Contract Formation in Construction

Introduction

The Construction Law is made up of employment law, planning law, commercial law, tort and contract law (Dada & Jagboro, 2015). This law mainly helps the companies to deal with matters regarding building and construction, engineering and other fields as well as covers a wide range of issues faced in legal procedure relating to contract, sureties and guarantees, bonds, liens, construction claims, consultancy contracts and other interests. This branch of law deals with different parties present in the industry related to construction. These involve construction workers, planner, architects, builders, quantity surveyors, surveyors and financial organisations (Adriaanse, 2016). The construction law is seen to build on the basis of general legal principles and methodologies by incorporating them in to form the regulatory framework. The report discusses five areas which are Letter of intent and contract formation, practical defects and completion, collateral warranties and design responsibilities, contract arrangement and payment terms and lastly the dispute resolution involved in construction contract law.

I. Letters of Intent and Contract Formation

In many cases, various dire consequences are being faced at work when it initiates without any form of agreement which defines the way the work is to be executed. A contract is defined as the promise enforced by legal document between two parties which if breached or violated allow the party who is aggrieved to have some sort of remedy in a legal way. The contract developed in this case is limited to the main contractor for performing the obliged roles and duties related to the construction works whereby in some other contracts it includes operation of a financial project being designed. The contract laws recognise and govern the rights and duties which arise from agreements. According to the common law, the formation of contract entails an acceptance, offer and consideration that are being followed by an essential that is mutual intention to remain bound or create a legal relationship (Adriaanse, 2016). The majority of the contracts developed in the oral way are bindings but there are those which are to be formulated in the form of writing that is to be signed and dated in a proper way for the destined parties to make them bound by the legal terms mentioned in the contract. In civil law, law of obligation underlines the contact law (Thomas & Wright, 2016). All forms of agreements are not required to be contractual in nature as all the parties involved have the noble intention of remaining legally bound to one another. For instance, “gentleman’s agreement” is not the one which is legally enforceable. The case of RTS Flexible System Limited vs Molkerei Alois Muller GMbh & Co KG (2008) informs that the key findings are overturned by the court of appeal and the lower court (RTS Flexible System Limited vs Molkerei Alois Muller GMbh & Co KG, 2009) (www.supremecourt.uk, 2009). It proceeded to the Dispute Court and the court of appeal (Supreme Court [House of Lords]) ruled the verdict that the mentioned parties are to agree at first on their contractual terms before initiating their work. The Letter of Intent (LOI) in the mentioned case asserted that till an agreement is formed between the mentioned parties and it is been signed by them no terms of the contract are bindings for any parties to work.

Sisyphus Limited is to be reported that to form a contract, the parties are to reach mutual assent which is also named as “meeting of the minds” that is to be attained by keeping into play an offer and acceptance which must not required to vary in terms. This is also referred as “mirror image rule”. The offer is mainly referred as a specific statement which bears the intention and willingness of the offerer to be bound in a legal way for fulfilment of certain conditions (Clough et al. 2015). The principles mentioned in this case are advanced as per the review of the authorities done by the Supreme Court in the case of British Steel Corporation vs Cleveland Bridge and Engineering Co Ltd (1984). In the case of G-Percy Trentham Limited vs Archital Luxfer (1993), it is seen that a contract developed can be emanated partly by the virtue of the discussion done orally and partly through the written exchanges as well as through the performance transaction and not only the result of acceptance and offer (www.nadr.co.uk, 1993). The case of Spartafield Ltd vs Penten Group Ltd 2016 informs that the judge in the case on reviewing the documents given ruled the verdict that apart from the minor details all the other agreed upon activities in the main contracted are abided though they were not signed and it has led to the fact that the contract has been formed and thus it was able to replace the letter of intent (www.adjudication.co.uk, 2016). In case of Sisphyus Limited, they are to consider these key points before making a construction contract.

