12 Nature of Contracts

The Nature of Contracts
Contracts & Specs

Dept. of Civil Eng. © Collier, K. (2001). Construction contracts. Spring 2008
Hashemite University Dr. M. El-Mashaleh
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Contracts
• Construction work is usually done

through a contract
– The contractor makes an offer to construct

a building
– Every time the offer is accepted, a

contract is made
Contracts & Specs
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١
• A contract determines the actions of the
parties in their dealings with each other
• The parties to a contract are bound to

each other for a certain period of time
by a unique and exclusive relationship
they have created for their mutual
benefit
Contracts & Specs

٣
• This unique relationship called “privity

of contract” gives them both
obligations which they had agreed to
accept so that both may benefit
• “Privity of contract” describes the

private and exclusive relationship by
which parties are bound together until
they have performed their contract, or
until it is in some other way resolved
Contracts & Specs

٤
٢
• This contractual relationship persists
until the contract is discharged or
terminated
– either performed
– or terminated because of impossibility,

agreement (by the parties), bankruptcy, or
breach of contract
Contracts & Specs

٥
The primary ingredients of contracts
• Collier (2001) defines 4 primary

ingredients
(1) Mutual agreement and genuine
intention
(2) Capacity to contract
(3) Consideration in a contract
(4) Lawful object
Contracts & Specs
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(1) Mutual agreement and genuine
intention
• Mutual consent normally expressed by the
parties to a contract in the offer originally
made by one, which then is accepted by the
other
• A contract may be defined as a promise

enforceable by law, and there must be
genuine intention on the part of the parties
Contracts & Specs

٧
• Not only must the parties have a

genuine intention to take on the
obligations of the contract, but they
must also be in complete agreement
about the same things
• As the law says, there must be a

meeting of the minds, or consensus
Contracts & Specs

٨
٤
Offer and acceptance
• Offer and “acceptance of the offer” are

the natural expressions of mutual
agreement
• As such, both the offer and the

acceptance must be identical as to
their substance
Contracts & Specs
٩
• There must be a real and complete

agreement between the parties
supported by their genuine intention
• When an offer is made, it should be

accepted without qualification
• No change to an offer should be made

in the acceptance, and what is offered
should be accepted as it is offered
Contracts & Specs
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• Otherwise, the offer should be refused,
and, if required, notice may then be
given that a different kind of offer is
sought
Contracts & Specs

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An offer and acceptance example
• A contractor offers to do construction

work “shown on the drawings and
described in the specifications for the
sum of $100,000”
• The drawings show the work to be done

at the south end of the site
Contracts & Specs
١٢
٦
• The owner communicates his
acceptance
• However, this acceptance comes with a

qualification:
• The work is to be done at the north end

of the site, instead of the south end as
shown
Contracts & Specs

١٣
Is a contract made by this offer and

acceptance?
• No contract is made by this offer and
acceptance because of the qualified
acceptance
• The offer was to do the work at the

south end of the site as shown on the
drawings, but the acceptance was for
the work to be done at the north end
Contracts & Specs
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٧
• They are talking about two different
things, and there is no acceptance of
the offer as it was made
• There is no consensus, and there is no

meeting of minds
Contracts & Specs

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• If the contractor is prepared to do the

work at the north end of the site, he
should submit another offer accordingly
after the owner has provided him with
properly revised bidding documents
showing the work to be done at the
north end of the site as required by the
owner
Contracts & Specs

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٨
Withdrawing an offer
• An offer may be withdrawn at any time prior
to its acceptance, and this is compatible with
the principle of mutual agreement
• Mutual agreement must be based on free

assent (acceptance), so that there is a real
meeting of the minds of the parties
Contracts & Specs

١٧
• From this, it follows that an offeror must

have the freedom to withdraw his offer
prior to acceptance
• Otherwise, he might be forced into a

contract and this is not in accordance
with the principle of mutual agreement
• Once an offer is accepted, the offer can

not be withdrawn because it has been
changed by its acceptance into a
contract
Contracts & Specs
١٨
٩
• There is a misunderstanding about this,
particularly when a bond is submitted
with the bid
• The primary purpose of a bid bond is to

ensure to the owner that the bidder who
is awarded the contract (offer accepted
by the owner) will enter into and perform
the contract
Contracts & Specs

١٩
• If the contractor fails to enter into

contract, he is entitled to pay to the
owner the difference between his bid
and the next lowest bidder up to the
amount of the bid bond
• Most construction bids (offers) must be

accepted within the prescribed period of
time stated in the instructions to the
bidders, and often that stipulated period
is made part of the wording of the bid
(proposal)
Contracts & Specs
٢٠
١٠
• If no time for acceptance is specified, then the
law requires that acceptance be made within
a reasonable period of time (the law always
determines on the basis of reasonableness in
the absence of express terms and conditions)
• 30 days used to be a common period for the

acceptance of bids for construction, but it can
be made more or less, depending on
economic conditions, the nature of the
proposed construction work, and the owner
• In Jordan, 90 days
Contracts & Specs

٢١
• Is it possible to have an offer open to

acceptance indefinitely? Why?
• That would not be feasible because the

costs and the conditions upon which the
offer was based would not remain
unchanged for very long
• Time is of the essence in a contract
Contracts & Specs

