CHAPETR – 2

Chapter
h Outline
li
‡2.1. Principles of Contract Law
‡2.2. Types of Construction Contract
‡2.3. Contract Documents
‡2.4. Contract Management :
„Contract Administration and Closing
„Claims and Dispute Management
Preface

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing

Contract Procurement Contract

Planning Management Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance
Principles
p of Contract Law
Principles of Contract Law
Principles of Contract Law
Principles of Contract Law
Principles of Contract Law

‡ Legal Definition of Contract

„ According to the Civil code of Ethiopia, Art.1675:

‡ A contract is an agreement whereby two or more

persons as between themselves create, vary or
extinguish obligations of a proprietary nature.

‡ An agreement that affects the legal relationship

between two or more parties.
Principles of Contract Law

‡ Elements of a Contract ‐ What does it

take to have a legally binding
contract?
t t?
‡ Contracts require 4 basic elements
„ Mutual Agreement
‡ Offer
‡ Acceptance
„ Legal Objective
„ Valid Consideration
„ Legal Capacity of the parties
 Principles of Contract Law

1. What is Mutual Agreement?

„ It should show evidence that there was ‘MEETING OF MIND’’
„ Offer – Clear and Unambiguous
„ Acceptance – clearly accepting deal offered & anything else –
Counteroffer & Non acceptance
2. What is legal objective?
‡ The
h thing
h contracted
d must be
b legal
l l in and
d off itself.
lf
3. What is a valid consideration?
‡ In exchange for the offer to perform,
perform the recipient or client
must offer something of value
„ Money
„ Promise of future work or revenue
„ Goods or Services
Principles of Contract Law

‡ Without valid consideration a contract is invalid

& unenforceable

4. What is legal Capacity?

‡ In simplest form, parties must be:
„ Of Age
„ Mentally
y Competent
p
‡ In construction environment, parties must have:
„ Legal authority to issue & execute contracts
„ Must have proper license to have legal capacity
Principles of Contract Law

Concepts and Basic Terms of Contracts: ‐

‡ Offer: ‐ proposal to enter into a contract.
‡ Acceptance: ‐
‡ Performance of Contracts: ‐
„ Performance – fulfilling respective legal obligations
‡ Contractual Liability:
‡ Extra – Contractual Liability: ‐
Types of Construction Contracts
Types of Construction Contracts
Types of Construction Contracts

Contracts for the execution of civil engineering

g g works are
of following type:
‡ (a) Lump sum contract
‡ (b) Unit rate contract
‡ (c) Lump sum and schedule contract
‡ (d) Cost plus fixed fee contract
‡ (e) Cost plus percentage of cost contract
A. Lump Sum Contract( Fixed Price)
‡ Lump sum contract are typically used for buildings.
‡ Difficult to make adjustments.
j
Types of Construction Contracts

‡ A lumpp sum contract is more suitable for works

for which contractors have prior construction
experience.
‡ Not
N suitable
i bl ffor unpredictable
di bl conditions.
di i
B. Unit Price or Bill of Quantity (Fixed Price)
‡ Also
Al called
ll d S
Schedule
h d l contract
t t
‡ Used for work where it is not possible to
calculate the exact quantity of materials that will
be required.
‡ Unit‐price
p contracts are commonly y used for
heavy/highway work.
Types of Construction Contracts
Types of Construction Contracts

‡ Items whose actual quantity varies from the

estimated quantity by more than 15 or 20%, either
above or below the estimated quantity, are
sometimes subject to renegotiation of the unit
price.
C. Lump sum and scheduled contract
‡ Combines the features of the Lump sum and
schedule
h d l contracts
‡ Additional items are amounted as per the
attached
tt h d item
it rate.
t
Types of Construction Contracts

D. Cost plus
‡ Used when it is impossible
p to ppredict their costs during
g the negotiation,
g , bid,,
and award process.
‡ Factors ‐ unpredictable and extreme weather conditions, transportation
problems, combat or war, or contracts where the amount of effort that will be
required depends on another contractor’s work.
‡ Cost plus contracts take many forms: most common cost plus fixed fee and
cost plus a percentage.
D.1. Cost plus Fixed Fee Contact
‡ Is desirable when the scope
p and nature of the work can at least be broadly y
defined.
‡ The amount of fee is determined as a lump sum from a consideration of the
scope of work, its approximate cost, nature of work, estimated time of
construction, manpower
p and equipment
q p requirements
q etc.
‡ The contractor will not be tempted to increase the cost to get more revenue.
‡ The contractor in this type of contract is selected on the basis of merit rather
than the fee alone.
Types of Construction Contracts

