Legal Principles Applicable To Construction Contract Disputes: A Case Study Essay.

Agro Builders Inc enters into a contract with Supersafe Prisons Inc to build a new   prison facility. Agro Builders engages Ego Architects to prepare the architectural drawings. The contract provided for payment for drawings on a 3-stage basis.

The drawings are presented and approved by Agro. Subsequently Agro refuses to pay for the Architectural services on the basis that they assert that the drawings involved a variation of the provisions of the contract and were inadequate.

A site meeting is organised with the parties.  They discuss the requirements and verbally agree on terms to vary the contract so that the drawings as presented can be carried out. Acting on this agreement the building proceeds.  A few weeks later the builder refuses to pay the architect because the builder asserts that the drawings are not complete and do not comply with the terms of the written contract.

1. Is there a contract in this case and how is it formed?
2. In this case can the verbal agreement vary the terms of the written contract?

A) Describe the Legal Principles applicable and the hierarchy of contract

B) What is the legal affect of stamping the specifications “approved” on any future contractual position? Discuss and explain the legal principle applicable.

C) Having regard to the problems encountered in this case what procedures would you formulate to cover to avoid problems of amendments in the course of construction and advice about the resolution of technical disputes and use of experts?

1 -3 require an identification of the relevant legal principles of Contract and the application of these principles to the fact situation to indicate a possible outcome. Question 4 requires the identification of the problems in the case example and having regarded to the legal principles what action can be taken in planning to avoid these problems in the future?

(a) (Assume that the Security of Payment Legislation Does not Apply).  Eiffel wishes to commence court proceedings to substantiate its claim that the   specifications are not complete. Describe what the project manager needs to do to have technical material for the court hearing and how the Court assesses expert witnesses? What are the problems and risks in using expert witnesses? Refer to case examples.

(b) You are required to advise Agro Builders of the procedures required in the future if it wishes to avail itself of the payment process under the Building Industry Security of payment Act (Victoria). In your advice you should include what is required to ensure that a claim fall under the scheme of the Act and any issues as indicated in the cases referred to in the blackboard notes .Refer and discuss the relevant section of the Building Industry Security of Payments Act. (Victoria)

1 requires evidence of the understanding of the court process, risk involved and   preparation use of witnesses and the role of expert witnesses in the court process.

2 requires how an application under the Security of Payments Act would proceed in the fact situation provided. Reference to the relevant section of the Act is required.

Part A (1) Formation of a Contract between Agro Builders engages Ego Architects

Construction contracts are not unique. They are even prevalent in the modern application of commercial law. These contracts are either between the owner and the engineer, a building administrator and a subcontractor, or engineer and contractors. Like any other contract, construction contract can be oral or written depending on the intensity of the task. However, the law encourages people to create written contract as it's not prone to ambiguities. Notwithstanding that, a construction contract either for ad hoc or small buildings must follow the general rules of a contract. This paper would discuss a dispute between an engineer and architect, and evaluate whether their contracts is regardless enforceable in law.

This question represents two issues; one is the rescission of a contract, the second one is an amendment to an existing contract. The purpose of contract law is not to force the parties to create a contract but to enforce the contract that the parties have already established. This simply means that a contract is a “force of law made by the parties, but the court can intervene when one party files a petition in court.” For a contract to be enforceable in law, it has to meet some standards. Some of those are offer, acceptance, and consideration.

The law states that a contract starts with the offeror making an offer. A valid offer on itself should have come from a deliberate intention of the offeror, and it should have considerations. Also, an offer carries with it some terms and conditions. Likewise, the performance of that offer from the side of the offeree should match the set conditions.

After an offer has been made to the offeree, the offeree should then accept the offer to create a valid agreement, which was stated in a ruling as “A contract is not binding on an offeror until acceptance by the offeree”. The law states that a valid acceptance should be willful, and it should have no conditions. With this short explanation, it’s then possible to conclude that there was a valid agreement between Agro builders and Ego architects.

The terms of the contract were that Ego architects were to present perfect drawings, and Agro Builders were to pay Ego in three phases. When one party performs contrary to the agreed terms, the innocent party has the right to rescind the contract. So it doesn't matter whether Agro had first approved the specifications or not, what matter is whether Ego supplied the drawings as agreed in the contract. Like said above, the law of contract doesn't force parties to form a contract, but it rather enforces their promises. The construction law allows the parties to a construction contract to vary the work for different reasons. Variation can be described as;

"Work performed by a contractor, or omitted from its scope of works, usually at the express direction of the contract administrator (acting on behalf of the owner) pursuant to a contractual power, where the instructed work is different to that which was in the original scope of works, or it represents an omission of work which the contractor was otherwise required to perform"

Part A [2] Subsequent Oral Modification to Written Contract

So from the above explanation, Agro was the contract administrator, and it was the one which through its powers invited Ego to modify the contract.  Since Ego complied with variation, they both formed a valid contract that is enforceable in law. Consequentially, when parties change a contract, all of their future conducts are governed by the new terms. This part was explained in as;

 “Obviously, neither party can unilaterally change the terms of a contract after it has been made, but an agreement between the parties can always modify a contract. A modification is a contract in itself, distinct from the original contract that it changes. As a separate contract, it is subject to most of the usual requirements of contract law for formation and validity.” 

