Literature Review on Contractual Issues Arising Claims

Avoiding construction claims and disputes requires understanding of the contractual terms, early no adversarial communication, and understanding of causes of claims.(Cheryl Semple, Francis T. Hartman, and George Jergeas) identify some of the critical element in construction contract, and investigates the causes of claims, categories of compensation of claims and contract clauses quoted in claims by studying high-rise apartment building and institutional buildings. Construction contract determines the basis for the relationship between the parties involved in it. A contract is a promise or agreement that the law will enforce. Construction contract are very often long, complex document, consequently, disagreement or disputes can arise regarding contractual obligations or expectations, when one party feels that the contractual obligations or expectations have not been meet and they fell that they deserve monetary and/or time compensation they may submit a claim. A claim is defined as an assertation to the right to remedy, relief or property (Canadian Law Directory)

Currently construction industry in UAE has number of disputes arrives because of disputed in legal document and poor coordination in general and particular condition of contract. UAE is fast growing country in terms of construction and lots of competition for getting the project because of that contractors are bidding less and claiming more amounts. A client tries to reduce the over all cost of project and contractors tries to get more profit and result is disputes arise. Every claim submitted by the contractor puts presser on client and consequently it affect increasing property price. That is why construction claim are considered as the most unpleasant event in construction industry. Claims can be reduced by proper arrangement of scope of work in contract document. Contract is the document which explains all rolls and liabilities of the parties involved in it. For the purpose of study for analyzing contractual issues literature review is divided in two parts. First part will discuss on Contract law in general and particular terms used in formation of construction contract. Second chapter will discuss on Claims under FIDIC contract and previous research in claims.

1 Introduction to contract law
1.1 Legal systems

A legal system, is a system for identifying factual situations where the state will impose sanctions on a person (criminal law), where one person can seek redress from another person (civil law), and where a person can challenge decisions of the state and public bodies, such as local authorities (administrative law)1. For example: If someone takes property belonging to another with the intention of permanently depriving them of that property, this is categorized by the criminal law as a crime (theft) for which the state can seek an order for imprisonment, a fine or both. The same conduct is categorized by the civil law as a tort (known as conversion) for which the person whose property is taken can seek an order requiring the person taking the property to return it, to pay compensation (damages), or both. If the property is taken by the state or a public body in wrongful exercise of a statutory or other power, the decision to do so can be challenged in administrative law by seeking a declaration that it is invalid and should be reconsidered.

1.2 Criminal, civil and administrative law

The criminal law is principally concerned with the imposition of fines and imprisonment sought by the state against persons. The civil law is concerned with awarding compensation and making orders in favor of one person against another. Administrative law is principally concerned with making orders concerning the administrative actions of the state and public bodies.

1.3 Obtaining redress

The usual means of obtaining redress is in a court of law. The criminal courts, primarily the Magistrates’ Courts and the Crown Court, are concerned with redress in respect of criminal matters .The civil courts, primarily the County Courts and the High Court, are concerned with redress regarding civil claims. In many countries, a separate court is established to deal with claims concerning the administrative actions of the state and public bodies, but this is not the case in everywhere, where administrative law matters are dealt with by the High Court. The courts are not the only means of obtaining redress in many civil matters.

1.4 The civil law of obligations

Each of the principal divisions of law – criminal law, civil law and administrative law – contains numerous subdivisions. The subdivision that is relevant to this publication, and to the series of which it forms part, is that part of the civil law concerned with the law of obligations.