D.2. Cost pplus Percentage

g off Cost Contract
‡ In this type of materials and labor are arranged between
the client and the contractor.
‡ The tendency of the contractor to increase the cost of work
to earn more profit by way of percentage of enhanced
actual cost is the major
j demerit of this contract type.
yp
Special Types of Contracts:
„ Turn – key Contract
„ Package Contract
„ Negotiated Contract
„ Runningg Contract
2.3. Contract Documents
‡ The main contract documents are:
„ Invitation
I it ti tto ttender,
d
„ Instruction to tender,
„ Form of tender
tender,
„ The Agreement,
„ Condition of contract(( General and Particular),
),
„ Specification (General and Particular),
„ Bill of Quantities,
„ Drawings,
„ Addenda and
„ Appendix
A d to Tender.
d
2.3. Contract Documents

Standard Bid Documents

MLDOs Business Asson’s

Asson s Professional Asson
Asson’ss
WB, ADB, EC/U, etc Contractors, Civil Engineers, Architects,
Consultants Construction Management,

Donors’ Interest
Donors
Business Interest Professional Interest

Public Authorities Public and / or

Public Works Bodies, Government
Public Financiers Interest
2.3. Contract Documents

‡ In Ethiopia Construction Industry the following

standard conditions of contracts are commonly
used:
„ FIDIC (1987) – Condition of Contract
„ PPA,
PPA Standard Bid Document
„ MoWUD, Standard Condition of
Contract (1994)
„ BaTCoDA,
BaTCoDA Condition of Contract
2.3. Contract Documents

‡ FIDIC Conditions of Contracts

„ FIDIC is the international federation of national
associations of independent consulting engineers
„ Founded in 1913 by the national associations of three
European countries (France , Belgium and Switzerland)
„ Now with membership from over 74 countries,
countries
members are generally national associations with the
Ethiopian Consulting Engineering and Architects
Association being one.
„ FIDIC has evolved into a leading body for development
of model standard forms of contract for use in the
international construction industry.
2.3. Contract Documents

‡ FIDIC conditions of contracts have two parts:

„ General Condition of Contract
„ Particular Conditions of Contract
‡ FIDIC Conditions of Contracts
„ 1957 – RED BOOK
‡ The very first edition – civil engineering
‡ Contract type – Add Measurement Type
„ 1963 – YELLOW BOOK
‡ For mechanical and Electrical works
„ 1987 – OLD FIDIC
‡ Comprises the RED and YELLOW Books.
2.3. Contract Documents

„ 1995 – ORAGE BOOK

‡ For Design Build and Turnkey Projects
„ 1999 – GREEN BOOK
‡ For short
h period
d projects ( 6 months)
h )
‡ Low contract value ($ 500,000)
„ 1999 – SILVER BOOK
‡ For turnkey for power plants, factories and facilities
‡ MBD – Harmonized Edition
„ Multi‐later banks (MDBs) tried to harmonize the FIDIC
conditions to suite there procurement needs.
„ W ld B
World Bankk – has
h published
bli h d one iin 2004
2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY

‡ 1959 – Ministry
y of Housing
g

‡ 1987 – Building and Transport Construction and Design

Authority (BaTCoDA)

‡ 1994 – Ministry of Works and Urban Development

(MoWUD)
„ Based on FIDIC RED Book
„ Difficult to use for private contacts

‡ 2006 – Public
P bli Procurement
P t Authority
A th it (PPA),
(PPA) Standard
St d d
Bid Document
 2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY

