Dr.
Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
Elements of a Contract
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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
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There must be a meeting of mind
A mutual mistake can allow either party to void a contract, but,
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unilateral error does not
Ambiguities are usually construed against the drafter of the
document
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Fraud or misrepresentation may enable the victim to void the
contract
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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
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association or by the owner who frequently construct projects.
Performance and payment bond forms are usually included
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Part III: Conditions of the Contract
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Include the general and special conditions
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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)
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Addenda and pre-bid changes to the contract are issued after the
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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
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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 industry-
specific terms given their normal interpretation
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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
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prove their interpretation was reasonable
8. Clerical errors are discounted or ignored, unless reasonably relied
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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’
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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)
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Negotiation & communication prior to contract award are reviewed
Prior dealings between the parties are examined. Example, a
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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
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If negotiations or prior communication shed no light on the issue, the
judge will look at local and national practice
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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)
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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
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State prompt payment acts governing retainage and the time of
payment may apply
Pay when/if paid clauses may be declared unenforceable
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State statutes will dictate licensing or registration requirements and
construction lien proceedings.
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You should consult with an attorney to determine what statutes may
modify the contract or otherwise affect recovery
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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).
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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]
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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.
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Although seldom used as a legal theory, equity can be invoked as
a theory of recovery when the contract and case law are unclear
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or an issue is not addressed by the Contract
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Privity of a Contract vis-
vis-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
contractor’s costs resulting from inadequate design
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
Privity of a Contract vis-
vis-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.
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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
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action against the designer or contractor for alleged design
or construction errors.
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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.
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Subcontractors cannot pursue claims directly against the
owner but must “pass through” their claim the general
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contractor who submits the claim to the owner.
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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.
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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
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Dr. Farrukh Arif
CE-5018 Construction Law Case Studies (Contextual Lecture)
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
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Construction loan agreements typically require that the
project be free of liens, leaving the owner the choice of
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paying or “bonding around” the lien to avoid termination of
the loan or interest increase.
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