Professional Documents
Culture Documents
Postgraduate Program:
Construction Technology & Management
Construction Contract & Law Course
Lecture Notes
On
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1. Background
2. Definition & Types of Contract
3. Formation of Contract
Capacity of Persons
Consent of Persons
Object of Contract
Form of Contract
4. Effects of Contract
Interpretation of Contract
Performance of Contract
Variation of Contract
Non-performance of Contract
5. Extinction of Contractual Obligations
6. Proof of Contract
1. Background
Generally, a contract is an agreement or willful promise enforceable at law.
However, not all agreements or promises are contracts. Some may lack enforceability at
law.
A construction contract is a product of an agreement between the employer & the
contractor & it is enforceable at law.
“Enforceable at law” means that if the agreement reached between the employer & the
contractor breached( deviations occur from the promises) by one of the parties, the
aggrieved party, either the employer or the contractor, may bring a legal action against the
other to demand the enforcement of its rights with the support of law.
In this part of the Course, we will try to legally define the very concept of Contract, the legal
elements or ingredients to be fulfilled to constitute contract, the formation & variation of
contract & extinction of obligation, the express & implied terms of contract, the very
principles of interpretation of contract, the legal effects & proof of contracts.
The general Law of Contract is governed under the Civil Code from Article 1675-Article
2026.
Except otherwise provided by the provisions of the Special Contracts, the provisions of the
general Law of Contract shall apply.
The Special Contracts are provided under;-
the Civil Code;
the Commercial Code;
the Maritime Code; and
Other special applicable laws;
Under the Civil Code
The following are illustrative of Special Contracts provided under the Civil Code:
Aleatory contracts;
Commutative contracts are such type of contracts in which the performance of the
contract by both parties to the contract is made at the same time.
If one gets a service & pays the service fee instantly, it is a commutative type of
contract.
In commutative type of contract, there is no time gap during the performance of
the contract by both parties to the contract.
Aleatory contracts are quite to the contrary to the commutative types of contract.
There is a certain time interval between the performance of the obligation of one
party to contract & the other.
Insurance contracts & construction contracts may be classified under this type of
contract.
Under the insurance contract, the premium is paid immediately by the insured,
whereas the obligation of the insurer to pay the indemnity to the insured may not
come in to picture unless the uncertain event or risk happened in future.
Under the construction contract, the contractor executes first his performance
obligation & the employer pays the contract price long after the works are
executed by the contractor & certified by the engineer.
Under the types of contract (insurance & construction), performance of obligation
by respective contracting parties is not simultaneous.
Form
On the basis of form, contracts may be classified in to:-
Consensual contracts; or
Solemn contracts;
Consensual contracts require no written form, whereas solemn contracts do.
The construction contract, especially if it is made with the public body should
necessarily be made in writing.
In that case it becomes a solemn contract.
Freedom of Negotiation
Based on the criterion of freedom of negotiation, the following categories of type
contract are recognized:
Contract of consultation; and
Contract of adhesion;
3. Elements of Contract
According to Article 1678 ( Elements of Contract) of the Civil Code:
No valid contract shall exist unless
A. The parties are capable of contracting and give their consent sustainable at law.
B. The object of the contract is sufficiently defined and is possible and lawful.
C. The contract is made in the form prescribed by law.
The following are the fundamental elements of contract.
Capacity of the contracting parties;
Consent of the contracting parties;
Object of the contract; and
Form of contract, if any;
Capacity
Please, see Article 1678(a) of the Civil Code.
Capacity means competence to enter in to a legally binding agreement.
Offer is defined as a proposal expressing the declared willingness of the offeror to enter
in to an agreement, if the offer is accepted.
Offer is a legal process which is a declaration of willingness or intent to be bound by
specific terms set out.
Offer may be made:- Orally; In writing; By sign; By conduct; By specially stipulated
manner for acceptance;
In case of (public) construction contract, offer shall be made in writing.
Characteristics of Offer
The following are characteristics of a valid offer.
These are that the offer should be:-
Certain;
Communicated;
Unconditional;
Distinguished from invitation to treat;
Certainty
The terms of a contractual offer must be certain or capable of being made certain.
Unless the details of the bargain are certain, the parties could not be expected to
reach any real agreement.
Communicability
The tender is an offer on the part of the bidder contractor.
The offer, i.e. the tender must be communicated to the offeree, i.e. the prospective
employer.