1.5 Obligations in contract and tort

The law of obligations has, in turn, two parts: the law of contract and the law of torts. In the law of contract, a person’s obligations are primarily founded on agreement and are, in general, owed only to the other party to the agreement, not to persons generally. Because obligations owed in contract are founded on agreement, they can be as prescriptive and detailed as the parties wish and their agreement requires. For example, agreed obligations can concern the development of an office block in accordance with detailed requirements, or the structuring of a long-term business relationship, such as a partnership. It would be impossible to regulate such relationships using only the law of torts, since obligations in tort are too generalized. In the law of torts, a person’s obligations are primarily determined by general principles of law and are, ordinarily, owed to persons generally. Since obligations owed in tort are imposed as part of the general law, they are expressed in the form of general standards of conduct. For example: the obligation to exercise reasonable skill and care so as not to cause injury or damage to others forms the basis of the tort of negligence; the obligation not to unreasonably interfere with a person’s use or enjoyment of their land forms the basis of the tort of nuisance. Both parts of the law of obligations are significant for the construction industry. Work on a building project, such as the provision of consultant services, construction or materials, will ordinarily be carried out under a contract since this is the only way that obligations having the required definition and precision can be given legal force. But the work provided may, if defective, cause damage not only to the person with whom those obligations are agreed but to others, such as adjacent landowners, users and subsequent owners of the project. While the person or persons with whom the contract is made will, ordinarily, be able to seek redress in the law of contract, those who are not parties to that contract will have to seek redress in the law of torts.

The law of contract is of fundamental importance for the construction industry because the contract is the principal vehicle for those working on a project to be engaged, their obligations are regulated and redress assessed if things go wrong. The law of torts has a subsidiary importance if things do go wrong.

1.6 Rights and obligations

The law is often discussed in terms of obligations, there is, in general, for each obligation a corresponding right .Thus, an obligation not to unreasonably interfere with a person’s use or enjoyment of land can be seen, from the perspective of a landowner, as a right to enjoy and use their land free from such unreasonable interference. An obligation to perform the terms of an agreement can be viewed from the other party’s perspective as a right to have those obligations performed. In contract law, these rights and obligations are often referred to as the benefits and burdens of the contract.

1.7 Defining a contract

There are various definitions that attempt to encapsulate the essential nature of a contract. The definition that is most readily understandable in a commercial context is that a contract is an agreement that gives rise to obligations, and corresponding rights, that the law will recognize and enforce.

Since a contract is founded on agreement, the parties are free, within wide limits, to agree the obligations to which they wish to be bound. This is known as the doctrine of freedom of contract. It means, at any rate in a commercial context, that the parties to a contract will ordinarily be bound by the agreement they make, however inappropriate, one sided or even ruinous that agreement may turn out to be for one of them. The corollary of the doctrine of freedom of contract is that a person cannot be forced to contract. In a commercial context this means that, if terms cannot be agreed, either party to the negotiations can walk away, however inconvenient or costly, in terms of wasted time and money, this is for the other party. It may be possible to break off negotiations and walk away even if work has commenced in anticipation of a proposed contract.

Once a contract is concluded, it binds the parties in law. If a party to a contract fails to comply with its obligations under the contract, the other can seek redress for that failure. This can be done, as appropriate, by enforcing a right to payment (a claim in debt), by seeking financial compensation for losses suffered as a result of the failure (a claim in damages for breach of contract) or, in certain circumstances where financial compensation does not provide adequate redress, by an order that the defaulting party perform its obligations (a claim for specific performance) or stop acting in breach of its obligations (an injunction). For example, if a consultant fails to perform services he or she has contracted to provide, the client can seek damages based on the additional cost of obtaining substitute performance from another consultant. If an employer fails to pay for work provided by a contractor, the contractor can recover that payment as a debt. If a person contracts to sell land, such as an office or house, but refuses to complete the sale, the purchaser can seek an order that the land be conveyed to it.

1.8 Categories of contract

The categories of contract is most relevant to the construction industry include the following.

Contracts made by deed and simple contracts (the rest). Contracts entered into by deed do not require consideration; simple contracts do. For example, a promise of a gift will be contractually binding only if it is given by deed. Contracts made by deed also attract a longer limitation period (the period during which proceedings for redress must ordinarily commence) than simple contracts. The period is 12 years from breach for contracts made by deed, 6 years from breach for simple contracts.