٢٢
١١
• Even though that the offer comes first
followed by an acceptance, it is a usual
practice in the construction industry for
an owner to prescribe the precise
wording of the offer, apart from the
actual amount, which will be stipulated
by the bidder
– We hereby offer to do all the Work shown
on the Drawings and described in the
Specifications for a Sum of ……………
Contracts & Specs

٢٣
(2) Capacity to contract
• Refers to the competency to make valid

and enforceable contracts, as there are
restrictions in law applicable to some
classes of persons
Contracts & Specs

٢٤
١٢
• A citizen who is:
– Not under the age of majority [the age at
which full civil rights are accorded]
– Sane, and not drunkard
– Not under legal restraint (such as legal
guardianship or imprisonment)
– Not restricted by his or her occupation or
profession
• Has the greatest possible freedom to

enter into and make contracts
Contracts & Specs
٢٥
• Conversely, an enemy alien, an infant, a

convict, a known drunkard, and persons
in certain occupations may find that they
are restricted to a greater or lesser
extent in the kind of contracts they may
make
• The law’s intentions to ensure the

highest possible degree of full and
proper mutual consent and capacity
Contracts & Specs

٢٦
١٣
• Infants, or minors, could be subjected
undue influence
• Persons of unsound mind could be

unduly influenced, or might not be able
give proper assent, or might not be able
to fulfill their contractual duties
• Similarly, enemy aliens and convicts are

also restricted in their ability to perform
and to be responsible
Contracts & Specs
٢٧
• For corporations and organizations, only

certain officers can act on its behalf in
making contracts
• Therefore, it is important to know those

persons before entering into a contract
with a corporation
Contracts & Specs

٢٨
١٤
(3) Consideration in a contract
• Consideration is something of value given by
one party in exchange for something else
• Thus, consideration flows both ways between

contracting parties
• The contractor promises to build the building

and the owner promises to pay the contractor
a stipulated sum of money
Contracts & Specs
٢٩
• We think of “consideration” as:

– The construction work promised by the
contractor on the one hand, and the
payment by the owner to the contractor on
the other
• For example, once a lump sum contract

is made by the acceptance of a bid, the
law usually is not concerned about the
amount of the sum stipulated
Contracts & Specs

٣٠
١٥
• In other words, a contractor can not go
to court when the contract is partially
fulfilled and say:
– Your Honor, I now find that my bid was too
low and I need an increase in the contract
amount or a release from my contract
• The contractor has set himself up as an

expert in construction and has made an
offer based on his experience; the offer
was accepted and now the contractor
has a contract to perform
Contracts & Specs
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Lawful object
• The object of a contract must be lawful
• The law will not enforce a contract for an illicit

(unlawful) purpose
• The legality of the object of most construction

contracts is not a common problem, although
we may conjecture upon possibilities
Contracts & Specs
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• For example a contract to construct a
building for illicit purposes that were
apparent from the design would not be
valid or enforceable
• Example?
Contracts & Specs

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In summary
• The primary ingredients of valid and
enforceable construction contracts are:
(1) Mutual agreement between the parties

expressed by a bid, an identical acceptance
of that offer without qualification, and the
parties’ genuine intention to take on the rights
and duties of the contract
Contracts & Specs

٣٤
١٧
(2) Capacity of the parties to make the
contract unimpaired by either inherent
liability or legal restriction
(3) Consideration of value to be

exchanged by the parties, namely,
construction work in exchange of
payment
Contracts & Specs

٣٥
(4) Lawful object of the contract to be

achieved by proper performance within
an agreed or otherwise reasonable
period of time
Contracts & Specs

٣٦
١٨

12 Nature of Contracts

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12 Nature of Contracts

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The Nature of Contracts

Contracts & Specs

• Construction work is usually done

– The contractor makes an offer to construct

– Every time the offer is accepted, a

• The parties to a contract are bound to

Contracts & Specs

• This unique relationship called “privity

• “Privity of contract” describes the

Contracts & Specs

– or terminated because of impossibility,

Contracts & Specs

The primary ingredients of contracts

• Collier (2001) defines 4 primary

• A contract may be defined as a promise

Contracts & Specs

• Not only must the parties have a

• As the law says, there must be a

Contracts & Specs

• Offer and “acceptance of the offer” are

• As such, both the offer and the

• There must be a real and complete

• When an offer is made, it should be

• No change to an offer should be made

Contracts & Specs

An offer and acceptance example

• A contractor offers to do construction

• The drawings show the work to be done

• However, this acceptance comes with a

• The work is to be done at the north end

Contracts & Specs

Is a contract made by this offer and

• The offer was to do the work at the

• There is no consensus, and there is no

Contracts & Specs

• If the contractor is prepared to do the

Contracts & Specs

• Mutual agreement must be based on free

Contracts & Specs

• From this, it follows that an offeror must

• Otherwise, he might be forced into a

• Once an offer is accepted, the offer can

• The primary purpose of a bid bond is to

Contracts & Specs

• If the contractor fails to enter into

• Most construction bids (offers) must be

• 30 days used to be a common period for the

Contracts & Specs

• Is it possible to have an offer open to

• That would not be feasible because the

• Time is of the essence in a contract

Contracts & Specs

Contracts & Specs

(2) Capacity to contract

• Refers to the competency to make valid

Contracts & Specs

• Has the greatest possible freedom to

• Conversely, an enemy alien, an infant, a

• The law’s intentions to ensure the

Contracts & Specs

• Persons of unsound mind could be

• Similarly, enemy aliens and convicts are

• For corporations and organizations, only