In simple terms, the invitation to vary the contract was an offer, and Ego accepting to the request was a valid acceptance. Agro was supposed to act in good faith that it varied the contract, and therefore it was expected to be bound by the new agreement.

It goes without saying that construction work can change due to different circumstances. And to provide better results, the engineer or the contract administrator can modify the contract to cope with the arising situation. The only issue with the case between Agro and Ego is that they made oral modifications which were to affect an already written contract. Then the big question is; can subsequent oral modification affect an already written contract? Being normal for changes to occur in the course of construction, disputes with owners denying modification are common when subcontractors demand their pay.  For example, the court ruled that Udevco should pay Wagner because the developer had established an express oral waiver which Wagner relied on upon while performing the extra work.  In this case, Udevcor had orally requested the Wagner to modify the framing of the cabinet and doors because they didn't match original design, and hence could not fit the prefabricated roof trusses did not fit. When Wegner did as requested, Udevcor refused to pay disputing that an oral agreement could not modify the contract.

Also, the conducts of the parties can show the intention that the parties were no longer intending to be bound by the written agreement but rather the oral modification. In a case, the judge dismissed the request for the respondent trying to deny the waiver of the ‘no oral modification clause’ stating that “evidence is insufficient to permit an inference of conduct inconsistent with the oral agreement.”

Also, it can be argued that Angro cannot go back to the old terms because it’s the one that invited Ego to amend the contract. “In the cases where a party to a written agreement has induced another's significant and substantial reliance upon a misrepresentation, the first party may be estopped from benefiting from such misrepresentation.” Besides, there is the concept of good faith.  Steyn Li recommended the protection of expectations of an honest man. So Agro was obligated to respect the trust that it had earned from Ego.

Part A (3) The Legal Effect of Stamping Specifications 'Approved'

Construction work usually contains a series of papers. All these documents hold crucial information and provisions regarding the entire construction. In a real sense, the more documents they are, the easier the chances of conflicting information. But still, sometimes these documents indicate how a resolution from opposing provisions of different documents can be attained.

The most common technique is whereby the contract rules the entire hierarchy of documents. For example, the contract can state that it would only be the provisions of the contract that would overrule in any case where there would be a conflict of document provisions. Not only that, but a contract can also include a clause declaring that any ambiguities or discrepancies with the documents be referred and resolved by the contract administrator. This provision is commonly referred to as the 'orders of precedence.' When the contract is silent on express provisions for conflicts resolution on documents ambiguities, the parties can also look at the wording of the contract to see what the parties intended at the first time of contract formation.

Constructions specifications require approval from the architect/engineer or the owner. The approval can be of the proposed materials or deviation from the original design.  The main purpose of the approving process is to allow the owner to apply some measure of control or power that the owner has been granted on the project. These measures and control come with liabilities too. For instance, an engineer can be liable of a poor interpretation of misconception of the figures if they lead to defective construction. Therefore, it's the duty of the engineers to determine structural soundness of a building. If they fail to exercise ordinary care, then they will be liable for a breach of contract. Also, stamping specification means accepting responsibilities. Simply, it's the responsibility of the architect disapprove or eliminate errors in the specifications; it's a kind of an obligation. The court made the same remarks as "the responsibility of an architect may be similar to that of a lawyer or a physician: the law requires the exercise of ordinary skill and care

Considerably, the architect doesn’t owe the responsibilities to the owner alone, but also to anyone who has an interest in the premises. “An architect who plans and supervises construction work, as an independent contractor, is under a duty to exercise ordinary care in the course thereof for the protection of any person who foreseeably and with reasonable certainty may be injured by his failure.” 

Finally, the court doesn’t allow the architect/engineer to put a burden of its duties or to the contractor through delegating extra work or modifying the contract. It should also not increase the burden of the owner through increasing or modifying the contract to include other materials that were not stipulated in the contract. If such a thing happens, the court will always hold the engineer/architect liable for the breach. 

Variation is sometimes is inevitable in a construction project. Variation can result from omission of sufficient details in contract documents, or it can the negligence of the construction professionals. When variation happens, it sometimes leads to  “scope-of-work” disputes. The most common cause of variation is the mistakes of with the drawings or missing data in the specifications. There are some procedures that a construction manager can adopt to avoid variation.  An example of these is providing a budget that sufficiently covers the project. The manager or the engineer can also adopt the use of carefully prepared and coordinated front-end documents to limit variations

Part A (4) Procedures for Avoiding Problems of Amendments in the Course of Construction and Resolving Technical Disputes

Also, an engineer can ask another qualified engineer to review the specifications. At other times, avoidance of marking up different project's specifications simultaneously can also keep a check on variations. Another thing that can help limit variations is that engineers can keep updating their master specification regularly to keep it up to date with the current industrial standards, procedures and the laws concerned with construction. In the same token, the engineers can avoid variation by making sure that they don't allocate the duty of editing front-end documents to someone else, making sure they themselves edit such documents.

