Construction contracts

The simplest definition of a contract is ‘A promise enforceable by law’. A slightly more elaborate definition is ‘An agreement between two or more parties in which each party binds himself to do or forbear to do some act and each acquires the right to what the other promises’. Under common law, however, the promise has to be accompanied by ‘consideration’ which, in simple terms, means financial reward but it could also be any legally acceptable act agreed upon. Since it is between one party and at least one other and since the contract is made with the mutual agreement of the parties, it is necessary to have ‘an offer’ and ‘an acceptance’. If the contract or the promise is not performed, the remedy can be either the specific or actual performance of what was actually promised, or a financial compensation of one sort or another.12 The enforcement of a contract is one of the most important sections of the legal system. In any democratic society, the freedom of the individual to contract has been deemed the supreme facet of freedom since the beginning of social intercourse. The extensive growth of commercial activities in the nineteenth and twentieth centuries produced some abuse of this freedom, necessitating intervention by the State in the form of legislation to prevent mono poly and its harmful effects on society. This intervention, however, has not always been by way of legislation. In some cases, it has been initiated by specific groups of people interested in preserving the concept of fair play in a certain commercial activity. Others have done the same to prevent one-sided agreement in which the strong might impose their will on the weak. The result was the Standard Form of Contract consisting of a standardised set of conditions. presented in an already printed form best suited to the particular use for which it was envisaged. In construction contracts, where the obligations and responsibilities of the contracting parties can be extremely complex but to a large extent remain unchanged from one project to another, the Standard Form was developed by the relevant professional in stitutions in order to help make the contracts fair, just and equitable. This development was extremely suitable for the tendering system usually adopted in construction contracts as it ensured a common basis for the comparison and evaluation of tenders. In Europe, and more particularly in the United Kingdom and in Ireland, such forms were produced as early as the nineteenth century. The RIBA Form, which is used for building work contracts, was issued under the aegis of the Royal Institute of British Architects some time towards the end of the nineteenth century and that was followed by the RIAI Articles of Agreement and Schedule of Conditions of Building Contract, issued by the Royal Institute of the Architects of Ireland. In civil engineering works, the ICE form was first issued by the Institution of Civil Engineers in the United Kingdom in 1945. In civil engineering, various forms which were in use in the English language prior to the Second World War by different employers were fused, in England, into an agreed standard document. This was achieved in December 1945 by the Institution of Civil Engineers and the Federation of Civil Engineering Contractors. The document thereafter was known as the ICE Conditions of Contract. In January1950, it was revised and issued with the added agreement of the Association of Consulting Engineers, UK. Five further revisions were made, the last of these in September 1999: the document which is in use at present is the seventh edition. To the credit of those responsible for drafting the ICE document, many professional institutions all over the world based their conditions of contract on its text and made only minor amendments to accommodate differences in matters of law and nomenclature. Amongst these forms are two which will be referred to later in detail due to the relevance of their insurance clauses. These are the IEI Form and FIDIC’s Red Book. The first is issued jointly by the Institution of Engineers of Ireland, the Association of Consulting Engineers of Ireland and the Civil Engineering Contractors Association and is in its 4th edition since 1995. The second document, dating back to 1987, is also in its 4th edition and is prepared by the International Federation of Consulting Engineers (FIDIC). Revisions were implemented in the ICE, IEI and FIDIC Conditions of Contract as a result of demand from one or more of the constituent organisations or from the construction industry. This demand was in response either to a need or to a legal decision given by a court of law in deciding a case based on one of the conditions of the document in question. Originally, these documents were drafted in precise, legal language, which would be expected to remain unequivocal even when subjected to detailed and hostile scrutiny by astute legal minds. However, as revisions were incorporated, the language became more and more complicated and inscrutable. In certain cases, the number of words in each sentence grew to a level beyond the understanding of the average reader. for Works of Civil Engineering Construction, published in 1977, the number of words was at a level in excess of what a reasonably intelligent person is expected to readily.

are (i) foreseeable in general but not in specific terms, (ii) unforeseeable but (at least partly)preventable, or (iii) unforeseeable but insurable.16In this connection, it is worth noting that in respect of the philosophy of the construction contract, it is important to appreciate that besides setting out the scope and cost of the project to be constructed, the purpose of a construction contract is to allocate the risks to which that project is exposed; and to provide a clear statement as to how these risks are to be dealt wit hand managed.

