ECM 521 : Professional Ethics and Liability in Construction

Pokhara University Nepal Engineering College Centre for the Post Graduate Studies ECM 521 : Professional Ethics and Liability in Construction 4. Law and Contract

What is law? • "The rule of law is better than the rule of any individual.” - The Greek philosopher Aristotle (in 350 BC) • John Austin (English jurist born 1790) • "A rule laid down for the guidance of an intelligent being by an intelligent being having power over him.“ • "A body of rules fixed and enforced by a sovereign political authority.“ • Max Weber (German Sociologist born 1954) • "Law…exist if it is externally guaranteed by the probability of coercion (physical or psychological) to bring about conformity or avenge violation, and is applied by a staff of people holding themselves specially ready for that purpose.“ • Thomas Hobbes (English philosopher born 1588) • "Law is the formal glue that holds fundamentally disorganised societies together."

What is law? • Definition of law - Marxist theory • a tool of oppression (Burden, Impose) used by capitalists to control the proletariat (Workers, Laborers). • Law may be defined as • the system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties. • is a system of rules, usually enforced through a set of institutions. It shapes politics, economics and society in numerous ways and serves as a primary social mediator of relations between people.

Definition of law • Law is a term which does not have a universally accepted definition, but one definition is that law is a system of rules and guidelines which are enforced through social institutions to govern behavior. • Laws can be made by legislatures through legislation (resulting in statutes), the executive through decrees and regulations, or judges through binding precedents (normally in common law jurisdictions). • Private individuals can create legally binding contracts, including (in some jurisdictions) arbitration agreements that exclude the normal court process. • The formation of laws themselves may be influenced by a constitution (written or unwritten) and the rights encoded therein.

Principles of Law • As part of the law, general principles of law do not represent binding normative circumstances in the way that explicit legal norms do, but can be seen as rules of law which should be followed as far as possible. • Since they do not carry such rigid binding force as norms of the legal order proper, these principles are called "optimization precepts". For example, the principle deriving from Roman law which holds that agreements are to be kept (pactasuntservanda) is a general judicial starting-point to which there are many exceptions. • Hence it is possible to be released from excessively harsh and inequitable contractual obligations on the basis of, inter alia, the principle of reasonableness.

Principles of Law • Principle - a rule or standard especially of good behavior; "a man of principle"; "he will not violate his principles" • Jus sanguinis - the principle that a person's nationality at birth is the same as that of his natural parents • Jus soli - the principle that a person's nationality at birth is determined by the place of birth • Pre-emption, preemption - the judicial principle asserting the supremacy of federal over state legislation on the same subject • Relation back, relation - (law) the principle that an act done at a later time is deemed by law to have occurred at an earlier time; "his attorney argued for the relation back of the amended complaint to the time the initial complaint was filed" • Law, jurisprudence - the collection of rules imposed by authority; "civilization presupposes respect for the law"; "the great problem for jurisprudence to allow freedom while enforcing order"

Principles of Law • The Solicitor's Regulation Authority's (SRA) Handbook outlines ten mandatory principles which apply to everyone that the SRA regulates and to all aspects of practice. • uphold the rule of law and the proper administration of justice • act with integrity • not allow your independence to be compromised • act in the best interests of each client • provide a proper standard of service to your clients • behave in a way that maintains the trust the public places in you and in the provision of legal services • comply with your legal and regulatory obligations and deal with your regulators and ombudsman in an open, timely and co-operative manner • run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles • run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity • protect client money and assets • It may be the case that two or more of these principles come into conflict. If this is occurs then the principle that takes precedence is the one which best serves the public interest in the particular circumstance, especially the public interest in the proper administration of justice.

Scope of Law • The law shapes politics, economics, and society in various ways and serves as a social mediator of relations between people. • Law provides a rich source of scholarly inquiry, into • legal history, • philosophy, • economic analysis or sociology. • Law also raises important and complex issues concerning equality, fairness and justice • In a typical democracy, the central institutions for interpreting and creating law are the three main branches of government, • impartial judiciary, • democratic legislature, and • accountable executive.

