Construction and Contract

Law
CE-476 Construction Contract Management

Lecture 2
HOW CONTRACTS AND LAWS ARE USED IN THE ENGINEERING
AND CONSTRUCTION INDUSTRY
• It is crucial that engineers and constructors
• understand construction contracts,
• how construction contracts are used in the engineering and construction
industry, and
• how the legal system interprets contracts

• This is important because they (engineers and constructors) are the

ones that will either write or interpret contracts for construction
projects.
HOW CONTRACTS AND LAWS ARE USED IN THE
ENGINEERING AND CONSTRUCTION INDUSTRY
• Contracts are required in order to:
• set forth the terms and conditions of agreements
• protect whoever is a party to a contract from being taken advantage of by the other
signatories to the contract, and
• protect parties in case the other signatories to a contract default on their legal
obligations, as set forth in the contract.
• Contracts have been evolving into complicated legal instruments that only
lawyers are able to interpret.
• Most lawyers understand the legal aspects of contracts, but not the inner
workings of the engineering and construction professions.
• Engineers and constructors are required to have an understanding of the basics of
contract law in order to be able to analyze contracts in terms of their adequacy
and fairness
HOW CONTRACTS AND LAWS ARE USED IN THE
ENGINEERING AND CONSTRUCTION INDUSTRY
• The goal of understanding contracts is with the focus on providing engineering
and construction professionals with:
• the knowledge that allows them to determine whether a contract is written in such a
manner that it does not favor only one party
• the ability to know which contract clauses they would be able to use as a defense if a
breach of contract (contract default) occurs during the execution of a contract
• the knowledge to determine what is to be performed under the contract and to
prevent one party from benefiting at the expense of another party.
• the knowledge of the terms and conditions of the contract to understand the
requirements for performance of the contract in case if a contract is fulfilled by all
the parties to the contract
• the ability to identify the responsible defaulting party to a contract in case if a
contract is not successfully completed
LAWS THAT INFLUENCE THE ENGINEERING
AND CONSTRUCTION PROFESSIONS
• Engineers and constructors should have a basic understanding of the laws that
influence their work.

• In addition to contact law, engineers and constructors have to comply with labor
laws, environmental laws, safety regulations, and negligence (tort) laws.

• Building codes also have to be followed along with any local laws or ordinances
that affect engineering and construction.
WRITING ENGINEERING AND CONSTRUCTION
CONTRACTS
• Most engineering and construction firms either write their own contracts or they
purchase standard engineering and construction contracts through professional
organizations or trade associations such as the American Institute of Architects
(AIA), the Joint Engineers Construction Document Committee, the Associated
General Contractors (AGC), or the International Federation of Consulting
Engineers (FIDIC).

• Standard form contracts require modification in order to adapt them to the

specific requirements for each individual engineering or construction project.
INTERPRETING ENGINEERING AND CONSTRUCTION
CONTRACTS
• In order to be able to interpret contracts, engineering and construction
professionals should have a basic understanding of contract law, along with being
familiar with the laws that impact engineering and construction.

• Depending upon how engineering and construction contracts are written, they
could be interpreted in a variety of ways, therefore, it is essential to be aware of
the different potential interpretations of clauses in case legal proceedings are
required to clarify contract provisions.

• Engineering and construction professionals should learn how to interpret

construction clauses because not only it provides them with, an ability to not only
be able to defend the position of their firm relative to the contract but it also
helps them determine which clauses should be included in contracts and which
clauses to avoid including in contracts.
AVOEDING BREACH OF CONTRACT
• Breach of contract occurs when one party to a contract does not fulfill their legal
obligations, as stated in the contract.

• Breach could either be partial or full, depending on whether only a small portion
of the contract is not completed or the entire obligation is not performed
according to the contract documents.

• In order to avoid being in breach of contract, members of firms should ensure

that all aspects of a contract are implemented exactly as they are described in a
contact.

