Construction Law

Formation of construction
contracts
Requirements for a contract

 What are the fundamental requirements

for the formation of a contract?
 students to respond on either-
agreement (consensus ad idem),
intentions to be contractually bound,
consideration, legality, capacity, physical
possibility of performance
 Formation of construction
contracts ctnd
 Construction contracts are not different from
any other kind of contract.
 They are based on agreements, intentions to
create legal relations, considerations and other
elements
 In the construction industry one of the
mechanisms used to establish contracts is the
process of tendering
 Various parties are involved in the formulation
of the contract through this process of
tendering i.e.
 Client, Architects, Engineers, Quantity Surveyors and/or
 Formation of construction contracts

 These parties decide on the salient points to

be the framework of the tendering and
subsequently contract agreements
 Tender and Tendering (
What a tender is
 It is an offer to do a predetermined amount of work in
a stated period for offered price or set of prices
Construction bidding
Is the process of submitting a tender by the contractor to
the client as a proposal to conduct or manage a
particular construction project. The bidding process is an
incredibly important part of a construction project. This
enables firms and companies to hire contractors.
What is tendering
 A process by which tenders or bids are invited from
interested contractors to carry out specific packages of
construction work
The purpose of tendering
 The entire tendering process is about
contracting
 The process enables the owner to identify a
party who will enter into a contract with the
owner for provision of the goods or services
 Both public and private goods and services are
procured through the tendering process
 Tendering processes and procedures
The tendering process is dictated by the choice
of the procurement route
Prior to the commencement of the tendering
process, the client should choose the most
suitable delivery method for the project.
Tendering Process
Typically the process of tendering involves three
distinct, phases:
Tender preparation, tendering and tender
evaluation
Tender preparation activities
 Project Definition and Scoping
 Selection Process for Tenderers
 Tender Documentation
 Criteria for Selection
Tendering activities
 Call for Tenders
 Responding to Invitations to Tender
&Developing the Offer
 Tender Meetings & Enquiries
 Amendments to Tender Documents
 Submission & Closing of Tenders
Tender evaluation activities
 Tender Analysis
 Tender Clarifications
 Tender Selection & Award
Tendering procedures
 A variety of tendering procedures are
used in the construction industry.
 The main distinguishing feature is the
extent of the competition
 Open tendering
 Selective tendering
 Nominated
 Tender documents
 These are documents that give all the
relevant information about the proposed
contract, rules, conditions, etc.
 They provide tenderers with common
data and are supplied to the contractor to
enable him to price the work as
accurately as possible
 The documents depend on factors such as
contractual arrangements, procurement
method and size of the project (i.e. major
or minor contract works).
Typical Tender Documents are
 Invitation to tenders
 Instructions to Tenderers
 Form of Tender
 Qualification Information
 Conditions of Contract
 Specifications
 Drawings
 Bills of Quantities
 Form of Securities
 Legal status of the tendering
Traditional process to
approach contract
formation
 The first steps in a tendering process is to issue
a Request for Tender (RFT)
 Issuing of an RFT by a party requesting that a
tenderer submit a tender, is no more than an
"invitation to treat",
 An invitation to treat has been described in
Butterworths Australian Legal Dictionary as a
"request to negotiate or make an offer with a
contract in mind".
 As such issuing an RFT is not in law regarded as
 No binding contract arises between the parties
until a tender is accepted by the party inviting
tenders however, it may give rise to obligations
to act fairly.
 The submission of a tender by a party in
response to an RFT is regarded in law as an
"offer" by the tenderer.
 Prior to acceptance, it is possible for the bidder
to withdraw or amend its offer.
 It is also possible for a principal, after receiving
tenders, to negotiate with the bidders to alter
the scope of work or the bid price.
New approach to contract formation
 It views that tendering has two separate
agreements.
 This came as a result of a landmark decision
in the courts of Canada that introduced the
“two contract” model into the law of
tendering
Under this model tendering involves two
 separate agreements, "Contract A“(process)
and "Contract B". (substantive)
 The ‘process’ contract, governs the manner
in which the tendering process is conducted.
 The ‘substantive’ contract is a contract to
perform the work that has been bid, which
comes into existence once the bid is accepted
by the principal.
Process contract