‡ 2006 – PPA Condition of Contract

‡ Dispute/Claim Management –
„ Claim ‐ Adjudicator – Arbitration
‡ Price Escalation –
„ MoWUD – only by decree ( Fuel)
„ 2004 – Directive
Di ti ( Cement,
C t Reinforcement
R i f t and
d Bitumen
Bit
were added)
„ PPA – price escalation formula is provided
‡ Advance Payment - Special Condition of Contract
‡ Duration - Special Condition of Contract
‡ Liquidated Damage – 1/1000 of Unjustified Delay Amount
vs. 1/1000 on basis of contract price
2.3. Contract Documents
ETHIOPIAN CONSTRUCTION INDUSTRY
2.4. Contract Management :
C t t Administration
Contract Ad i i t ti and d Cl
Closing
i
‡ Contract Management Process
Contract Administration
‡ Identifying
y g contractual responsibilities
p of Stakeholders.
„ Reviewing the Terms of Contract Documents
„ Extract Monitoring Responsibilities
„ Preparing
p g Monitoring
g Responsibility
p y Summary
y Sheets
‡ Determining and understanding the construction
components of the project.
‡ Reviewing the Contract Drawings and Technical Specifications
‡ Extract the Construction Methods and Sequences
‡ Prepare Construction Methods and Over all Sequences Sheets
‡ Review submitted (Integrated) Schedules and Breakdowns for
operations such as Organizational Breakdowns, Resources
Breakdowns & Schedules and Time Schedules.
‡ Record, Monitor and Evaluate Progress of Mobilizations,
Record Mobilizations
Works and Completions.
Contract Administration
‡ Report
p Project
j Status daily y and / or p
periodically
y
and Completions.
‡ Certify qualities of materials, shop drawings,
samples,
l workmanships
k hi and d works.
k
‡ Measure Works, Record Site Potentials and
Certify Payments and Completions
„ Take off sheet and Bending Schedules are used for Measurement
of Works
„ Method of Measurement is according to standard practices
„ Site Potentials such as material, equipment and Manpower on
site together with appropriate site organization is recorded
„ Advance Interim and Final Payments are certified
Advance,
‡ Mediate Disputes.
Contract Closing
‡ Closing of Contract looks into issues related to
Maintenance Period and Remedial works,
Dealing with Left Over Claims and Disputes, if
any, Closing of Accounts and Completion
Certificates.
Claims and Dispute
Disp te Management
 Claims and Dispute
Disp te Management
‡ Dispute in simple terms is a difference in a line of
thought.
‡ Claim is mostly y concerned with entitlements and
liabilities arising under, or as a result of, a legally
valid contract.
‡ A construction claim is therefore can be a demand
for payment of additional compensation,
adjustment
dj off the
h partiesʹ
i ʹ respective
i contractuall
obligations, Extension of Time or compensating
delay damages,
damages or any other change with regard to
the contractual conditions or terms.
Cl i and
Claims d Di
Dispute M
Management
‡ Claim in practice can also be understood in
different ways based on the perceptions held by
contractual stakeholders.
„ A claim is a disguised form of a blackmail,
„ A claim is the last chance to bail out of a losing job, and
„ A claim is an assertion to a contractual right.

‡ Claims
Cl i can bbe associated
i t d with
ith th
three major
j
categories that can be understood as the different
types of claims
claims. These are:
 Cl i and
Claims d Di
Dispute M
Management
‡ Time Related Claims: Claims associated with delay or in time
completion of projects where either of the following six Entitlements or
Penalties are subjected to:
„ Time Extension only
„ Liquidated Damages only
„ Ti
Time E
Extension
t i and d Cost
C t Compensation
C ti
„ Concurrent Compensations
„ Bonus
„ Relivingg of Obligation
g
‡ Cost Related Claims: Claims associated with monetary compensation
where either of the following entitlements or penalties are entertained:
„ Additions requiring rate adjustments
„ Price Changes
„ Provisional sum adjustments
‡ Default by Contracting Parties: Claims associated with non
performances of contractual obligations
p g such as:
„ Delay in Payment Certificates
„ Suspensions and Terminations
Cl i and
Claims d Di
Dispute M
Management
‡ Claim Administration Processes
Contract Conditions related to Claims
Major Causes for Claims
‡ Levy, 2000 outlined 11 reasons why claims can
be initiated. They are related to
„ p
poor or unclear tender and/or contract documents,
„ poor or inadequate administration of
responsibilities by stakeholders, and
„ U f
Unforeseen or uncertain
t i situations
it ti d
during
i execution
ti
‡ Wideman, 2001 has also identified claim causes
into three main categories:
„ Changed conditions
„ Additional works,
works and
„ Delay for cost overruns and time extension.
Al
Alternative
i DiDispute R
Resolution
l i S System
‡ ADR – includes
‡ Preventive Dispute Resolution System ‐ Partnering, Use of dispute
resolution advisors and Use of Facilitators

‡ Amicable Dispute Resolution System ‐ Negotiation, Mediation,

Conciliation and use of Mini‐Trials to administer the claim in a less
formal, simple procedure, more flexible, less adversarial and strictly
confidential mode so as to avoid the time and cost implication of
claim processing.

‡ Judgmental Dispute Resolution System including Adjucation or

use of Dispute review board, Arbitration and Litigation where the
formal adjucatory or common law system is applicable to bring the
closure of claim processing.
Alternative Dispute Resolution System
Preventive
i Dispute
i Resolution
l i System
‡ PARTNERING –
„ Project Partnering
„ Strategic Partnering
 Alternative Dispute Resolution System
P
Preventive
i Dispute
i Resolution
l i System
‡ ALLIANCING
‡ Alliancing is generally a tender arrangement where all the principal
tenderers organise into groups with common aims, prior to submitting
the tender.
‡ STANDING NEUTRALS
‡ DISPUTE REVIEW BOARDS
‡ DRB ‐ a representative from the owner, one from the contractor and a
third, selected by these two representatives. The third member chairs
the board.
‡ The members usually have experience in the kind of construction work
being undertaken and are also familiar and experienced in dispute
resolution. It is important that all the board members are independent
off any off the
h contracting parties, although
lh h they
h are paid
d by
b them.
h
Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System