Scope of law in Engineering Activities • Constitutional law • provides a framework for the creation of law, the protection of human rights. • Contract law • regulates everything from buying a bus ticket to trading on derivatives markets. • Tort law • allows claims for compensation if a person's rights or property are harmed. If the harm is criminalized in a statute, criminal law offers means by which the state can prosecute the perpetrator. • Administrative law • is used to review the decisions of government agencies • international law governs affairs between sovereign nation states in activities ranging from trade to environmental regulation or military action. • Corporate law • Environmental law • International law etc etc

Sources of Law • Precedents • Customs • Legislation • Statutory interpretation • Preparatory works

Sources of Law • Precedents • The judgments passed by some of the learned jurists became another significant source of law. When there is no legislature on particular point which arises in changing conditions, the judges depend on their own sense of right and wrong and decide the disputes. Such decisions become authority or guide for subsequent cases of a similar nature and they are called precedents. • Customs • A custom is a rule which in a particular family or in a particular district or in a particular section, classes or tribes, has from long usage obtained the force of law. The dictionary of English law defines custom as a law not written, which being established by long use and consent of our ancestors has been and daily is put into practice. Custom as a source of law got recognition since the emergence of sovereignty on the horizon of jurisprudence. • Legislation • that source of law which consists in the declaration of legal rules by a competent authority. Legislature is the direct source of law. Legislature frames new laws, amends the old laws and cancels existing laws in all countries. In modern times this is the most important source of law making. The term legislature means any form of law making.

Sources of Law • Statutory interpretation • Statutory interpretation is the process by which courts interpret and apply legislation. Some amount of interpretation is often necessary when a case involves a statute. Sometimes the words of a statute have a plain and straightforward meaning. • It is a very important function of the court, the process of ascertaining the meaning of letters and expressions by the court is either interpretation or construction. Interpretation is the process of which the court seeks to ascertain the Meaning of a particular legislature. It is through interpretation, the judiciary evolves the law and brings the changes in it and thus keeps the law abreast of law • Preparatory works • In some legal cultures some of the documents produced in the process leading up to legislation are subsequently used as guidelines on how to interpret and understand an act of legislation.

Contract: Definition (v.) To make an agreement; to covenant; to agree; to bargain; (n.) To enter into, with mutual obligations; to make a bargain or covenant for. (a.) Contracted; affianced; betrothed.

Contract: Definition • A contract intends to formalize an agreement between two or more parties, in relation to a particular subject • "A contract is a promise or a set of promises for the breach of which the law recognizes duty". This amounts to saying that a contract is a legally enforceable promise(Jackson 1973). • A contract is a legally binding agreement. It is a bargain and each side, or party to the contract, must contribute something to it for it to be valid (Gahlot et al, 1996) • A Contract is “an agreement concluded between two or more parties for performing or not performing any act which could be executed according to law.”(Nepal Contract Act,1999, Section-2)

Contract: Definition • The simplest definition of a contract is that it is a promise enforceable at law. The promise may be to do something or not to do something. By extension, the term "contract" has also come to refer to the written document in which terms of the promise are written down. • In a commercial sense, a contract is a mutual agreement enforceable at law between two or more parties that something shall be done or not done by either or both parties. By implication, both parties thereby accept certain responsibilities and in return receive certain benefits. • A contract is an agreement, based on consensus between legal subjects with contractual capacity, which is legal, physically possible and complies with the prescribed formalities and which is reached with the intention of creating a legal obligation with resultant rights and duties.

Law of Contract • Law of Obligation: • A legal obligation is a legal tie between legal subjects, recognised by law, which is created as a result of a certain legal fact and which creates rights and duties that are recognised by law. • A legal obligation consists of two elements- • the Right of the Creditor to claim performance and • the Duty of the Debtor to perform accordingly. • The creditor’s right is known as a personal right, which corresponds to the legal object of performance (i.e. a specific action or inaction, delivery of a specific thing or payment of a specific amount of money).

Law of Contract • Sources of obligations:Legal obligations arise out of legal facts, which can be categorised as follows: • Events without human intervention:- Forces of nature, animal behaviour, lapse of time, etc. • Human conduct: • Non-juristic acts:- Acts to which the law gives effect irrespective of the intentions of the parties (e.g. delicts). • Juristic acts:- Acts to which the law gives effect according to the intentions of the party or parties. • Unilateral juristic acts:- Acts conducted individually by single parties (e.g. wills). • Multilateral juristic acts:- Acts conducted collectively by two or more co-operating parties (e.g. contracts). • The most important sources of obligations are acts of contract, delict and unjust enrichment. Hence, a contract is not a legal obligation in itself but rather a legal fact that gives rise to a legal obligation.

Law of Contract • The law of contract is the body of legal rules governing the conclusion and consequences of contracts. • It defines the basis and requirements of contractual liability, as well as the rights and duties of the parties. Moreover, it regulates the breach of contract and provides remedies for such breach. Finally, it governs the termination of contractual obligations. • These rules, along with the law of delict and law of enrichment, fall under the law of obligations, which is a category of the law of patrimony, forming part of private law, which is fundamentally concerned with defining, protecting and balancing legitimate individual interests.