Contracts for estates or interests in land (such as a contract for the sale or lease of a house or office). Such contracts are governed by the Law of Property Acts and related legislation and by that branch of the law known as the law of real property. Most of such contracts are subject to the code for payment and dispute resolution provided for in that Act.

Arbitration agreements (an agreement that provides that disputes will be determined by a private tribunal sitting as arbitrator, not by the court). Such agreements are subject to the detailed code set out in the Arbitration Act 1996.

Consumer contracts (certain categories of contract, principally contracts for goods, for work and materials and for services where one of the parties is contracting for purposes that are outside the scope of its business, if any, and the other is contracting in the course of a business). Such contracts are subject to various statutory controls that may invalidate certain types of unfair or unreasonable terms imposed to the determent of the consumer.

1.9 The importance of contracts in the construction industry:

Contract is only the forming agreements that are recognized as binding by the law of contract that the parties can regulate their rights and obligations in the knowledge that these rights and obligations can, if necessary, be enforced. Given the importance of contract law in structuring commercial relations, it is surprising that those procuring and providing work in the construction industry often deal inadequately with the formation of their contracts. This leads not only to uncertainties about what was agreed and when, but also to disputes about whether a binding agreement was concluded at all and whether legally enforceable obligations are created to provide work or’ to pay for it. Such disputes can arise during the work as well as after it is completed.

1.10 Contractual terms used in formation of contract

The obligations that the parties accept when they conclude a contract are contained in its terms. The terms may be express or implied or, more usually, a combination of both.

1.10.1 Express terms

Express terms are those that the parties expressly state when making their contract. Express terms may be written or oral. Oral terms may be evidenced in writing.

* Written terms set out in documents forming the contract – for example, where a client and builder execute a copy of a standard form building contract, such as a copy of the FIDIC condition of contract setting out all of the terms they have agreed, or where, as is often the case in a contract for the sale of goods, all of the terms are set out in a letter of offer, accepted by the purchaser orally or by conduct.

* Written terms contained in documents referred to (incorporated by reference) in the exchange of communications forming the contract

* Oral terms agreed at a meeting or over the telephone. It is preferable for oral terms to be recorded (evidenced) in writing so that there can be no dispute about what was said, for instance by making and circulating a note of what was agreed. But failure to do this will not affect the validity of such terms, unless the contract is of a type whose terms must be made or evidenced in writing.

1.10.2 Implied terms

Implied terms are those that are included in a contract even if the parties do not expressly refer to them at the time the contract is concluded.

* Contract terms are implied by law or by statute if the contract is of a type in which such terms are ordinarily implied and the implication of those terms is not contrary to the express terms of the contract. For example, terms are ordinarily implied by the Sale of Goods Acts into contracts for the sale of goods, and by the Supply of Goods and Services Acts and law into contracts for work and materials or for services.

* Terms implied to reflect the parties’ presumed intention if, having regard to the words used in the contract and the circumstances at the time it was concluded, they are necessary to give business efficacy to the contract or are so obviously a part of the contract that both parties would, if asked at the time, have said that they go without saying. For example, a contract to use a wharf will be subject to an implied term that it is safe for the ship to lie at that wharf. But a term will not be implied on this basis if it is inconsistent with the express words of the contract.

* Terms may be implied by custom where the custom is a certain and general incident of a particular trade or place, and the use of the term is well known, reasonable and not contrary to law or to the express words of the contract.

* Contract terms implied by course of dealing where the parties have contracted on the same terms on a number of previous occasions and they make another contract of similar type without expressly referring to those terms.

1.10.3 Exemption clauses

An exemption clause is a contract term by which one party, usually but not invariably the party proposing the terms of contract, seeks to avoid or exempt itself from what would otherwise be its obligations or liability under the contract (an exclusion clause), or seeks to restrict or limit its liability in some way (a limitation clause).An exemption clause can work indirectly by, for instance, restricting the enforcement of obligations under a contract, or by making enforcement unusually onerous.