This is a contract that arise in relation to the

tender process before acceptance of a tender by
the party inviting tenders
 It creates an agreement between the owner
and the bidder relating to how the tendering
process is to be carried out
 The process contract is a common law concept
existing to protect the integrity of the bidding
system
  The RFT will be the offer
 The submitted offer will be the acceptance
of that offer
 The terms of the process contract are set out
in the wording of the tendering documents
Where a process contract arises, this
usually means that:
 The invitation to tender constitutes an offer to
all potential bidders to enter into a process
contract.
 The rights and obligations of the bidders and
the principal crystallise the moment a bidder
submits a conforming tender in response to
the offer
 The instructions/RFP/RFT forms issued to
tenderers establish the specific terms and
conditions of the process contract
 There will also be implied terms of good faith
and fair dealing.
 An obligation of being (generally)
contractually bound to enter into the
substantive contract (ie the second contract) is
created if the principal accepts the tender.
 The process contract will comes to an end
when a principal either;
i. enters into the substantive contract
with one of the bidders
ii. rejects all the bids
iii. when the specified period of the tender
process (if applicable) expires.
Factors that indicate a process
contract
 the formality of the process i.e. the
extent to which the tender process is
formally defined
Deadline for submission
Specific terms & conditions on the
substantive contract which are not open
to negotiations
Any arduous obligation on tenders e.g.
(complicated & comprehensive requirements for bid content)
 Prequalification or multiple tender rounds
 Payment of deposits or bonds
 General obligations imposed in tendering

Subject to the specific terms of the tender

documents, various obligations may be implied
 The duty to consider a tender
If the tender submits a conforming tender
before the deadline, he has the contractual right
of having his tender to be opened and
considered in conjunction with all other tenders
 Duty to act fairly and in good faith
This is an implied term in contracts
 All bidders should be treated fairly and
equally consistent with the goal of protecting
and promoting the integrity of the bidding
process and benefits all parties involved
 The duty to reject noncompliant bids
 The obligation to consider only disclosed
criteria in evaluating bids
 No bid shopping
The term bid shopping refers to the practice of
soliciting bids from contractors and using that
information to attempt to negotiate a better
price/ deal with interested parties
 Essentially; it involves the manipulation of
bidders and tender process to achieve a
better outcome for the client
 However this may result in ccompensation of
an aggrieved bidder where the tendering
process is found to be inconsistent
 Legalities in tendering
A party calling for tenders is not making
an offer.
He is simply inviting others to submit offers to
him.
As such, he is under no duty to accept or even
consider a particular tender.
But if he advertises for tenders and in his
advert undertakes to accept a tender (for
example, the lowest), he is bound by the
undertaking.
 If a client purports to accept an offer but on
terms differing from those contained in the
offer, he makes a counteroffer which
implies rejection of the tender (offer) which
lapses.
Only the person intended by the offeror to
accept the offer may do so.
 Consider tender submitted to A by B, but the
offer is accepted by A and C in association.
 Only A can accept the offer not A in association
with C
Penalties according to the Conventional
Penalties Act 1962 can be applied for:
 Nonperformance by the offeror who has
undertaken to hold his offer open for defined
period
 The tenderer who fails to provide security i.e.
insurance or bond to the satisfaction of the
client concerned.
 The tenderer who fails to submit detailed
priced bill of quantities for contract purposes
within stated number of days after date of
formal acceptance of his tender
Nature of possible penalties
 Additional expenses incurred by the offeree
in having to accept a less favourable tender
 Additional expenses for calling for fresh tender
 Additional expenses to otherwise
arrange for the execution of the works
 The difference between the withdrawn
tender price and the cost of execution
of the works
Protesting a penalty:
Section of the conventional penalties act
1962 states that the court has power to
reduce a penalty if it considers it to be
out of proportion to the prejudice
suffered by the aggrieved party as a
result of the breach
The onus of proving that a particular
penalty is excessive rest on the party in
breach
The court is obliged to take into consideration
not only the aggrieved party’s proprietary
interest
but every other rightful interest which may
be affected by the breach in question, for
example; inconvenience, loss of reputation,
etc.
 A revocation is not effective until it is
brought to the knowledge of the
offeree who can thus accept an offer ,
after the offeror has taken steps to
 An offer can be revoked at any time by
the offeror provided there was no
acceptance.
 Once acceptance has taken place there
can be no revocation.
Building tenders are usually irrevocable as
the tenderer contracts to keep his offer
open for a specific time.
In such a case an option is created and the
tenderer is not entitled to revoke his
tender until the time has elapsed.
In the event of the breach of the contract
by the offeror the offeree is entitled to
damages, unless the terms of contract or
the surrounding circumstances indicate
a different intention.
An offer lapses on death of either the
offeror or the offeree
provided acceptance has not taken place.
Once the offer has been accepted; death
of either party does not usually affect
the contract.
E- Tendering