Essential Elements of a Valid Contract • Agreement (Offer and Acceptance): when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). • Consideration: the parties to a contract must exchange something of value. • Capacity to contract: A person is competent to contract if, at the time of making, he is of sound mind, major and not disqualified from contracting under law

Essential Elements of a Valid Contract • Legal purpose: The contract must be legal and may not contradict any statutory or common law rule. • Legality of form: The contract must abide by any formalities set by law or by the parties themselves. • Intention to create legal relations: parties intended to make legally enforceable contract • Consent to contract: the parties to the contract have a mutual understanding of what the contract covers Vitiating factors: Misstates, Undue influence, Misrepresentation, Duress

Different Kinds of Contract: • Void, Voidable and Unenforceable contracts (defective contracts) • Bilateralcontracts and Unilateral contracts (Sales contract, Rewards) • Executed Contract and Executory Contract (both the parties have performed their obligation, both the parties have yet to perform their promises) • Express Contract and Implied Contract: (the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, proposal or acceptance of any promise is made otherwise than in words) • Quasi-Contract and Contingent Contract (Certain obligations which are not contracts in fact but are so in the contemplation of law, a promise is conditional and the contract shall be performed only on the happening of some future uncertain event)

Engineering/ Construction Contract • Construction is a services activity with business side as one of its dimension • The construction industry is almost unique amongst commercial endeavors where the "Project is sold before it is made" • The facility is purchased before it is "manufactured" based on a set of drawings and work descriptors.

Engineering/ Construction Contract • Project delivery systems have been developed to provide the construction buyer (i.e., the client) with a single point of contact or source of purchase. • An engineering contract is a mutual agreement negotiated between two (or more) parties for the purpose of undertaking, on a commercial basis, certain clearly specified engineering work.

Classification of Contracts • Depending upon the magnitude and nature of the work, its special design needs, funding requirements, complexities of the job and owner's own preference, different types of contracts are entered into. • Contracts for any particular engineering project can be classified in the first instance as either Main Contract (sometimes referred to as Head Contracts) or Subcontracts. • The essential difference is that a Main Contract is directly between the Principle and Main Contractor, where as a Subcontract is between a Main contractor and another contractor referred to as a Subcontractor.

Classification of Contracts • Engineering contracts, whether Main Contracts or Subcontracts, can further be classified in a number or ways, each of which depends upon a particular characteristic or feature. • The three most commonly used characteristics for this purpose are: • The method by which payment for the work under the contract is evaluated. • The method by which the contractor is selected. • The method by which the responsibility for the technical and administrative aspects of the work is allocated. There are number of options under each of these headings, which can apply to any contract, and the contract can be defined by selecting the appropriate option from each. Each has its advantages and disadvantages for a particular application, and each has developed a certain degree of flexibility so that, in reality, many of the individual alternatives overlap one project's contractual agreement precisely.

Classification of Contracts • Classifications by the method of payment. • Lump sum or fixed price contracts contractor is paid the amount nominated in the contract for the work as agreed with the principal when negotiating the contract • Schedule of rates or unit-price contracts The total price is completed by multiplying the unit price by guided quantity and summing up the cost of whole the items • Cost plus contracts actual costs incurred in carrying out the work under the contract plus a fixed or variable fee to cover overhead costs and profit. • cost + percent of cost • cost + fixed fee • cost + fixed fee + Profit sharing • cost + sliding fee • Sometimes, Part Lump sum and part Unit-Price Contract is also adopted in a single project as a fourth type Advantages and Disadvantages of all types

Classification of Contracts • Classifications by the method of selecting the Contractor • Competitively Tendered Contracts the award of contract is generally made to the lowest responsible bidder and an agreement is reached between the Principle and the Contractor Single Fixed Price or Lump Sum Contracts and Unit Price Contracts • Negotiated Contracts with the selected contractors the principal negotiates directly with a contractor to arrive at a mutually satisfactory agreement to undertake the work. fixed-price, unit-rate and cost plus fee can be adopted • Selective Competition Competition among few selected contractors

Classification of Contracts 3.Classifications by Technical and Administrative Responsibility Engineering contracts can be classified by the manner in which project implementation responsibilities are allocated. There are a number of classifications under this method, the principal ones being; • Traditional Approached Contract • Design-Build or Design-Manage (Turn Key) • Build-Own-Operate Transfer (BOOT) • Management Contracts