2. Practical Completion and Defects Liability Period (DLP)

The certification of the practical completion is the duty of the contract administrator o\n completion of all the tasks as mentioned in the contract. In some nature of contracts such as in the United States, the practical completion of tasks is referred as “substantial completion”. The period of defects liability mentioned in the Joint Contracts Tribunals (JCT) contract which is presently known as “rectification period” initiates immediately after the certification of the practical completion which typically lasts from 1-12 months. The clients within this time provide feedback or report regarding any defects which occur to the administrator of the contract who is allocated the duty to assess whether any maintenance issues or fact defects are encountered. In case it is been ruled out by the contract administrator that there are defects in the project, then accordingly the instructions are to be delivered to the contractor for rectifying the issues within reasonable time. The Sisphyus Limited requires noting that it is not the duty of the client but it is the responsibility of the contractor for identifying and rectifying any defects encountered in the project. The meaning of the condition is that of the client raise the defect issues to the contractor then it is to be made clear about the list of defects in details and not in a comprehensive manner (Tan, Zaman & Sutrisna, 2018; www.jctltd.co.uk, 2011).

As soon as the defects liability period ends, the administrator of the contract is required to come up with a defects schedule and in the list, they are to notify the defects which have not been rectified yet. The facts are to be put together with the contractor to agree for a deadline by which the defects identified shall be effectively rectified. The contractors, in any case, require having the efficiency to execute the rectification within minimum time. On consideration by the administrator of the contract that all the defects in the items are properly rectified within the schedule, a certification informing making good defects is required to be issued which result to release any form of remaining retentions leading the final certificate to be issued properly. It is imperative in nature to note that DLP is not an opportunity for rectifying problems which are apparent during the practical completion but it is a time when it is the required of the contractor to be recalled for correcting any identified defects. In case defects become apparent before the actual completion, then the defects are to be corrected as it is an issue for the certification of practical completion. Thus, it can be able to put the administrator of the contract in a hard situation since both the contractor and the clients are keen on issuing the certificate for allowing the handover of the building but the identified defects are present beyond the minimal in the tasks (du Plessis & Oosthuizen, 2018; www.holmes-hills.co.uk, 2016). The issuance of the certificate, in this case, is able to expose the administrator of the contract to be liable for the problems being caused by the calculating the liquidated damages.

In relation to the interest of the client, it is common to issue the certificate for practical completion along with list of omissions and minor defects which is to be corrected within the given period. A good instance related to the situation is that if as well as when the certificate of practical completion is to be issued it is likely to result in “tenants fit out” which is to be followed by rent payment, when it is related to the interest of none to cause delay in the execution of the process for replacing a light fitting or to deliver a small furniture. Thus, Sisyphus Limited is required to get advice on the case related to contracts of the construction management and certificates for practical completion separately for each contract of trade and therefore it is must to have different periods of liability. This activity is also to be applied for the contracts regarding management whereby each single work contract is to be assessed as well as certified in a separate manner (www.mondaq.com, 2018).

3. Collateral Warranties and Design Responsibility

The collateral warranty is referred to the party's legal undertaking which is running alongside another contract. The key purpose of the warranty is creating responsibilities for the contract where they are not otherwise having been existed. In present era, the collateral warranties are able to be so widely used that it is uncommon not being found in a construction project where the design team do not require providing them. However, the key reason for the parties to enter such a form of legal undertaking is that it is often misunderstood by the contractors, consultants and the sub-contractors. Therefore, while venturing into to the construction industry it is the duty of the Sisyphus Limited that they have information about the precise brief in the way and when as well as why the collateral warranties are important and the way they are to work. It is seen that the responsibilities mentioned under the collateral warranties vary a great deal ranging from ensuring that the design would be for the design responsibility purpose to the duty of exercising reasonable care (ter Haar, Laney & Levine, 2016; www.jctltd.co.uk 2018).

In the English Law, the party who has a stake in a defective building are able to face difficulty or it is impossible in nature for them to pursue a contractor or a responsible designer without the contractual relationship. This is because the way in which the contractor or the designer is to be pursued without such nature of contract is by bringing a claim of negligence. However, in spite of the nature of condition, it is seen to be very rare in form for incurring the loss of finance faced by a defective building through the claim of negligence. This fact is seen to underpin the essential aspect of the collateral warranty where it creates direct association of contract between the contractor or the designer and a third party who has a stake in the building in the form of purchaser, financer or leaseholder. This nature of warranty assists the third party with the interest of pursuing the contractor or designer through the claim of contract breach in case it is seen that the building has become defective. This importance is able to explain the reason behind regular containment of clause by the consulting appointment and building contracts which is able to make provision for the collateral warranties as a prerequisite condition for the certification of precedent condition to payment or practical completion (www.designingbuildings.co.uk, 2018; . www.jctltd.co.uk 2018)