• This requires that contracts be evaluated and analyzed in order to determine how
every item listed in them has to be constructed and what materials and quality of
workmanship are necessary to avoid breaching the contract.
TORT LIABILITY OF ENGINEERS AND
CONSTRUCTORS
• Engineers and constructors should be aware of the legal liability they assume
while working on designing and constructing construction projects.

• The area of liability with the greatest impact on engineering and construction
professionals is the area of tort liability, which is referred to as negligence.

• Tort liability is the area of law that deals with intentional or unintentional acts
that result in an individual, or individuals, being injured or killed or property
being damaged or destroyed, as a result of an action or inaction of an individual
or individuals.

• One example of tort liability is when an engineer is aware that there is an unsafe
condition at a job site and he or she does not take remedial action to eliminate
the dangerous situation and someone is injured or killed as a result of the unsafe
condition.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Knowing the origins of legal systems when trying to settle disputes with firms
from foreign countries provides an advantage for engineering and construction
personnel when they are involved in legal disputes, but even within one nation
there is a high degree of variability in the outcomes of legal cases.

• The most frequently used legal systems are civil law and common law.

• Other legal systems of significance include varieties of Asian legal systems and the
Shari’a law.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Civil Law Jurisdictions
• Civil law legal systems are the most prevalent legal systems in the world.
• Civil law jurisdictions include Europe, South America, Scotland, Quebec, Louisiana,
and the former French colonies including South Korea
• In AD 528, the emperor of Constantinople Justinian published all the laws of the
empire as the Code of Justinian or Corpus luris Civilis.
• Many civil law legal systems are still based on this code, and its precepts are also
used in some of the common law legal systems.
• When the code was revived in the Middle Ages, it became known as Romano-
Germanic law and as “a rule of conduct intimately linked to ideas of justice and
morality”
• In civil law jurisdictions, judges are more involved in the litigation process than they
are in common law proceedings because they are responsible for promoting the
discovery of all the facts related to cases.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Civil Law Jurisdictions
• Civil law relies on decisions that are based on legal codes rather than precedent
cases; it does not have rigid rules of evidence or stringent procedures such as the
ones used in common law proceedings.

• It is easier to prove that a liquidated damages clause is valid in civil law legal systems
than in common law legal systems because legal cases are evaluated based solely on
the merits of the liquidated damage clause.

• In civil law legal systems, awards for liquidated damages (damages that contractors
pay on a per day basis if a project is not completed on time and an owner is able to
prove a financial loss due to a delay) are normally based on actual damages.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Common Law Jurisdictions

• Examples of common law jurisdictions include Great Britain and the former colonies
of Great Britain such as the United States, India, and Malaysia.

• Common law is based on the legal system that developed in the United Kingdom.

• Common law is also referred to as judge-made laws because the judges formalized
court rules and applied them throughout the kingdom.

• Judicial decisions were recorded by the court system and used as precedents for
future legal cases. These changes to the legal system made the law common to the
entire nation.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Common Law Jurisdictions

• Litigation in common law legal systems is conducted by opposing attorneys who

plead their case before a judge or a jury.

• Common law jurisdictions typically emphasize the intent of contracts, and precedent
laws (previous cases) are referenced to support cases, whereas civil law legal systems
focus on literal interpretations of contract clauses.

• Liquidated damages have to be actual losses incurred by an owner, or they will not
be awarded in common law legal systems.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Asian Legal Systems
• Many Asian countries are examples of jurisdictions that are neither common law nor
civil law legal systems.
• The legal system in Japan is derived from ancient Japanese law, but it was influenced
by French civil law.
• In the People’s Republic of China, the law codes of the Ch’in have been in use since
220 BC, and they were not modified until the twentieth century.