‡ Amicable Dispute Resolution System includes

Negotiation, Mediation, Conciliation and use of
Mini‐Trials
‡ NEGOTIATION
‡ IS NEGOTIATION AN ALTERNATIVE DISPUTE
RESOLUTION METHOD?
‡ It can be argued that negotiation is not part of an
ADR at all, largely because it is not a specific,
detailed system such as arbitration or even
mediation
di ti
 Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System
‡ MEDIATION
‡ Defn: “a process in which the parties to a dispute, with the
assistance of a neutral third party (the mediator), identify
the disputed issues,
issues develop options
options, consider alternatives
and endeavour to reach an agreement. The mediator has no
advisory or determinative role in regard to the content of
the dispute or the outcome of its resolution
resolution, but may advise
on or determine the process of mediation whereby
resolution is attempted”.
‡ WHY USE MEDIATION?
„ Save money
„ Preserve relationships
„ Maintain confidentiality and privacy
Alternative Dispute Resolution System
Amicable
i bl Dispute
i Resolution
l i System
Alternative Dispute Resolution System
A i bl Dispute
Amicable i Resolution
l i System
‡ CONCILIATION
‡ Conciliation is in many respects similar to
mediation. The conciliator is still an independent
p
third party but the difference is that the
conciliator may make more specific suggestions
to resolve the dispute. The conciliator may also
have a more forceful and powerful role in the
various meetings.
meetings
‡ Unlike mediation, there is an international set of
rules for conciliation
Alternative Dispute Resolution System
Judgmental
d l Dispute
i Resolution
l i System

‡ Includes Adjucation or use of Dispute review

board, Arbitration and Litigation
‡ The Adjucation
j or dispute
p review board has been
discussed in the above section.
‡ Litigation
g means g goingg to court and being
g jjudged
g
by a public appointed jury. This process is
obvious quite expensive as the public judiciary
system is
i less
l efficient
ffi i and
d time
i taking.
ki
‡ The most common alternative to litigation is
arbitration.
bit ti
ARBITRATION
‡ ‘Arbitration’
Arbitration has been defined as: “ is the
reference of dispute or difference between not less
than two parties for determination, after hearing
both sides in a judicial manner, by a person or
persons other than a court of competent
j i di ti ”
jurisdiction”.
‡ ARBITRATOR
‡ He
H iis private
i iin so ffar as
„ He is chosen and paid by the disputants
„ H does
He d nott sit
it in
i public
bli
ARBITRATION
„ He acts in accordance with p privately y chosen
procedure so far as that is not repugnant to public
policy
„ S ffar as the
So th law
l allows
ll h
he iis sett up tto th
the exclusion
l i off
the state courts
„ His authority y and p
powers are only y whatsoever he is
given by the disputant’s agreement
‡ ARBITRATION ADVANTAGES
„ There is belief by both parties that Arbitrator is
qualified to handle the case
ARBITRATION
„ The Arbitrator is an expert
p in the field
„ The procedures are open to the parties
„ Hearing are private
„ The decision is binding

‡ THE LEGISLATION
‡ The UNCITRAL Model Law on International
C
Commerciali lA
Arbitration
bi i iis usedd as the
h starting
i
point from which to consider current and
proposed legislation in relation to a given clause
clause.
ARBITRATION
‡ MODEL LAW
‡ O off the
One h advances
d in using arbitration
b as a tooll ffor d
dispute
resolution around the world was the publication of the Model Law as
adopted by the United Nations Commission on International Trade
Law on 21 June 1985.
‡ The Model Law applies specifically to international arbitration.
‡ The definition provided by the Model Law to the interpretation of the
words ‘commercial’ states that it should be applied to all relationships
of a commercial nature,
nature whether contractual or not (Model Law
Endnote 2).
‡ In Ethiopia the important source of legislation for Arbitration is Addis
Ababa Chamber of Commerce & Sectoral Associations (AACCSA)
Arbitration Institute
Institute.
‡ Regional sources of information include Kenya (Dispute Resolution
Center and Nairobi Peace Initiative), Malta (Malta Arbitration Center),
Nigeria (Nigerian Arbitration and Conciliation Act) and South Africa
(C
(Center for
f Conflict
C fli Resolution
R l i and d Commission
C i i for f Conciliation,
C ili i
Mediation and Arbitration).
THE ARBITRATION PROCEDURE