Exemption clauses are commonly found in standard terms of business. For example, a seller of goods may seek to limit its obligations by providing in its standard terms that they form the whole agreement of the parties, and no terms are to be implied at law. The purpose of such wording is to exclude the implied terms of quality and title that would otherwise apply to the contract. A consultant provides in its terms of appointment that any liability, whether for default under the contract or in negligence, is limited to a specific sum. The purpose of such a provision is to cap the consultant’s potential liability to its client. Because exemption clauses exclude or limit what would otherwise be a party’s obligations or liabilities under a contract, they must be clearly incorporated and clearly worded if they are to be effective. There are also various statutory controls over the effectiveness of such provisions, and, in a few instances, criminal sanctions are imposed on those who seek to include such clauses in their contracts.

1.11 Most Commonly Used Types of contract in UAE construction industry

There are various types of conditions of contracts used all over the world. Most commonly used conditions of contracts in the past are FIDIC in Middle East & JCT & NEC in United Kingdom. In United Kingdom mainly JCT & NEC conditions of contract is in practice in various forms. The conditions of contracts are listing the legal structure to be refereed to in case of any dispute or ambiguity arises. It also establishes a common basis to both the contractor and the client in understanding each party’s commitments and rights against the other party. Understanding the rights and obligations are important prior to the agreement of a contract between the parties.

1.12 Key contract clauses used in condition of contract
1.12.1 Audit –

This clause typically outlines an owner’s right to perform reviews (audits) of contractor costs or records. Such clauses ordinarily outline what costs or records are subject to audit, when and under what circumstances. In cost plus contract this clause is very useful to client to restrict the overall project cost

1.12.2 Changes –

This clause is critical. This is the clause that allows the owner to direct changes to the work, including plans, specifications, and time of performance, means, and methods. Absent a change clause, an owner is precluded from making changes to the work. Of particular importance in this clause is whether the clause allows the owner to unilaterally direct changes to the work (in which case, if the contractor refuses to comply with the directives, they are in breach of the contract). Alternatively, the clause requires the owner and the contractor to mutually agree on the change (a bilateral change). On the other hand if there has been any discrepancy in specification or drawing this clause will help contractually to change this discrepancy with required adjustments. However changes can result positive or negative variation in construction industry.

1.12.3 Contractor Responsibilities –

This clause lays out, in general form, the duties, obligations and responsibilities of the contractor in performance of the work. This clause assigns specific risks to the contractor, including customarily the risk of adequate labor and equipment to accomplish the work within the required timeframe, the obligation to perform work safely, to perform work in strict accordance with the terms and conditions of the plans and specifications, and to be responsible for the work of subcontractors and suppliers, etc. This clause is very important in construction for client’s points of view. As such client investing a large amount of money in the project so because of this clause he will get relief and guaranty for the works which has to be executed.

1.12.4 Delays –

This is, ordinarily, a risk allocation clause with respect to delays in the work. “Excusable delay” under a contract results in time extensions but no time related damages. That is, a contractor’s performance time is extended because of excusable delay situation, but the contract is not entitled to collect time extension costs nor is the owner entitled to impose late completion damages for this time. “Compensable delay”, on the other hand, results in both a time extension as well a time excusable and compensable to the contractor while contractor caused delay is the responsibility of the contractor (to either make up the lost time or pay the contractually stipulate late completion damages). Third-party caused delay (sometimes referred to as force majeure delay) is, most often, excusable and no compensable to the contractor.