Unless the bid/tender prepared by the bidder (prospective contractor)
communicated to the (offeree) on or within the specified time in the instruction to
bidders, one can not say that there is a bid or tender.
Unconditionality
If the offer is accepted, it may go to the creation of an agreement.
For the offer to be valid & acceptable, it should not, thus, be unconditional.
Unconditional offer is not clear, thus not acceptable.
Not being Invitation to Treat
The following are not offers but invitation to treat:
Display of goods;
Advertisement;
Tender;
Tender
Invitation for bids or invitation to tender prepared by the employer or the
project are not offers.
They are invitation to treat.
Bidders are making offers, for ex. in terms of
o submitting filled & signed Form of Tender;
o priced BOQ;
o alternative proposals, if allowed;
The employer is within his right to accept or reject such offers, however;
Termination of Offer
The following could be the way by which the offer could be terminated.
These are:-
By Death; -of either party before acceptance of the offer;
By Counter offer; -of the offeree;
Revocation; -by the offeror, within the time limit;
Withdrawal; -by the offeror; within the time limit;
By lapse of Time; -on part of the offeree, i.e. accepting the offer after the
prescribed time has elapsed;
By failure to accept in the stipulated manner;- by the offeree, if a specific
mode of acceptance was prescribed in the offer;
By silence of the offeree; -silence is not acceptance, in principle;
By Liquidation;- if the offeror construction company has been liquidated
before the offer accepted by the employer;
By Insolvency;-in case the construction company declared by the court
insolvent, before the offer has been accepted; If the offer were accepted
& contract concluded, that contract is going to be terminated by the
employer on the ground of bankruptcy of the contractor;
By being adjudged bankrupt;-by the court, before the offer has been
accepted; If the offer were accepted & contract concluded, that contract
is going to be terminated by the employer on the ground of bankruptcy
of the contractor;
Acceptance
Acceptance is a declaration of will to enter in to a legally binding contract.
By acceptance, a contract shall be completed, where the offeree accepts the offer
without any reservation.
Forms of Acceptance
The following could be forms of acceptance.
These are:- Orally; In writing; By sign; By conduct; As specially stipulated by the offeror;
In the construction contract, especially for public works, acceptance in writing is the most
common & legally imperative practice.
The Letter of Acceptance is a clear example to this.
Characteristics of Acceptance
Acceptance could be conditional or unconditional.
Conditional acceptance rejects the original offer made by the bidder (offeror) &
creates a counter offer or new offer by the project owner.
Unconditional or unreserved acceptance of an offer by the project owner creates a
Contract Agreement between the bidder & the project owner subject to other
subsequent actions, ex. negotiation.
In case of Public Projects, approval of the Contract by higher authorities may be
required. In that case, legally, the Contract is not yet concluded until the required
approval is secured.
Defects in Consent
Consent given in the process of offer & acceptance should be free from defects in
consent or vices of consent, for the contract to be sustainable & enforceable at law.
Defects in consent or vices of consent are the following.
These are:- Mistake; see Art. 1697-Art. 1703 of the Civil Code; Fraud; see Art. 1704-
Art. 1705 of the Civil Code; Duress; see Art. 1706-Art. 1709 of the Civil Code;
Mistake
Mistake is defined as a misunderstanding of or erroneous belief about a
matter of fact or a matter of law.
Mistake is, therefore, divided in to: Mistake of law; and Mistake of fact;
Mistake of law could be:-Mistake of the law of the country; or Mistake of
foreign law;
Mistake of fact could be, common, bilateral or unilateral mistake, and related
to the following factual circumstances:
Mistake as to the subject matter of the contract;
Mistake as to the possibility of performance of the contract;
Unilateral mistake;
Mistake as to person; in terms of its identity, qualification, and the
fundamental elements of the contract;
The legal sanction or remedy against mistake is invalidation of the contract &
damages. See Art. 1696 & Art. 1703 of the Civil Code, respectively.
Fraud
Fraud means a false representation, by means of a statement, conduct made
knowingly or recklessly in order to gain a material advantage.
Fraud is divided in to:- Decisive fraud; andIncidental fraud;
Decisive fraud is that without the fraud, the person in error or the person
deceived would not have thought of entering in to the contract.
Whereas, in case of incidental fraud, the fraud has not determined the person in
error or deceived, who even knowing the truth, would have thought of
contracting, but at less onerous terms.