• Shari’a Law Jurisdictions

• Some Islamic countries in the world are governed by Shari’a law.
• In Shari’a law jurists try to deduce rulings from the legislation issued from God.
CIVIL LAW, COMMON LAW, SHARI’A LAW, AND
ASIAN LEGAL SYSTEMS
• Other Religious Laws

• In addition to Shari’a law, there are other religious laws that mostly govern the moral
behavior of human beings and that directly address their conduct in different aspects
of personal, devotional, family, and social life, including Buddhism, Hinduism, and the
Jewish faith, but the laws prescribed by these religions are not used to govern
countries.
COMMON LAW VERSUS CIVIL LAW: DIFFERENCES
AND INTERCONNECTIONS
• In the commercial activities of today's highly complex society, standard forms of
contract have become an essential part of the day-to-day transactions of most
agreements.

• When considering contract law in its widest sense, there are a number of key
differences between the common law and civil law systems.

• The sample contracts used in the large-scale international projects are often
based on the common law.

• However, the large and rapidly growing building markets in the Middle East,
South America, the former states of the USSR, Central and Eastern Europe and
many African countries are heavily influenced by the civil law tradition.
COMMON LAW OR CIVIL LAW IN PAKISTAN?
• There is a fine distinction between Civil Law and Common Law, however the same
are used interchangeably in Pakistan and most countries of the World.

• Pakistan was a colony of the British Empire pre partition therefore, Common law
systems were inherited by Pakistan.

• Common law is the law developed by judges through decisions of courts and
similar tribunals (also called case law), rather than through legislative statutes or
executive branch action.

• A “common law system” is a legal system that gives great precedential weight to
common law, on the principle that it is unfair to treat similar facts differently on
different occasions.

• The body of precedent is called “common law” and it binds future decisions.
PAKISTAN LAW OF CONTRACT
• The general law of contract in Pakistan is contained in the Contract Act 1872
which is the main source of law regulating contracts in Pakistan. English decision's
(where relevant) are also cited in the courts.

• It determines the circumstances in which promise made by the parties to a

contract shall be legally binding on them.

• All of us enter into a number of contracts everyday knowingly or unknowingly.

Each contract creates some right and duties upon the contracting parties.

• Contract Act deals with the enforcement of these rights and duties upon the
parties.
THE FIDIC RED BOOK
• The Red Book (by FIDIC) was modelled on contract forms drafted for use as a
domestic contract in the United Kingdom. The changes made to transform that
domestic form to an international one were minimal.

• A brief knowledge of the legal systems around the world and how these relate to
the legal concepts on which the FIDIC Red Book is based is therefore helpful, if
not essential, to the understanding of the problems which may result from its
use.

• Some topics of significance include:

• the diversity of legal systems
• the applicable law in international construction
• the applicable law of the contract
• the law governing procedure
• the law governing enforcement of awards
• the various groups of contemporary legal systems
THE FIDIC RED BOOK
• Diversity of legal systems
• As long as there is human endeavor, there will always be conflict.

• The idea of law was born and developed independently in communities around the
world at very early stages of civilization in order to provide an instrument to regulate
the various aspects of human behavior and relationships between one individual and
another and thus achieve a balance between the freedom of choice of the individual
and the control of this freedom for the protection of others.

• Societies aspired to have laws that mirrored justice so as to eliminate the necessity
to resort to force except for the purpose of upholding the supremacy of the law
itself.
THE FIDIC RED BOOK
• Diversity of legal systems
• As these developments in the law took different directions in different cultures
around the world, it is practically impossible today to achieve any degree of
international standardization of the law dealing with legal relationships of individuals
from different states. Even worse, it is now impossible to unify the national laws of
all political entities and states of the world.

• The contemporary legal systems of the world have evolved across societies and
cultures and across political systems differently. Because they are rooted in different
cultures, they are written in different languages, influenced by different religious
beliefs and formed under different customs.

• A certain minimum basic knowledge of the law governing the areas of professional
activity is necessary for the engineer. Furthermore, for the engineer in international
contracts, it is essential for him to understand the implications of the applicable law
of the contract in a particular project since it is accepted that ignorance of the law is
no excuse for mistakes.
THE FIDIC RED BOOK
• The applicable law in international construction

• In an international construction contract, the law under which the parties' rights and
obligations are determined may be one of many. It could be the law of the country
where the contract is made or where the project is constructed or that of the
domicile of one of the parties to the contract. There are however other aspects as
well that could determine the law under which the parties' rights and obligations are
determined.