1.12.5 Differing Site Conditions or Changed Conditions –

This clause normally provides an equitable adjustment to the contract in the event the contractor encounters a materially different condition at the site during performance of the work. This is the clause which will give relief to the contractor when he will get differ in site condition e.g. Non stop rain for few month. Differing site conditions are unforcing events no one can predict these events. In this situation this clause is very important in construction industry to restrict unnecessary claims

1.12.6 Dispute Resolution –

This clause customarily sets forth the mechanism to resolve disputes during the performance of the work. Most dispute clauses contain some form of a stepped resolution system. For example, the clause may require on site negotiation between project managers, followed by an appeal to project executives, followed by 3 days of mediation, followed by binding arbitration under a formal set of rules. Often, the location (jurisdiction) of the disputes resolution will be set forth. In construction industry there are several methods of dispute resolution like negotiation, mediation, Conciliation natural evaluation, adjudication, arbitration, and litigation. However each of then having its own framework to resolve the dispute. These are the primary steps of resolving the the disputes on claims in construction industry.

1.12.7 Force Majeure –

Some contracts contain a force majeure clause or a clause dealing with delays to the work caused by unforeseeable events beyond the control of both the owner and the contractor. Such clauses often provide lists of examples of force majeure events – acts of God, acts of the government, civil disorder, acts of war, adverse weather, fires, floods, strikes, etc. Other contracts provide for such events in the excusable delay clause. In construction to get the relief to the parties involved in the contract from the unforeseen event. This will help to gain loss or expense due to unforeseen event.

1.12.8 Governing Law –

The contracts involve parties from differing locations with subcontractors and suppliers from even more locations. Accordingly, contracts often specify which law applies to a dispute, regardless of where the dispute is handled.

1.12.9 Indemnification –

To indemnify another is to protect them against loss or damage either by paying for the loss or standing in their place in the event of legal dispute. An indemnification clause in a contract typically requires a contractor to indemnify the owner against all loss resulting from contractor errors, omissions, accidents, third party property damages in construction industry.

1.12.10 Insurance –

This clause requiring the owners and contractors to furnish multiple insurance policies prior to commencing work, among which are the following: builder’s risk/all risk; workman’s compensation; automobile, aircraft, and/or marine liability; general liability; bodily injury; broad form property damage; completed operations; personal injury; etc. Generally in UAE construction industry Third party insurance and professional indemnity insurance are covered in the contract document.

1.12.11 Late Completion Damages –

This clause specifies the damages for late completion. In general terms, there are two types of late completion damages – actual and liquidated. Actual damages are those damages an owner actually suffers when a contract is completed late and may include loss of revenue, increased engineering, architectural or inspection services, increased financing costs etc. Liquidated damages, on the other hand, is a pre-agreed upon amount the contractor will pay the owner in the event the project is completed late due to no excusable delay cause-that is, due solely to the contractor’s fault. Such damages are typically expressed in terms of a daily cost and need not be proven as actually incurred if the project is completed late.

1.12.12 Limitation of liability –

In order to cap (or limit) a contractor’s risk from late completion damages, performance penalties, etc., under a contract, many contracts contain a clause limiting maximum liability to a percentage of the value of the contract. However this clause is very important UAE construction industry. UAE is fast growing country and maximum contracts are on lump-sum basis. Contractors have to bear all risk involved in the construction.

1.12.13 Order of Precedence –

This clause intended to provide guidance to both the owner and the contractor in the event of conflicting provisions. Typically, specifications have precedence over general provisions, and so on and so forth. The legal concept is to provide guidance to people on projects in the event there are two or more conflicting provisions relating to a topic. In UAE construction industry most preferable contract is FIDIC and the order of precedence used is Contract document, ant amendment to contract document, drawing, specification and Bill of Quantity. However if any disputes arises the above mentioned order is used to settle the disputes in construction

1.12.14 Owner Responsibilities –

Similar to a contractor responsibility clause, an owner responsibility clause ordinarily sets forth the obligations of the project owner, including adequate project financing, all required and necessary permits, appropriate site access, etc. These are the responsibilities covered in the contract document to run the project without any disturbance from the client/owner side. These clauses bound the owner in contractual framework to take any action during the execution of works

1.12.15 Payments –

This is key contract clause in terms of project cash flow. This clause sets forth how often the contractor is to be paid, in what manner, and what are the conditions precedents to the issuance of payment. In construction it helps the contractor to manage the finance before the commencement of project.