Construction and the law

The interaction between construction and the law stems from the activity generated by the construction process. It involves matters related to legal concepts that reach far beyond the law . FIDIC Conditions of Contract for Electrical and Mechanical Works.14 Sir William Harris, Chairman of the Joint Contracts Committee (JCC) responsible for the revision of the ICE documents to the 5th edition.15 ‘Clearing the Critics’ Confusion’, New Civil Engineer, 20 December 1973, London, page 33. INTERACTION BETWEEN CONSTRUCTION, INSURANCE AND LAW 11
of contract. Professionals involved in construction must realise that ignorance of the law is not only a handicap, but is also no defence. Therefore, a certain minimum basic knowledge of the laws governing the areas of their professional involvement is necessary. To start with, however, it is important to set out two propositions that are vital to this discussion. The first is that, in general terms, we are only dealing with civil wrong acts as distinct from those that are likely to be followed by criminal legal proceedings. The second proposition is that the principles of the law that apply to construction are similar in almost all jurisdictions irrespective of the legal system that applies in a particular jurisdiction. Some authors and commentators even refer to the body of law that applies to construction as‘ construction law’.17 In jurisdictions within the common law group, besides common law ,legislation and equity form two integral parts of the whole legal system. Figure 1.4diagrammatically shows these areas. In a construction contract one may encounter all of these three areas of the law. For example, a person may be in breach of a statutory duty if he either does not follow or incorrectly follows the legislation of the jurisdiction. Under common law, he can be in breach of either the law of contract or the law of torts. Under the former, if the contract or the promise given is broken, he will find himself in breach of contract. Under the latter, he will find himself in breach of the law of torts and there for subject to tortious liability if the four following elements are established:• duty of care is owed, requiring conformity to a certain standard of conduct for the protection of others against exposure to risk;• a breach of that duty has been committed;• damage or injury is suffered as a result of that breach; and• a proximate connection exists between the conduct in question and the resulting damage. Thus, torts are essentially civil wrongs dictating no fixed measure of response. A civil wrong can simply be defined as: ‘a breach of a legal duty which affects the interests of an individual to a degree which the law regards as sufficient to allow that individual to complain on his or her own account rather than as a representative of society as a whole.’18 To distinguish tort from contract, one should focus on two main aspects: First, tortious duties are primarily fixed by law, whereas contractual duties are based on consent of the contracting parties. Therefore, contract is concerned with voluntary obligations while tort is concerned with in voluntary obligations. Second, tortious duties are owed to persons generally, whereas contractual duties are undertaken towards specific person(s). The following definition is a simple, but encompassing one:19A tort may therefore be defined as: An unlawful act arising primarily from operation of law and not from breach of agreement between parties, the typical remedy for which is

an action for unliquidated damages; and which is not exclusively a breach of contract, or exclusively a breach of trust or other equitable obligation, or exclusively a crime. A voluntary assumption of risk by the party suffering injury, or damage, or contribut orynegligence on his behalf, would either negate or lessen liability. There is also a duty impose don that party to mitigate the loss In construction, it is important to note that there is an interaction between the principles of contract and tort. Two situations must be considered. The first is where a claimant is a party to a contract but wishes to utilise a longer period of limitation than that available under the contract but permitted under the law of tort. In this situation, the courts might be willing to accept concurrent liability depending on the applicable law and provided there is nothing in the contract which excludes liability in tort. The second situation arises where there is no contractual relationship between claimant and defendant, but the damage results from the defendant’s wrongful performance of a contract to which the claimant is not a party. The third area of the law, in common law jurisdictions, that one may encounter is equity, and so one must consider the rules of equity to find out if one is within the boundaries of justice. The idea of equity stems from the concept that justice is not always achieved by simply being within the bounds of legal acceptability. It evolved to correct the rigour of law when applied to individual cases, which may not conform to the generally applicable legal set of rules and regulations. Thus, in a matter concerning construction, one of the equity rules demands that ‘Regard must be paid to the intent and not the form’, which means that where the parties to a contract include a term to the effect that on a breach of contract a fixed sum will be payable, and where equity is satisfied that the fixed sum is meant as a penalty and nota reasonable measure of the loss which the breach would entail, then equity will not allow the penalty to be enforced. Also falling under the rules of equity in the context of construction laware specific performance, injunctions and their modes of operation. Sometimes, the rules of equity are referred to as the rules of natural justice. It is however, arguable whether this reference is accurate or metaphoric insofar as it is debatable whether nature can always be termed as just.

