1 GENERAL PRINCIPLES OF CONSTRUCTION CONTRACTS

1.1 Formation of Construction Contracts The following chapters of the course reader ‘Construction Law’ relate to this session: Ch 6 The following sections of the course reader ‘Construction Contract Claims’ relate to this session: 3.1, 3.3, 3.8 In this Session we’ll consider the way in which modern construction contracts are made and some of the problems which can arise if good practice is not followed. At the end of this Session, you should be able to describe why it is necessary to have recognised guidelines, the pitfalls that exist and some of the possible consequences if good practice is not followed. 1.1.1 Introduction Unlike buying finished goods, a construction project has to be defined by drawings and specifications or some other recognised means. If you're buying a new house, which has not yet been built, in many cases you'll be able to see what you will be getting for your money by looking at a glossy brochure, or a model or even a similar house on the same development. However, many promoters (the persons wishing to have construction work done, called `the employer' throughout this Section) of construction projects do so only once or twice. They may not be able to appreciate the complex building technology and design that may go into the proposed project. Hence, they will need to take specialist advice, usually by calling in an architect or other consultant. In later Sessions we’ll be looking at various methods of contracting. In this Session we'll only consider the procedures available to help an employer to obtain an offer for the work to be done and to evaluate the offer, and what form the acceptance might take. Activity 1 Look at the references given at the beginning of this Session.

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1.1.2 Invitations to tender Whilst some contracts are negotiated, in the main, contractors are invited to tender for the work to be done. The employer may draw up a list of potential contractors (tenderers) on the advice of their consultants and invite tenders based on drawings and other tender documents. This may be appropriate for small contracts, but where major contracts are involved, and due to the high cost of tendering for the work, tendering contractors expect to be assured that if their tender is competitive, then they have a fair and reasonable chance of being awarded the contract. 1.1.3 The Code of Procedure for Selective Tendering (NJCC) and JCT Practice

Note 6 (Series 2 – 2002) To this end, the industry has developed rules and procedures, for example, the `Code of Procedure for Single Stage Selective Tendering' January 1996 issued by the NJCC (National Joint Consultative Committee for Building). In 2002, the JCT issued Practice Note 6 which is intended to be a successor to the Code of Procedure and also includes rules for two stage tendering and design build tendering. The essential points are : * There should be a limited number of tenderers, all of whom should be carefully

selected having regard to the type of work. * A preliminary enquiry should be made to establish the names of firms who are

able and willing to submit a bona-fide tender. * A final list of tenderers should be drawn up and those firms who are not

included should be informed promptly. * The tender documents should clearly set out the conditions of tendering; all

tenders should be submitted on the same basis; tenders based on alternative periods for completion of the works may be sanctioned.

* A standard form of contract is recommended (but not mandatory) although

Practice Note 6 relates to JCT standard forms of contract. * Sufficient time should be allowed for tendering. * Qualified tenders should be rejected if they afford the tenderer an unfair

advantage. * The lowest tenderer should submit priced bills of quantities as soon as possible. * All but the lowest three tenderers should be informed that they have been

unsuccessful as soon as possible. * After award of the contract, every tenderer should be informed of the tender

prices received.

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* The priced bills of quantities should be confidential. * The priced bills should be checked for errors (before award or rejection) and

errors should be treated in accordance with one of the alternatives set out in the Code.

* After rectification of errors (and if the tender remains the lowest) or if there are

no errors, the tender should be recommended for acceptance. * Negotiations may be conducted to reduce the price, and if these fail,

negotiations may proceed with the second lowest, and if these fail, with the third lowest. If all negotiations fail, new tenders may be required.

The Code also confirms the general principle in English law that a tender may be withdrawn at any time before acceptance. Different provisions apply in Scotland. This legal principle can be a problem for employers who need time to evaluate tenders before acceptance. In some countries, such as Kuwait, the law provides for tenders to be held open for acceptance for the period specified in the tender documents (for government contracts). Where an employer requires the tenderer to keep tenders open for acceptance for a given period, tender (or bid) bonds for a percentage (usually ten percent) of the tender sum may have to be provided by the tenderer with the tender. If the tender is withdrawn, the bond can be called i.e. the employer may insist that the institution underwriting the bond should pay the stated percentage of the withdrawn tender sum. This practice is rarely used in the United Kingdom but it is common elsewhere. 1.1.4 Errors in Tenders What if the employer or his professional advisers discover an error in the tender? You will see from 6.2 to 6.4 of the Code and 46 of Practice Note 6 that the tenderer should be notified of the error and given the opportunity of rectifying it. This only covers errors that are discovered in computation of the tender.

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Activity 2 Let's assume that a tenderer makes the following mistakes in the tender: 1. Quantity of an item = 20,000 m3; unit rate per m3 = £3.50; extended price of 20,000 m3 @ £3.50 = £7,000.00 (whereas it should be £70,000.00). 2. Unit rate for an item = £1.00 per m2 (whereas it should be £10.00); the total quantity is 1000 m2 (an error of £9,000.00). 3. The tenderer’s priced bill of quantities omitted an entire page and therefore the prices for work on that page were not transferred to the summary and tender sum. Given the rules in the `Code of Procedure for single stage selective tendering', write down below how you would deal with these mistakes.