1.12.16 Quantity Variations –

The contracts contain estimated quantities to be installed. In the event as-bid quantity estimates vary substantially (+/- 10 percent or more) many contracts (both unit price and lump sum) contain a quantity variation clause which allows either the owner or the contractor to request a predetermination of the as-bid unit price on affected portions of the work.

1.12.17 Schedules –

A schedule clause typically sets forth the requirement for contractor scheduled , including format (bar chart vs. CPM), level of detail, submittal requirements, frequency of schedule updating, damages for failure to submit, delay or time extension analysis requirement, actions to be taken in the events of forecasted late schedule, etc.

1.12.18 Suspension of Work –

This clause habitually allows a project owner to suspend or stop all or some of the work, with or without clause. Such clauses normally provide for some adjustment to the terms of the contract in such events, including a time extension and payment of delay costs. However, recovery of time and cost limited by the terms of contract. Often, if the actual clause of the suspension order is something for which the contractor is responsible (i.e., unsafe work conditions, work not in compliance with contract requirement, etc.) no recovery time or cost is allowed. This clause gives the owner choice to delete the some or whole part of work with legal manner

1.12.19 Termination –

Almost all contracts have a provision allowing the owner to end, in whole or in part, performance of the work prior to project completion. There are, typically, two types of termination; termination for convenience and termination for default. Termination for convenience usually occurs when a project owner decides, for their own reasons, not to complete the project as designed. Such situations might arise if the owner’s needs change, if project financing fails, or if the underlying project economics change substantially. In such a circumstance, the owner may elect to terminate the contractor’s performance for the convenience of the owner and pay off the contractor in accordance with the terms of the clause. Termination for default arises only when a contractor is found to be in material breach of the contract, has been provided with a cure notice form the owner outlining the material breach, and has failed to remedy the breach in a timely manner. Usually the owner will terminate the contractor from the project and call upon the contractor’s financial guarantees to complete the work (i.e., letter of credit or surety bond). Some contracts also provide a contractor the right to terminate their participation in a project. Under certain carefully proscribed circumstances (such as, failure to make payments, bankruptcy of the owner, suspension of the work for more than a defined period of time, etc.) the contractor is allowed to terminate their own involvement in the project.

1.12.20 Time of the Essence/Time of Performance-

Timely project completion is normally important, most contracts contain a clause stating that “Time is of the essence of this contract. “Such a clause must be included to make enforceable a time of performance clause and collection of late completion damages. Absent such a clause, the time of project completion is considered unenforceable. The time of performance clause, typically expressed either in work or calendar days after issuance of notice to precede, sets froth when the work must be completed and the consequences of failure to meet these dates.

1.12.21 Warranty –

A warranty clause, which ordinarily continues in existence for some specified period of time after project completion, guarantees the contractor’s work after project acceptance. It is not uncommon for warranty clauses to require a warranty for 1 year after project completion, during which time, if any portion of the project fails, the contractor is obligated to return to the project and make it right or agree to some commercial settlement of the issue.

1.13 Strengths and Weaknesses of contract in construction industry

Various advantages and disadvantages in the usage of contracts. The contracts are imposing a better control over the contractors and always state the penalties for non-compliance. Punishment used as a tool for guidance of the projects for timely completion and it is not working always successfully.

1.13.1 Strengths

* Firmly laid down rules and regulations

Rules and regulations are made up to follow the instruction in the same way contract provides rules and regulation for the parties. It provides instruction to the parties what should have to be done at each stage of the projects. Such as health and safety requirement in document for each construction project.

* Pre agreed procedural commitments

Contract includes the procedure which should have to follow by the parties involved in it. It provides what should be done by the parties in the initial stage of the proj