Employer Consultancy contract Construction contract Consultant Contractor Classification of Contracts Traditional Approach • The owner employs a designer who first prepares the plans and specifications, then exercise some degree of inspection, monitoring or control during construction. • Construction itself is the responsibility of single general contractor under contract to the owner

Construction contract Consultancy contract Employer Consultant Contractor Classification of Contracts Design-Build or Design-Manage (Turn Key) • employer prepares the employer’s documents, • transfer the majority of the risk onto the contractor, • employer needs to enter into one contract that is with the contractor, who in turn appoints their own design consultants

Classification of Contracts Build-Own-Operate Transfer (BOOT) "A project based on the granting of a concession by a principle, usually a government to a promoter, sometimes known as the concessionaire, who is responsible for the construction, financing, operation and maintenance of a facility over the period of the concession, before finally transferring the facility, at no cost to the principal, as a fully operational facility, “ (Smith and Merna, 1992) Similar contractual relations as in Turnkey contracts BOOT projects are contractor financed turnkey contracts

Managing contract Consultancy contract Employer Construction contract Consultants Management Contractor Construction Contractors Classification of Contracts Management Contracts • one form is retained to coordinate all activities from concept design through acceptance of the facility. • the firm represents the owner in all construction management activities.

Risks Allocation in Types of Contract The allocation of risks depends on the types of contract where risks would shift from client to contractor and vice versa

Chains on Contracts E E C C SC SC SSC SSC (a) (b) Sub-Contracting • Designated subcontracts • Selected subcontracts • Nominated subcontracts • Subcontracts are widely used in construction industry. • In principle there is no legal difference between a subcontract and a main contract.

Formation of Contract • Almost everyone makes contracts every day • Sometimes written contracts are required, e.g., when buying a house. However the vast majority of contracts can be and are made orally, like buying a book, or a coffee at a shop. • A verbal exchange of promises may be binding and be as legally valid as a written contract. An unwritten, unspoken contract, also known as "a contract implied by the acts of the parties", which can be either implied in fact or implied in law, may also be legally binding. • The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or ad idem (meeting of the minds) of two or more parties.

Formation of Contract:Mutual Consent (Meeting of Mind) • Consent in contract means: to agree in opinion or sentiment; to be of the same mind. • The parties to the contract have a mutual understanding of what the contract covers, e.g. - in a contract for the sale of a "mustang", the buyer thinks he will obtain a car and the seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract will likely be held unenforceable. • When two parties mutually agree to a transaction, a contract is formed. • “The mutual agreement” must apply to all significant or material aspect of the agreement. • The expressed written terms of contract will govern the relationship regardless of any misunderstanding on the part of any parties.

3. Formation of Contract:Essential Elements- Typically, in order to be enforceable, a contract must involve the following elements: Offer Acceptance Consideration

Offer • The offer is considered to be concerned with the making of a written or oral proposal to give or do something as part of an agreement that may be deemed to be a legally binding contract in certain circumstances • may be express or implied from the conduct of the parties in any given case. • An offer is simply a statement or other indication that the individual is prepared to enter into a contract with another on certain terms. The offer must be expressed in a manner capable of acceptance without anything further required of the person receiving the offer other than to indicate acceptance. It must also be clear that the person making the offer is prepared to be bound by the terms if the offer is accepted • any given offer must adhere to the following rules – • (i) it must be made to a definite person, class or person, or even the world at large; • (ii) it must be effectively communicated to the offeree before acceptance; but • (iii) the offer is only considered to have been made when it actually reaches the offeree a counter-offer is not an acceptance, and will typically be treated as a rejection of the offer

Offer Fearing bankruptcy, Carbolic argued the advert was not to be taken as a serious, legally binding offer. It was an invitation to treat, mere puff, a gimmick. But the court of appeal held that to a reasonable man Carbolic had made a serious offer. People had given good consideration for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will", said Lord Justice Lindley, "here is a distinct promise expressed in language which is perfectly unmistakable" a medical firm advertised that its new wonder drug, the smokeball, would cure people's flu, and if it did not, the buyers would get £100. Many people sued for their £100 when the drug did not work.

Acceptance • Acceptance is simply some indication by the person receiving the offer that the offer is accepted. The acceptance must be clear and absolute and without conditions attached. The objective bystander must be able to determine that the offer has been accepted • acceptance relates to the idea of where an offer is made by one party that is considered to be acceptable to another without qualification in words or through conduct to the offeror in conformation with the indicated or prescribe terms of the offer that has been made • An acceptance can be made orally or in writing. Mere silence will not create an acceptance. The acceptor has a right to withdraw his acceptance before it comes to the knowledge of the offeror. The effective acceptance must be communicated.