Expert determination is a method where a third party helps the disputing party in settling through an agreement. A person who acts as an expert should be independent, but the court has dismissed the notion that this should be a legal requirement. In most of the cases, expert agreement is acknowledged as binding, though sometimes it can be challenged. In construction projects, an expert determination can assist the parties in determining the completed work, and also assess its quality where such elements are the cause of the disputes. An expert can also be called to deal with specific matters. For instance, he/she may be called to determine payments owed to the contractor where there was time extension. In other cases, parties entering into a construction contract may include a clause stating that above all other means of dispute resolution; the parties would first use an expert determination for their disputes. 

Any party with an intention to file a claim for a breach of contract must substitute the claim. Court applications rely on the evidence, and without evidence, the court will have difficulties in providing a remedy to the offended party. As far as evidence is concerned, there are conditions set for the acceptance of documents as evidence. For one, the written document should be written during working hours. So in this case, it would be necessary for Agro to carry the project diaries that was used during working hours. The other rule is that document should be made within the site or during the construction. Thirdly, the person who prepared such document should make a testimony. Lastly, the court would require the information in the document to have come from a credible source.

To start with, Agro can bring the contract document as it will help the judge understand the terms that were agreed.  Also, a daily work report would be excellent in demonstrating the progress of the work. Another important thing that many engineers overlook is telephone recordings. It's always advisable to keep a record of all telephone calls that are made or received about the project. The logs should also have a summary indicating the identities and key details to the construction.

If there were tests undertaken at the site for the project, it's also good to keep a record of test materials. The report should also include the test results and structure where test materials were installed. Another thing engineers should not forget to keep a record of submittals. There should always be a record of all materials brought to for approval or any other consideration.

Part B (a) Court Proceedings to Substantiate Claim that Specifications are Not Complete

Expert Witness: So that the court can accept expert evidence, it must verify two elements. For one, " it must be agreed or demonstrated that there is a field of “specialized knowledge”; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert;” Secondly, “The opinion which is given must be “wholly or substantially based on the witness’s expert knowledge”

There are lots of issues affiliated with expert witnesses. One is the lack of consensus where two expert witnesses have different opinions. This can be a significant problem when one theory may be standard while the other is highly divergent from the prevailing technical view. Another possible risk of having expert witnesses is their inclination to argue for their case limiting an opposing viewpoint despite the facts in question. This sometimes can be caused by belief or personal bias. Finally, expert witnesses are costly.

The 'Building and Construction Industry Security of Payment Act (SOP)' helps people to secure their payments made in a construction job or people who supply goods and services to a building contest. Tom and Phillip stated that;

“The Victorian Building and Construction Industry Security of Payment Act 2002 applies to construction contracts in respect of construction work in Victoria. Its object is to ensure that ‘any person who undertakes to carry out construction work or ... to supply related goods and services under a contract is entitled to receive, and is able to recover, progress payments in relation to ... that work and the supplying of those goods and services’ (NSW Department of Commerce 2004).”

To make a successful claim, it’s very critical that the claim follows the rules stipulated in this act. To illustrate, the law requires that each person claiming his/her payments should serve the claim to the respondent. The law also sets different dates of the claim. So with this, each claim should include an earliest date, which is the date that the claimant made the claim. Apart from the earliest date (reference date), the claim should also have the latest date that the claim can be served.

This act allows the claimant to only claim the unpaid amount or the money due. It’s a good point to note that one can only claim the money agreed in the contract. If the contract doesn’t state the money, then the claimant can calculate the money due in accordance with the work performed. There are various types of dates set in the act. There is the periodic progress payment, final payment, and single or one-time-off payment. Parties to a contract are free to specify the reference date and the latest date. When it comes to a periodic progress, they should wait for three months after the reference date.  Furthermore, periodic progress payment can only allow a time duration of not less than three months and one day before the claimant serves payment claim.  No more claims should be served after making an application for a final payment.

Part B (b) Procedures for Availing Payment Process under the Building Industry Security of Payments Act in Victoria

Markedly, the claimant should acknowledge that contracts providing for  single or one-time-off payments do not qualify for a periodic progress claims. These contracts are that governs short jobs or with instant pay or short duration of offering goods and services that have instant pays. Other contracts with longer duration like big projects are applicable for periodic progress pay. And still, there are some contracts that prescribe when a progress claim should be made. If such provision exists, the claimant can wait for the lapse of  20 business days from the date stipulated in the contract. When it comes to final payment claim, the Act allows the construction contract to decide on the dates for making a final payment claim. If the contract doesn’t mention any date but it prescribes for a final certificate, the claimant can count the earliest date being the date following the final claim.

Conclusion:

Construction project must have a detailed contract covering every aspect. This paper has looked at the formation of a construction contract, and it has also looked at the effects of oral modification. In addition to that, it has also analyzed the effects of stamping specifications together with the variation of a construction contract. Another thing that this paper has covered is the issue of the expert witness and how to bring a successful claim. Above all, it's always advisable that parties to a contract can keep referring to their agreed terms to avoid any future liabilities.

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Building and Construction Industry Security of Payment Act 2002