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O.K., the first error is one which ought to be detected by a systematic check by an experienced quantity surveyor and should be communicated to the contractor. Correction of the error will obviously add £63,000.00 to the tender price. It is almost certainly a sufficiently large error to cause the tenderer to withdraw his tender. Under Alternative 1 (6.3 of the Code, 47 & 48 of Practice Note 6) the second lowest tender should be considered. Under Alternative 2 (6.4 of the Code, 49 & 50 of Practice Note 6) if the tenderer corrects the error, they may still be the lowest (in the case of a multi-million pound project) in which case the tender should be accepted. If the tender was no longer the lowest, the second lowest tender should be considered. The second error is one which is less obvious. The employer's professional advisers would be less likely to detect this error. If it was detected, then the same comments apply as those given above. The third error should be obvious during a systematic check of the bills of quantities. The same comments apply. Activity 3 What would be the situation if the employer or his professional adviser doesn't discover the error(s)?

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Well, 6.2 of the Code requires the provisions of Alternatives 1 (6.3) or 2 (6.4) if (and only if) the employer or his professional advisers discover the error. It is, of course, in the employer's interest to know of any significant errors. A major error which went undetected (such as the £63,000.00 error above) may cause the tendering contractor to go out of business, leaving the employer with additional costs of completing the project with considerable delay and loss of revenue. His professional advisers may be sued for negligence if the error was one which ought to have been detected by a competent person. Underpricing of rates (as in the second error) is less obvious and an action for negligence would be more difficult to pursue. However, once the tender has been accepted, and if the error had gone undetected, the tendering contractor would be bound by the error, W Higgins Ltd v Northampton Corporation. (In later Sessions, we’ll look at provisions in many contracts using bills of quantities that enable the contractor to escape from the tender price if errors in quantities are subsequently discovered.) Activity 4 What would be the situation if the employer or his professional advisers discover an error, but they accept the tender knowing of the error without informing the tenderer?

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Right, under the Code and Practice Note, there is an obligation on the employer to notify the tendering contractor of any errors. Failure to do so would be a breach of the Code and the tenderer would not be bound by his tender. The contractor would, (if he had already commenced work) be able to refuse to complete the work and claim payment for work done on a quantum meruit basis (a reasonable price in all the circumstances). Activity 5 - Would the situation be any different without the Code? What are the contractor's remedies?

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O.K., whether or not tenders were subject to the provisions of the code (which is not mandatory), then the contractor would have a remedy at common law and he would not be bound by his tender, MacMaster v. Wilchar Construction Ltd. It should be noted that there is a distinction between extension errors (i.e. the first error), page omissions (the third error) and errors in the rates (the second error). The first and third errors should be detected from the face of the documents whilst the second error is one which requires a study of the tenderer’s rates. Obvious errors may be detected, but the Employer`s professional advisers are not expected to analyse each and every rate to establish that they are reasonable. However, good quantity surveying practice will include a check of at least the rates for major items to ensure that there are no significant errors or manipulation of prices (for enhancing cash flow or for claims purposes which we’ll deal with in later Sessions). Also in later Sessions, we’ll consider errors which occurred but which were not detected at Tender stage. 1.1.5 Acceptance and Award If the selection of tenderers has been carefully done, so that all tenderers are known to be competent and experienced in the type of work and project, it is likely that all tenders will fall within a fairly narrow range. In a recession, one or two tenders may be significantly below the norm, indicating (save for errors) that these tenderers are `buying the job’ i.e. they need turnover to maintain the business. In a buoyant market some tenders may be significantly above the norm, indicating that these tenderers have a reasonably full order book. The employer’s professional advisers will have to be aware of these situations and take them into account when evaluating the tenders. Fortunately modern estimating techniques lead to fairly precise bids, unlike Mr Wythes, a successful contractor in the early 19th Century, quoted by Terry Coleman in ‘The Railway Navvies’ (Penguin Books, 1981). 'Firbank himself used to tell a story of one Mr Wythes (probably George Wythes,

who undertook, among other lines, that from Dorchester to Maiden Newton) who was thinking of submitting an offer for a contract. He first thought £18,000 would be reasonable, but then he consulted his wife and agreed it should be £20,000. Thinking it over, he decided not to take any risk, so made it £40,000. They slept on it and the next morning his wife said she thought he had better make it £80,000. He did; it turned out to be the lowest tender notwithstanding, and he founded his fortune on it`.

Once the tender(s) have been checked, unqualified acceptance of it will create a binding contract. Whilst both the Code and Practice Note gives guidance on the tendering procedure, with suggested letters and Forms of Inquiry and Tender, no guidance is given on the form of acceptance. This is a critical issue, often dealt with by qualified acceptance or letters of intent – a veritable treasure trove for lawyers!! If the employer does not have all of the necessary approvals or finance, but nevertheless wants to take a limited risk, he may authorise some of the work by issuing a letter of intent.

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Activity 6 You have received tenders on 10 August for the construction of a garage at Lower Lane, Bottomtown. The lowest tender is in the sum of £85,000.00. and the construction period is 8 months. Why don’t you give some thought to the form of acceptance, setting out what form the acceptance might take (e.g. a draft letter). We’ll look at these problems in the next session. End of session number 1

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