Acceptance • The acceptance must be made before the offer has expired. Most offers contain a time limit within which the offer can be accepted. Once the offer has expired, it can not be accepted unless the person making the offer has renewed it. • No conditions can be attached to the acceptance and the terms of the offer can not be changed. If conditions are attached or terms are changed, the parties are merely negotiating and may ultimately reach agreement on the terms of the contract • The offer must be accepted before it is withdrawn. An offer can be withdrawn before acceptance unless one of the terms of the offer is that it will remain open for acceptance until a specified time

Consideration • Consideration is known as 'the price of a promise' and is a requirement for contracts under common law. • The idea behind consideration is that both parties to a contract must bring something to the bargain. This means that each side must promise to give or to do something for the other. • The element of exchange is known as ‘Consideration’ and is an essential element of every valid contract. • A party seeking to enforce a contract must show that it conferred some benefit or suffered some that is recognized by law. • Consideration is some benefit or advantage to the person making the offer and a corresponding cost or prejudice to the person accepting the offer.

Consideration • Money is often recognized as consideration, but in some cases money will not suffice as consideration (for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount). • Some common-law and Civil law systems do not require consideration, and some commentators consider it unnecessary—the requirement of intent by both parties to create legal relations by both parties performs the same function under contract. • The law only requires that there be sufficient consideration; something of value must be given. The consideration can not be something given or promised in the past. To be valid, the consideration must be a new promise or some fresh benefit exchanged for the offer. • In general then, as long as the basic elements of an offer and acceptance with consideration are present, the parties have a valid and binding contract. There is no requirement that the contract be in writing except in certain special situations

Rules Governing Consideration • Consideration must be "sufficient" (i.e., recognizable by the law),but need not be "adequate" (i.e., need not be a fair and reasonable exchange for the benefit of the promise). • Consideration must not be from the past. • Consideration must move from the promisee. • The promise to do something one is already contractually obliged to do is not, regarded as good consideration, • The promise must not be to do something one is already obliged by the general law to do - e.g., to give refrain from crime or to give evidence in court • A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts • Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance

Online Contracts • Online contracts, which are easily made, are usually valid on a smaller scale for a period of one to three months, while on a larger scale can last about five years. • As with all things legal, especially in regards to the ever-evolving internet, general rules like length of validity have many exceptions. • All cases are evaluated on their own merits, and those merits are defined by the facts presented in each instance. • It is up to the owner of the site to do what it can to guarantee enforceability of its contracts. • Though 90% of people sign online contracts before reading the content, E-signature laws have made the electronic contract and signature as legally valid as a paper contract. • It has been estimated that roughly one hundred and ten electronic contracts are signed every second.

Unilateral Contracts In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog • Condition precedents can also be attached to unilateral contracts • An offer of a unilateral contract may often be made to many people (or 'to the world') by means of an advertisement • In that situation, acceptance will only occur on satisfaction of the condition • If the condition is something that only one party can perform, both the offeror and offeree are protected • unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition

Implied Contract • Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one refuses to pay after being examined, the patient has breached a contract implied in fact. • A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other.

Defective Contracts • Void contract: One of the requirements for a valid contract is absent - no contract is concluded. • Voidable contract: A contract is indeed concluded but it can be set aside on account of a defect that existed at the time of conclusion (e.g. consensus improperly obtained). • Unenforceable contract: A contract is indeed concluded but it creates only a natural obligation, which is recognized but not enforced by law (e.g. a wager).

Contract Practices in Nepal • Modern Approaches of Contract Management like Professional Construction Management Approach are still to be flourished in Nepali Contract Environment. • Mostly Traditional Approach especially in Public Sector-Negotiated contract is limited up to only Rs. 1.5 lakhs • In private sectors, other modalities like lump sum contracts cost plus contracts are also in use. • Turnkey and BOOT Contracts are also in Practice these days- limited number of power projects • It is vital to involve the private sector for the construction of Public Infrastructures- Kathmandu-Terai Express way • “Public Infrastructure Build Operate and Transfer Policy, 2000”

Performance and Discharge of Contracts • Performance of a contract (when the parties do what they agreed to do) discharges it. • Discharging a contract terminates it. • Discharge usually results from performance. Most contracts are discharged by the parties doing what they promised to do. • But some times discharge can occur in other ways: 1. the occurrence or failure of a condition on which a contract is based, 2. agreement of the parties, 3. operation of law, and 4. breach of the contract

ECM 521 : Professional Ethics and Liability in Construction