Legal sanction or remedy, i.e. invalidation of the contract has been provided for
the decisive fraud. See Art. 1696 cum Art. 1704(1) of the Civil Code.
Duress
Duress means a threat of imminent danger, which may be a future, or
immediate danger posted against the contractant himself or his nearest relatives.
See Art. 1706 of the Civil Code.
The legal remedy against duress is invalidation of the contract, which is the
result of duress. See Art. 1696 cum Art. 1706(1).
Invalidation of contract based on defects in consent is governed under Art. 1808
et seq. of the Civil Code.
Object
Please, see Article 1678 (b) cum Article 1711 – Article 1718 of the Civil Code);
The object of contract is the very obligations of the contracting parties ex, in the
construction contract, the obligations of the employer and of the contractor.
The possible objects, i.e. the obligations of the contracting parties, of contract are:-
obligation to do (perform);obligation not to do; or obligation to deliver;
The obligations of the contracting parties could be divided in to two broad terms:
Promises; and Considerations;
The object of contract (i.e. both promises & considerations) shall be:-Sufficiently
defined; Art. 1678(b) cum Art. 1714; Possible; Art. 1678(b) cum Art. 1715; Lawful; Art.
1678(b) cum Art. 1716(1); Not immoral; Art. 1716(1);
The object of a construction contract shall be sufficiently defined.
In the construction contract the whole purpose of all parts of the contract documents
(the BOQ, the Drawing, the Technical Specification, notably, & including the
Conditions of Contract (both General and Special Conditions of Contract), and other
documents like filled forms) is to sufficiently define the object of the construction
contract, i.e. the very respective obligations of the contractor & the employer.
The contractual obligation of the contractor (i.e. Promises) shall be determined from the
contract documents in terms of:
What to do: i.e. to construct:- water supply dam & systems; or irrigation dam;
or Hydropower dam; or other hydraulic structures; or road; or building; or
other type of structures;
In terms of its:- scope; quality; cost; time; safety; and other aspects of its
promises.
The Payment, obligation to do, or (Considerations) and other contractual rewarding
obligations of the employer shall also be sufficiently defined in terms of:
Payment obligation: extent of contract price; types of payment; timing for
payment; conditions of payment; other related issues;
and other obligations in terms of other benefits, exchanges, & rewards;
These obligations are the very promises & considerations of the contractor & the
employer in the construction contract, respectively.
Unless the principle of implied terms or the rule of interpretation of contract supports
to resolve the issue of the object of contract, it is difficult to define the object of contract
by any body else except by the contracting parties themselves.
The object of contract, even though sufficiently defined, it has to be possible or capable
of being performed.
Impossibility of performance of ones obligation may relate to physical or legal
impossibility.
Impossibility of performance must not be confused with difficulty of performance
The object of contract shall be lawful. Contract agreements can not serve to achieve
illegal objectives.
There shall not be any contract agreement on legally prohibited matters.
Contracts shall not also go contrary to accepted moral values (as to the principle of
right or wrong) of the society.
If the contract found to be unlawful or immoral, the legal remedy available is
invalidation of the contract at the request of any contracting party or interested third
party. See Art. 1808(2) of the Civil Code.
Form
Please, see Article 1678 (c) cum Article 1719 – Article 1730 of the Civil Code.
Form may mean types of contract.
Form may also mean the making of the contract orally or in writing.
Should the contract is to be made in certain prescribed form, it means that contract
should be made in writing.
In this case, form is related with the validity & proof of the contract itself.
By form, under these circumstances, we mean the making of the contract in writing, if
the law imperatively prescribes so or if the parties voluntarily wish to do so.
In the absence of the law requiring the contract to be in writing, (see Art. 1719(1), the
parties are free to make their contract as they wish. They can make it orally or in
writing. See Art. 1719 (2).
Should the parties wish to conclude a type of contract which should be made in writing,
any preliminary contract in respect thereof, shall also be made in writing? See Art.
1721.
This is true in case of a contract of agency, which is a preliminary contract for the basic
contract to be concluded between the agent & the third party.
Should the parties once choose to make or create their contract in writing; any variation
(see Art. 1722) thereto shall be made in writing.
Contracts with public (government) body shall be made, legally, in writing. (See Article
1724 of the Civil Code).
If the contract shall be made in writing, there are two possibilities:
Preparing fully tailor-made contract to the project at hand; or
Using standard conditions of contract suitable for the project at hand;
The first type of contract is called contract of consultation, whereas the second one is
called contract of adhesion.