The Sisyphus Limited while being a contractor undertakes certain work for their employer, then the organisation is responsible to the employer under both laws of tort and law of contract. For instance, if the employer designates the project to the third part then there would be no contract between the third party and Sisyphus Limited. This would result Sisyphus Limited to experience tort issues as no contract was seen to be in place to be able to bind the two parties. The third party as seen in the case of Caparo vs Dickman in 1990 which wishes to undertake legal actions in tort are required to demonstrate “fairness, proximity or foreseeability” for any nature of claim to succeed (webstroke.co.uk, 1990). It is being true that a third party is seen to have a contractual action against the employer who may has a contractual action against the contractor, it may not be the case which is always to be followed as following the path is not only difficult but also expensive in nature. Thus, the collateral warranties are to be designed in such a way so that it is able to act as a mirror of the responsibility of the contractor to the employer and extrapolates such responsibilities related to legal terms to the third parties (Kirby, 2017).

4. Contractual Agreements and Payment Terms

During the amendment of original Housing Grants (Construction and Regeneration) Act 1996 (Construction Act) new changes are introduced in part 8 of the Local Democracy, Economic Development and Construction Act 2009 (New Act). The new changes are not clearly understood regarding the way the new payment provisions mentioned in the Act is going to impact on the party’s behaviour present in the construction project (www.legislation.gov.uk, 2009). As asserted by the author, in case a new law is developed it leads to raise many queries as well as spin-off issues even though it is a straightforward concept. The original Construction Act informed that the party making the payment are to specify the amount being proposed or the payment amount by including the developed rationale based on which the figures are determined. Moreover, in this Act, no clear repercussions are mentioned for the failure to ensure proper compliance with the mentioned requirements. This happened because in this case, the employer was the one who was warranted for issuing such notices. Thus, it appeared to act in duplicating the certification process that is a common instance as seen in many construction projects due to which it was ignored. The payless notice informs the sum which remains due as per the mentioned date of notice and the rationale based on which the amount is being calculated and is required to be issued in the given time frame in the contract.

According to the New Act, the prerequisite for the contracts regarding construction is that a provision is to be made as per which notice is to be given for each payment made in the contract. The “notified sum” is the quoted amount mentioned in the payment notice of the contract which informs the person involved with issuing the notice that can either be payee itself or a specified person like contract administrator, architect and others who act as a payee in the contract (Ashworth & Perera, 2018). The notice is required to be such so that it mentions both the amounts which is either due or to be due by the date of payment as well as it is to mention the basis on which the mentioned amount is being calculated. Thus, Sisyphus Limited require to understand that when a consequence of facing failure in issuing a payment notice is faced the recipient which is the payee has the authority to issue “default” notice mentioning the due amount to be paid on the basis of calculation. Thus, Sisyphus Limited require to make new changes in their account as they are important according to the New Act which mentions that it is mandatory for the payer for remitting the notified sum that regardless of whether or not the notice of payless is being issued. In the law, there is no language which needs the mentioned sum to be in a proper value and requires the sum being mentioned to be just notified. In previous times, there was a mechanism in which the payer was allowed to evade while paying a sum that is due if such nature of grounds is present. This allows the payer to issue a notice of intent for withholding the payment. The New Act is seen to imitate this aspect very closely and the only difference is the requirement of the payer for paying the notified amount in the situation where a pay less notice has not been issued (Klee, 2018).

5. Dispute Resolution

During the onset of any construction contract, the intention of all the involved parties is for the contract to be executed in a smooth way and completed within the deadline and the allocated budget. However, it is not always accomplished as things being planned accordingly does not work out all the time. For instance, additional works are seen to be required due to some unforeseeable circumstances on the site or the employer request additional work to be done. Thus, such instances lead the mentioned work to be accomplished in longer timeframe than expected which subsequently leads to increase the project costs. As a result, one of the acting parties are seen to raise the claim in the raised dispute cannot be resolved through communication and dialogue. These situations and many others make the construction sector as one of the most disputable and conflict-ridden industries that have set it to face highest number of reported claims.