This is tendering which is done on the internet.

 There are a number of e -tender systems
available to tendering parties
 Each of the systems offering similar
common tools (e.g. messaging to all
parties), document management tools and
audits traits
 The functioning and process aspect of e-
tendering systems are similar and they
attempt to mirror the legal requirements of a
proper tendering system
 The components of the system facilitate the
process of prequalification or registration,
public invitation, tender submission, close of
tender, tender evaluation and award of tender
 The key to developing, implementing or
managing any e-tendering system is in
converting (or indeed, enhancing) the
functionality of the traditional paper-based
system to an electronic environment while
maintaining legal compliance.
 legal issues in e-tendering
Authentication system
 E-tendering system should minimize the
potential for a person to submit a tender
without the appropriate authority
 A person can forge a tender adopting another person’s
identity.
 Documents and identity can be easily manipulated in an
electronic environment
 E-tender systems can use some form of
prequalification or registration (or at least a password
system) may be necessary to prevent this from
occurring
 Or To enable the tender manager and principal to stay
Time of Close of Tender
 The time at which a tender will legally be received
by the principal is of importance to the question
of non-conforming tenders.
 In an electronic environment, additional factors
may impact on the ability of a tenderer to submit
their tender on time.
 For example, the principal’s server may be
unreachable at the time for submission of the
tender
 An offer to tender is generally effective upon
receipt (although the terms of the tender may alter this)
 In an e-tendering system, there may be some
uncertainty as to when an offer is received.
 An electronic communication is taken to be received
under the following circumstances
 If the recipient has chosen an information system
for the purpose of receiving data messages,
receipt occurs:
 At the time when the data message enters the chosen
information system; or
 At the time when the data message is retrieved by the
recipient;
  If the recipient has not chosen an information
system, receipt occurs when the data message
enters an information system.
 The conditions of tender should elect the information
system (that is, the “electronic tender box”)
 The time at which it will be deemed to enter that
tender box (possibilities include upon receipt of an
email confirming the tender had been received or at
the time noted on the e-tender website).
Award of Tender and Formation of Contract
 The process of awarding contract can be done
either electronically or on paper
 The contracting authority have to inform all
the participants of the results of the award as
soon as possible
Archiving
 This is process of maintaining and keeping records.
 Maintenance and keeping of records applies to both
paper based and electronically formed contracts
following the tender process
 Government agencies and private sector principals
alike need to keep and maintain records of the
tender process in the event of litigation.
Types of E-Tendering

A simplistic e-tender system

It involves only principal-to-bidder communication.
 This allows the principal to post the tender
advertisement and documents on a website and
the bidders download the tender documents.
 However, the documents are still submitted in
paper.
 There is no two-way communication occurring in
an electronic environment.
More automated options
 Include tender submission and two-way
communication.
 This is where the tender documents are
downloaded from a website and also submitted
electronically.
 There is two-way communication between the
principal and bidder and the distribution of any
addendums and negotiation take place
electronically.
 However, the tender is not awarded
electronically.
Fully automated processes
 This involve electronic contract formation and
post-formation contract management (i.e.. on-
going contract administration carried out
electronically via collaboration software,
perhaps through (say) to electronic final sign-
off in installation tenders).
Security in E -tendering