In public works, the use of standard conditions of contract is common.
Standard conditions of contract could be international or national in origin.
If the contract should be made in writing, the following additional legal formalities have
to be fulfilled, namely:
There must be a special contract document prepared for that purpose; (ex.
Form of Agreement, which summarizes the whole Agreement & sets out the
whole contract document);
On that document (including on the whole pages of all the Contract Documents)
the parties to the contract agreement shall put their signature; see Art. 1728;
In case of body corporate, their corporate seal has to be affixed on all parts or
pages of the contract documents;
The contract agreement shall be attested, at least, by two witnesses. The
witnesses shall also sign the contract agreement but only on the designated space
in the contract agreement. (Ex. On the last page of the Form of Agreement); see
Art. 1729;
Then, the contract said to be, legally, formed or created.
4. Effects of Contract
Effects of contract may have two dimensions;
The time when the contract is considered bound by the contracting parties; and
The fulfillment or performance of the set of promises prescribed in the contract;
The first dimension relates to the effectiveness of the contract, whereas the second is related
to the performance of obligations of the contracting parties under the contract.
Effectiveness of the Contract (Time Dimension)
This may be expressed in the following three ways: Contract is effective and thus is
binding on the contracting parties from the moment of the conclusion of the
contract;
Contract can be considered effective after some days are passed from the
conclusion of the contract; and
Contract can be considered effective after the performance of some actions by the
contracting parties; ex. Making advance payment a condition precedent for the
effectiveness of the contract. Securing approval of the contract by higher
authorities; Other pre-conditions, if any; This has a time dimension.
Performance of the Contract (Discharge Dimension)
The following discussions are focused on the real performance of the contract as
agreed.
This concept is related to the Latin maxim: pacta sunt servanda- one who enters into
a contract is legally bound or agreement to be kept.
Effects of contract may bring:-Contractual effects; and /or Legal effects;
Contractual Effects
The discussion refers the contractual provisions (Sub-clauses) of the MDB-FIDIC
Harmonized Edition Contract Conditions & the Civil Code.
According to Article 1731 of the Civil Code:
A contract lawfully formed shall be binding on the parties as though they
were law;
The contents of the contract shall be determined by the parties subject to
the mandatory provisions of law;
The lawful or valid formation of contract is related with the fulfillment of all the
four elements of contract, namely, capacity, consent, object, and form, if any.
Validly formed contracts are binding on the contracting parties, as they were law.
It means that contracts are producing rights, obligations & privileges & therewith
remedial rights to & liabilities against the contracting parties.
Effects of contract are, in principle, on the contracting parties, for ex. on the
employer & the contractor.
This principle is called privity of contract or relative effect of contract.
Third parties, in principle, are not entitled to rights or owe no obligation. (See
Article 1731(1) cum Article 1952(1) of the Civil Code.
Contracts made by contracting parties have no effect on non-contracting parties.
These non-contracting parties are called, legally, third parties.
The Construction Contract made by the Employer & the Contractor is not
binding on the Sub-contractor.
The Sub-contract Contract made by the by the Main Contractor & the
Sub-Contractor is not binding on the Employer
The Consultancy Agreement made by the by the Employer & the Engineer
is not binding on the Contractor.
The Construction Contract made by the by the Employer & the Contractor
is not binding on the Engineer.
By way of exception, third parties may have rights and/or owe obligations in the
contract made by other contracting parties.
For example in case of:
See also (under the MDB-FIDIC Harmonized Edition)Clause 13.7- Adjustment for Changes
in Legislation;
See also (under the MBD-FIDIC ) Clause 16.2 (d)- Termination by the Contractor (Due to
Employer’s conduct adversely affecting the economic balance of the contract);
Non-performance of Contract
Non-performance of contracts means the failure of the contracting party or parties
to carry out the obligations they have undertaken under the contract.
The effects of contract are sanctioned by applying the provisions of the law or the
agreement of the parties.
Non-performance involves the following legal concepts.