The common nature of claims being witnessed in the contracts regarding construction include the contractor claiming for delay in work or change of scope against the employer, employer claiming for defective work nature by the contractor, professional consultant claiming for pay failure by the employer, employer claiming for the improper supervision of the work and shortfall in designs by the professional consultant (Chaphalkar, Iyer & Patil, 2015). There are many ways in which the claims can be resolved and Sisyphus Limited require to understand all the aspects as well as the claims they may be facing while operating in the construction sector.

The dispute resolution is always seen to happen in the court of law where the process include entire disclosure of the documents, expert reports, lengthy pleadings along with statement of the witness that is followed by hearing. However, in 1990 an enormous level of growth is been encountered in the system to settle disputes in projects through area of alternative dispute resolution (ADR) like conciliation, arbitration, adjudication and mediation (Lee, Yiu & Cheung, 2016). There are many reasons behind selecting ADR techniques as the most probable way of settling disputes. The reason is that it is cost effective in nature whereas the process of litigation is time-consuming as well as requires a huge expenditure of money. The second reason is speed of settlement of disputes in comparison to traditional techniques. This is evident as court proceeding and listing are seen to take increased amount of time that leads the cases to be stretched more than two years in a row to make it reach the judges. The third reason is that ADR is flexible in nature in particular mediation than the traditional methods. This is because adjunction, arbitration and litigation are seen to be based on certain rights and obligations but mediation focuses mainly on the demands and needs of the parties in dispute. The mediator act to encourage the parties who are dispute to get a commercial solution which meets needs of both the parties involved in dispute. Thus, during eventualities, Sisyphus Limited require to take the most appropriate nature of dispute resolution which caters in an effective way for their short and long-term interests both in their existing field of operation or in the new venture sector of construction.

Arbitration is referred to the mechanisms in which both parties who are involved in dispute are to agree for allowing an arbitrator who is a third party to settle the dispute through their decisions. The arbitrators may be some nature of legal panel or expert in resolving disputes or a simple lawyer. The decision made by the arbitrator is able to be enforced in the court as a form of legal binding. The court-annexed non-binding arbitration is common in use in the United States which entails that since the findings of the arbitrator is a binding order of the court thus neither of the parties in dispute are able to rehear the decision by ant judge. The process of settlement in court combines early neutral settlement and mediation and it is been recently introduced by the Technology and Construction Court (TTC) in 2006 as a trail. This is being used in the situation where a judge involved in managing a case by the request of the parties understands that the parties are willing to reach an amicable solution. The conciliation is nearly similar to mediation but in this process, a third party who is a conciliator is seen to be in a more interventionist role for uniting the two parties in disputed by suggesting them a solution that is possible to help them develop settlement of disputes. The neutral fact findings are referred to be a non-binding mechanism which is employed in case of complex cases involving technical problems. The neutral expert is selected in this field for investigating as well as finding out facts related to the dispute and examine them on the basis of merits of the mentioned case. This is able to form an initiating point for future negotiations (Liu et al. 2019). Thus, on the basis of which side of the case is Sisyphus Limited present, they are to identify the nature of dispute resolution to be used so that neither interest of the parties involved is hurt.

Conclusion

The above discussion informs that the construction industry is a lucrative business as well as cross-fertilised field with already established Software and IT department where Sisyphus Limited in trying to venture. This nature of the industry is going to make it a great venture which will lead to make the company see creating dominance of their institution in the construction sector in a rapid manner. However, it is important that the company understand the legal obligations and develop effective planning for effectively operating in the sector. This paper is seen to provide briefs of various construction contact laws and they are important to be considered by the organisation before, during as well as after their amalgamation and transition of the three sectors. It ranges from requirement of contract formation, collateral warranties and design responsibilities, terms of payment and dispute resolution. The mentioned report acts as wholesome as well as sequential guide for the company to identify the most important points to be focused on each section. The reading is able to act as smooth guidance for the Sisyphus Limited for merging and expanding their business to form a Construction, IT and Software magnate.

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References

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