 The security and legal requirements of the e-

tendering process depends upon the nature of
the electronic process to be used.
 E-tendering security requirements are similar
to other electronic business systems.
 There is a need to address the honesty,
confidentiality, authentication and non-
repudiation in e-tendering communication
Key issues include:
 The need to provide secure access to
critical systems, particularly in the case of
the tender box which stores the tender
submissions after the tender closing time.
 Submitted tenders are highly confidential
documents, which are often a target for
business collusion.
 The security of an e-tendering system relies crucially
on the recording of the date and time at which events
occur within the system, as well as on the compliance
to agreed timelines.
 This is particularly important at the close of tender as
late tenders may be deemed to be non-conforming.
 The evidentiary reliability of electronic records and
data is important.
 System availability is crucial, particularly during the
tender submission stage before the close of tender time.
Some examples of specific security mechanisms include:
 Encryption for electronic communications;
 Unique username and password to identify pre-qualified
tenderers (meaning that only authenticated tenderers will be
allowed to download the tender specification).
 Tender advertisements, addendums and inquiry
responses should be digitally signed by the principal.
 Encryption of sensitive tender documents, such as
offers, while stored
 Digital time-stamping to provide timestamp integrity,
which can be implemented as a trusted third-party
service; and
 Digital signature mechanisms to provide
authentication and non-repudiation that will determine
the origin and integrity of records.
 Legal Tender Terms and
They include: Conditions
 Pre-qualification (or at least registration prior
to access);
 Access to the system must be through a
username and password
 The bidder is obliged to maintain security of
access username and password; and
 Excluding the principal’s liability for misuse of
username and password, and possibly
appropriate indemnities from the bidders.
 Certain communications between the principal
and the tenderer may need to be authenticated
and non-repudiation for each message
provided as they are part of the contract
formation process.
 Electronic or digital signatures need to be
addressed
 Provisions specifying the determination of the
time of receipt of e-documents or
communications should be included in the
conditions of tender;
 The terms of tender should contain a clause
whereby the tenderer consents to the use of
electronic communication and agrees to
designate an information system (email
address) for receipt of electronic
communications.
 This ensures compliance with provisions of the
Electronic Model Law and can alert the bidder
to the fact that all communication with the
principal will be electronic.
CONTRACT AWARD

 If a contractor’s tender is accepted a contract

award letter is given which simply advices the
successful contractor that it has won, the
contract
 This letter is issued once a procurement
process is complete that is to say , bids have
been clarified and terms and conditions
negotiated to a satisfactory conclusion
 However, in other circumstances a letter of
intent can be issued pending final agreement
on terms and other matters in the contract
Letter of intent
 It is a document expressing an intention to
enter into a contract at a future date but
creating no contractual relationships
 It is sometimes referred to as a unilateral
contract or ‘if’ contract
 This simply means that the contract has
been formed on condition and as such
there is no contract until the condition is
fulfilled
 It is not an agreement to agree
 Used as an interim arrangement to
mobilize construction prior to a formal
contract being executed where final
agreements on contract terms and other
matters are still pending
 Where this letter is issued, it does not serve as
an alternative to a full contract.
Why used
alleviate programme constraints by enabling
certain activities to be progressed pre-contract,
such as:
• off-site pre-construction activities;
The legal effects
 The letter of intent does not give rise to
any legal duty
 Also it does not give rise to any
responsibility in contract,
but does not exclude or negate a right to
recover reasonable expenditure on
quantum meruit
 The letter of intent results in the
creation of conditional or secondary
contractual obligation
 It can also result in a legally binding
executory contract capable of being
accepted if it is not properly drafted and
the whole works can be executed basing
on the contractor’s tender
 If the letter is properly drafted, either
employer or contractor can simply bring
the arrangement to an end without notice
Letters of intent normally commonly
stipulates a maximum figure that the
employer is prepared to pay
 The idea is that before the contractor
completes the works either the contract is
agreed and performed or the work is
stopped where negotiations would have
failed