e su+se3uentl% ad6usted due to instances of !ariations

ordered +% the client/ contract documents not accuratel% defining wor, to +eunderta,en/ etc.

&ost reim+ursement is a term used to descri+e one of the two principal methods ofma,ing pa%ment under a contract. 5n terms of definitions/ such contracts ha!e +eendefined as a t%pe of contract +% which the contractor recei!es all his costs together

with his fee or a contract in which the contractor is reim+ursed his actual cost plus a

fee to co!er his o!erheads and profit

The following pertinent matters need to +e ta,en notice on cost reim+ursement t%pe

of contracts: There is no finite sum tendered +% the contractor nor is one esta+lished at the time

of contractingE

F



The contractor is paid +ased on the prime cost of the wor, as defined in the

contract documents) plus a fee to co!er matters such as his o!erheads and profit/etc.E

Pa%ment of the contractor@s actual cost in!aria+l% ta,es into account an% attendant

fluctuationsE The +asis of the fee pa%a+le/ i.e. whether it is to +e a fi4ed fee/ percentage fee or

fluctuating fee is esta+lished when the contract is signedE and

The actual contract sum will onl% +e determined on completion of the wor,s andthe ascertainment of the final account figure.

QF. *hat are the pros and cons for each of them for fi4ed price and cost reim+ursementcontracts=

Proposed answer

7ros #or #ied price type o# contract

Pro!ides firm assurance of ultimate cost. 5nsures prompt ad!ice to owner of dela%s and e4tra costs.

Ge3uires minimum owner follow>up on wor,.

Pro!ides ma4imum incenti!e for 3uic,est completion at lowest cost.

5n!ol!es minimal auditing +% ownerHs staff.

Cons #or #ied price type o# contract

Ge3uires e4act ,nowledge on what is wanted +efore contract award.

Ge3uires su+stantial time and cost to de!elop in3uir% specifications/ solicit/ and

resulting from changes e!aluate +ids. Dela% completion +% months. ;igh +idding costs and ris,s ma% reduce 3ualified +idders.

&ost ma% +e increased +% e4cessi!e contingencies in +ids to co!er high>ris, wor,.

7ros #or cost reimursement type contract

Pro!ides ma4imum fle4i+ilit% to owner 'inimi7es contractor profits

'inimi7es negotiations and preliminar% specification costs

Permits 3uic,er start/ earlier completion Permits choice of +est>3ualified/ not lowest>+idding/ contractor

Permits use of same contractor from consultation to completion/ usuall% increasing

3ualit% and efficienc%

Cons #or cost reimursement type contract

No assurance of actual final cost No financial incenti!e to minimi7e time and cost

Permits specification of high>cost features +% ownerHs staff

Permits e4cessi!e design changes +% ownerHs staff increasing time and costs

QC. The fi4ed price and cost reim+ursement contracts are two t%pes of contracts that are

awarded +ased on pricingpa%ment criteria. 5dentif% their su+>classifications ande4plain when the% are commonl% used.

C



Proposed answer

The common su+>classification of fi4ed price contracts encountered in the

engineeringconstruction industr% are:

• 8ump sum contractsE

• 'easure and !alue contractsE and

• Turn,e% contracts.

8ump sum contracts are of the two principal t%pes.

•

*ith +ills of 3uantitiesE or • *ith drawings and specifications.

+ump sum ased on ills o# quantities contract is used predominantl% intraditional general contracts where the emplo%er causes the complete design to +e

underta,en and a detailed ill of Quantities Q) to +e prepared on his +ehalfE

which Q is then gi!en to the contractor for pricing. The Q full% descri+es the

materials and wor,manship and actuall% represents the wor,s to +e e4ecutedE wor,which +% its nature cannot +e accuratel% measured are descri+ed as pro!isional. The

Q is e!entuall% used as a +asis of effecting pa%ment to the contractor.

+ump sum contracts ased on drawings and speci#ications are used mainl%where:

• Detailed design wor, is not underta,en +% the emplo%erE

• The emplo%er is not confident of achie!ing a comprehensi!e co!erage of the

complete design re3uirements/ e.g. for a proprietar% s%stemE

• The si7e and nature of wor, does not 6ustif% the preparation of Q/ e.g. minor

reno!ation or maintenance wor,s/ etcE and

The emplo%er wishes to transfer the ris, of assessment of the wor, to contractoras far as possi+le.

'easure and !alue contracts come in the two +asic forms +ased on either:

• ( +ill of appro4imate 3uantitiesE or• ( schedule of prices.

Applications o# a ill o# approimate quantities contracts include the following

situations:

• *here the site conditions are not sufficientl% ,nown or defined until the wor,s

are actuall% carried out/ e.g. wor, +elow ground le!el in!ol!ing roc, e4ca!ationE

• *here the accurac% of the actual 3uantities cannot +e guaranteed or esta+lished

with reasona+le accurac% at the time of tendering/ e.g. pile lengths/ etcE and

• ?or a fast trac, pro6ect/ where earl% appointment of a contractor and

commencement of wor, on site is en!isaged +efore detailed design is finali7edand accurate ills of Quantities esta+lished.

A schedule o# prices contract is applica+le where time is !er% short or is not

practica+le for some reasons to prepare e!en +ills of appro4imate 3uantities. (

schedule ma% +e produced gi!ing descriptions onl% of the wor, to +e carried out andthe materials to +e used. The emplo%er ma% put prices against each item and re3uire

tenderers to state the percentage a+o!e or +elow the gi!en prices for which the%

would +e prepared to carr% out the wor,.

I



,urn'ey contracts can +e descri+ed as pac,age deal t%pe of contracts/ Design and

uild Design and &onstruct contracts/ -P&& t%pe of contracts/ etc the definingcharacteristic is the com+ining of all the fundamental tas,s of the pro6ect/ i.e. design/

production construction or +uilding) and management in a single pac,age. The

contractor ta,es full responsi+ilit% and carries sole lia+ilit% for design andconstruction.

5n such a t%pical contract/ the emplo%er approaches a contractor with a set ofre3uirements defining the emplo%er@s wants termed the -mplo%er@s Ge3uirements

co!ering +asicall% the following:

• #pecifications of wor, related to the performance re3uired called Performance#pecificationsE and

• ( proposed formula on how the wor, is to +e paid for.

The t%pes of cost reim+ursement contracts are dictated +% the formula adopted forreim+ursing the fee due to the contractor. ;ence/ such t%pes of contracts include:

• &ost plus fi4ed fee contractsE or

• &ost plus percentage fee contractsE

• &ost plus fluctuating fee contractsE or

•Target cost contract.

#uch contracts are still utili7ed in the following limited situations:

• 5n emergenc% situations where under the pre!ailing constraints/ such contracts

afford the +est alternati!es a!aila+le to the emplo%er to not onl% commence wor,

fast +ut also with minimum in!estigati!e wor,E

• *here through a pre!ious course of dealings/ an element of trust and relia+ilit%

has +een esta+lished +etween the parties ensuring that the formula adopted perthe contract is mutuall% ad!antageous and offers a @win>win@ solutionE and

• 5n ongoing contracts where the contractor encounters se!ere cash flow pro+lems

and is una+le to further finance his acti!ities on site/ to a!oid determination with

its attendant cost and time implications/ the most practical option would +e tocon!ert the contract into a @&ost Plus@ t%pe and finish off the wor,s on time/

discounting an% e4tra costs incurred.

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CA II - QS - Tutorial 1 - May 2013 - Proposed Answers

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