Notice requirement;
Notice necessary (Article 1772-Article 1774);
Notice unnecessary (Article 1775);
Specific performance; (Article 1776-Article 1783)
Actual performance;
Performing the very contract or obligation by the contractor itself;
This requires court decision;
Important considerations for specific performance decision by the court are:
special interests of the creditor & preserving the personal liberty of the
debtor;
Substitutionary performance;
By the employer himself;
by surety, in case of calling a Performance Bond by the employer;
by another contractor;
Cancellation of contract;
Cancellation by court (Article 1784-1785);
Cancellation by the contracting party (Article 1786-1790);
Damages;
Liability for damages; see (Article 1791-1798);
Quantum of damages: see Article 1799-1805);
Damages may be requested due to;
Non-performance of the contract; and
Invalidation of the contract.
A contract is voidable due to vices of or defects in consent & incapacity. That is the
contract was concluded as a result of mistake, duress, or fraud.
A contract is void (ab initio) because of the object of the contract being unlawful,
immoral or lacks the prescribed form.
The effects of invalidation of contract is that the parties shall, as far as possible, be
reinstated in the position which would have existed, had the (invalidated) contract
not been made.
By cancellation
Cancellation of contract may result from non performance of contract.
The contract may be cancelled by the party to the contract or by the court.
Cancellation of contract may (see Article 1772) or may not require (see Article 1775)
prior written notice to be give to the defaulting party.
The effect of cancellation is the same as the invalidation of contract.
By termination
A contract could be terminated by both parties to the contract (jointly) or by one of
them (unilaterally).
Termination of contract shall be accompanied by prior written notice.
The extent of the period of notice may be fixed in the contract or by custom.
The effect of termination of contract results the non performance of the contract by
the parties.
Termination of contract shall have no retrospective effect. All contractual acts done
before termination remain intact with their effects.
Termination of contract liberates the parties from the future performance of the
contract. This effect is contrary to the invalidation and cancellation of contract. The
latter have retrospective effect.
By remission of debt
Remission of debt results where the creditor releases the debtor from its obligation.
The remission may not exist where the debtor immediately refuses the remission of
the said debt.
By novation
Novation occurs where the parties agree to substitute therefore a new obligation
which differs from the original one on account of its object or nature.
The original obligation shall clearly be extinguished otherwise there is no novation.
By set-off
By limitation of action
This is the effect of time on rights, unless exercised within the legally allowable time.
The creditor may lose his rights unless he demands same within a given time.
The extent of time within which an action could be brought against the debtor is ten
years in contract, subject to special laws.
The action may relate to the performance of a contract, non-performance of a
contract & action for the invalidation of contract.
The effect of not bringing an action by the creditor against the debtor is liberating
the debtor from the said obligation.
The creditor’s action is limited by operation of time.
Period of limitation may be interrupted by certain acts of the creditor, by admission
of the debt by the debtor, by bringing an action against the debtor.
The period of limitation should be pleaded during the court action by the defendant
or the debtor & can not be raised by the court itself. (see Article 1856(2) of the Civil
Code and also Article 244(2)(f) of the Civil Procedure Code);
The Construction Contract is subject to the ten years period of limitation.
6. Proof of Contract
See Article 2001-Article 2026; Proof in Relation to Contracts; (of the Civil Code;
Proof of contract is important in case of construction claims & disputes.
Proof or evidence is important to prove the existence or non existence of a given fact, which
is either disputed or denied.
Admitted facts do not need proof.
Laws do not require proof. A judicial notice has been taken; it should be taken, by all
concerned, by operation of the law. The legal basis for this is Proc. No. 3/1995, which
establishes the Federal Negarit Gazeta;
All persons, natural & legal, including the legislative, the executive & the judiciary branch
of the government shall all take judicial notice of an enacted & publicized law.
The form of proof in relation to Construction Contract could be:
Documentary evidence;
Factual witness;
Expert opinion;
Project site visit;
Others, if any;
Documentary evidence has a wider application in case of Construction Contract.
It may include the following:
The Construction Contract itself;
Records in relation to the:
Time aspect of the project;
Cost aspect of the project;
Quality aspect of the project;
Safety aspect of the project;
Payment aspect of the Contract;
Site & Access thereto;
other contractual or legal obligations of the Contractor and/or the
Employer;
Variation in the works;
Outside Records;
Others, if any;
The records may appear in diverse forms:
Reference Materials
On
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I. Fundamental Codes
1. the Civil Code;
2. the Commercial Code;
3. the Maritime Code;
II. Other Applicable Laws: To be Specified, as per the discussion based on the lecture notes,
especially in relation to legal effects of contract;
III. Books
1. Commentary on Contracts in Ethiopia
By Rene David, Translated by Michael Kindred, Published by the Faculty