Development of insurance clauses in standard forms of contract

As distinct from engineering insurance, which began in England with the industrial revolution around the middle of the nineteenth century, the necessity to insure various aspects of construction project during its period of construction was recognised when the standard forms of contract were developed. The earliest contractors’ all risks insurance requirement appeared in individual civil engineering contracts as early as 1929 for the construction of the Lambeth Bridge over the Thames in London. In Germany, this type of insurance was introduced in 1934 using terms and conditions derived from erection all risks insurance developed for erection and testing of industrial facilities, which had been launched in 1924.20A standard form used in 1935 by the Electricity Supply Board of Ireland reads as follows:

Clause 26-Insurance

The Contractor shall insure with a Company previously approved by the Board in writing such plant and materials as may for the time being be upon the site and shall keep them insured against destruction or damage for the whole value of such plant and18 Clerk & Lind sell on Torts, 18th edition, section 1–01, Sweet & Maxwell, 2000.19 Law of Torts by J.G.M.Tyas, 4th edition, an M & E Handbook published by Pitman Publishing Ltd,London, 1982. 14 INTERACTION BETWEEN CONSTRUCTION, INSURANCE AND LAW
materials until the completion of the works. And he shall, from time to time, when so required by the Engineer, produce the policy and the receipts for the premium forinspection. All monies received under such policies shall be applied in or towards there construction or replacement of the plant and materials destroyed or damaged, but this provision shall not affect the Contractor’s liabilities under the Contract. The insurance requirement as set out in the aforementioned clause is limited to material and plant and it is not clear whether it was intended that the insurance should cease upon incorporation of the material in the works. After the Second World War, the responsibilities and liabilities of the contracting parties in construction contracts increased in extent and in value. Clients, who in many cases were banks and financial institutions, found it imperative to cover their liabilities through insurance. Hence, the 1st edition of the ICE form of contract, issued in 1945, highlighted theim portance of insurance by incorporating clauses which remained in force until 1973 when the 5th edition was issued incorporating a revision of the insurance clauses.22 This revision of the clauses took place to allow for the developments which had occurred in the insurance markets of the world during the intervening period since 1945 and to cater for the technological advancement and the appearance of new construction materials and methods which emerged during this period. These developments created two effects: the first was that the new materials, methods and technology created new sets of risks and remedies which had to be recognised and allocated to one or more of the contracting parties; the second was that the insurers, on their part, varied their insurance policies in accordance with these developments, thus creating a significant difference between the requirements of the conditions of contract and what the insurance market was prepared to insure. Thus, the 5th edition of the ICE standard form of contract included revised insurance clauses which achieve a certain harmony between the need to insure and the perils that them arket was prepared to cover in its standard policies. Some revisions to these clauses, with significant improvements, were made when the 6th and 7th editions were published in 1991and 1999, respectively. However, there still exist a number of gaps in the insurance cover as sought by the document and a number of anomalies have been left without solution. The 3rdedition of FIDIC’s Red Book followed a number of the changes made in the ICE 5th edition, but not all of them. However, extensive revisions were subsequently made in the 4th edition ,which was published in 1987 .

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