• In general, there is broad international acceptance that subject to few limitations,

the parties are free to choose for themselves the law applicable to their contract.

• A contract is only considered international if the parties have either their places of
business, or habitual residence, in different states.
THE FIDIC RED BOOK
• The applicable law of the contract

• The law which governs a contract between certain parties and by which questions as
to the validity, application and interpretation of its terms are addressed, is referred
to as the 'applicable law of the contract’.

• It is essential to recognize, however, that in certain circumstances it is possible to

have different contractual matters of a contract governed by different systems of law.
THE FIDIC RED BOOK
• The applicable law of the contract

• Governing (applicable) law is agreed upon by the parties as a general rule.

• Despite this, many international contracts do not contain a clause defining the choice
of law.

• This may lead to conflict of law issues and, therefore, a different risk allocation than
the one that the parties intended. A great deal of international construction takes
place in less-developed countries with undeveloped or not fully adopted applicable
law. Therefore, the characteristics of the applicable law are a key factor. These
characteristics vary depending on their common or civil law origins.
THE FIDIC RED BOOK
• The applicable law of the contract
• From a legal point of view, the differences mostly tend to occur in the following
areas:
• delay damages (liquidated damages) versus contractual penalty;
• substantial completion versus performance;
• binding nature of adjudication awards;
• limitation of liability;
• lapse of claim due to its late notification (time bars);
• allocation of unforeseeable and uncontrollable risk to the contractor;
• contract administration (the engineer’s neutrality and duty to certify);
• termination in convenience;
• time-related issues;
• quantification of claims;
• statutory defects liability; and
• performance responsibility: reasonable skill and care versus fitness for purpose.
THE FIDIC RED BOOK
• Law governing procedure
• Distinction must be made between the law applicable to procedure and that
applicable to the substance of a dispute or the applicable law of the contract
discussed above.

• This distinction is important because it is generally accepted that the law applicable
to procedure is the law of the forum where the litigation or arbitration takes place;
whereas the law applicable to substance is the law governing the matters in
principle: in a contract it is the applicable law of the contract or the particular term in
question.

• Accordingly, this distinction assumes greater importance where international

contracts are concerned because one may find that the applicable law of the
contract and that applicable to procedure belong to two different jurisdictions or
even two different systems of law.

• An arbitrator appointed to determine a dispute in an international commercial

arbitration may find that the applicable law of the contract is different from that
which regulates the internal arbitration proceedings.
THE FIDIC RED BOOK
• Law governing enforcement of awards

• Besides the applicable law of the contract and the law applicable to the procedure,
the parties in an international construction contract may be involved in yet another
system of law: the law of the country where a decision or an arbitral award is to be
enforced.

• A party seeking to enforce an award may have a choice of jurisdiction where to do

so.

• The selected location will depend on where the assets of the losing party are
situated and on the ease with which the award will be enforced.
THE FIDIC RED BOOK
• Law governing enforcement of awards

• Such enforcement usually means that some legal proceedings would have to be
taken in the jurisdiction where the assets are located, a location usually different
from the place of arbitration.

• One of the major considerations is whether the country where the assets are located
is a signatory to the 1958 New York Convention, or to some other treaty for the
recognition and enforcement of foreign awards.

• Another major consideration is the legal system of the place of intended

enforcement and its provisions. It is perhaps worthwhile for the parties to a contract
to look carefully at the question of asset location and enforceability at the time of, or
before, the formation of the contract.
THE FIDIC RED BOOK
• Grouping of the contemporary legal systems

• Where international construction is concerned, there are four major groups of legal
systems which apply today. These are:
(a) the Romano-Germanic group;
(b) the common law group;
(c) the Islamic law group, including those with origins from the first two groups;
(d) the socialist laws group.

• There are of course other minor groups in existence, some of which are totally
distinct from those mentioned above whilst others share some of their concepts.
The End