PREPARING AND MANAGING

THE CONTRACT
Learning Objectives

• To provide an introduction to contract law

• To understand mechanisms of contract management

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What is Contract?
• A contract is an agreement
between two or more
parties which is intended
to be enforceable by the
law.

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Type of Contract
• A contract whereby both parties make promises
and are bound is a bilateral contract. This of
course is the usual type of contract. For example,
a seller promises to transfer ownership of goods
to a buyer and in return the buyer promises to pay
an agreed sum of money.

• In contrast to this is the case where one party (the

promisor) makes a promise and is bound, while
the other person is free to perform or not as he
chooses. This is called a unilateral contract.
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Elements of contracting

• Offer
• Acceptance
• Consideration
• Intention to legal consequences
• Certainty of Terms
• Capacity to contract

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Elements of contracting
• Offer
• There must be a valid offer which has been
unconditionally accepted. An offer is made by an
offeror to an offeree. It should be clear and definite
and the offeree must intend to be legally bound by it.
The terms of the offer must include all the terms of the
proposed contract (expressly or by implication).

• An offer can be terminated through the following ways:

• Revocation
• Lapse
• Rejection By Offeree
• Implied rejection : counter offer
• Death
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Elements of contracting

• Acceptance
• An acceptance is a final and unqualified assent to all the terms of the offer.
• Rules of acceptance :
• Offer still in force
• Offer to made by the offeree
• Unqualified an absolute
• Acceptance can be in writing, oral or by conduct
• Silence does not constitute an acceptance
• Communication

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Elements of contracting

• Consideration
• Act or forbearance (or the promise of it) on the part of one party to a
contract as the price of the promise made to him by the other party to the
contract’. In other words, each party promises to do or supply something of
value to the other.

• Rules of Consideration
• Consideration does not have to be adequate
• Consideration must be sufficient
• Consideration must not be illegal
• Consideration must move from the promisee
• Past consideration is not good consideration

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Elements of contracting

• Intention to legal consequences

• For a contract to be legally enforceable there must be an intention
by the parties to be legally bound. In Commercial and Business
Agreements there is a presumption that the parties intend to create
legal relations: Edwards v Skyways.

• Exclusions:
• Express
This presumption can be rebutted but the onus is on the party seeking
to exclude legal relations. An express exclusion of intention by the
parties will be given effect by the courts.

• Social & Domestic Agreements.

There is a presumption that social and domestic agreements are not
intended to create legal relations. However this can be rebutted by
evidence to the contrary.

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Elements of contracting

• Certainty of Terms
• As a general rule the courts will not enforce vague or incomplete agreements.
• However the courts will strive to fund a valid contract. If terms are uncertain,
the courts may clear the uncertainty by the means:
• Trade customs & Usage
• Previous dealings between the parties to determine the essential terms of the
agreement.

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Elements of contracting

• Capacity to contract
• The capacity of certain persons to enter into legal contracts may be affected.
• Especially minors, drunkards and bankrupts

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Purchasing Contract

• Contracts are agreements with the vendor to supply materials or services

under negotiated conditions and within a certain period.

• Contracts are differentiated as follows:

• Quantity contracts: An agreement that a company will order a

certain quantity of a product during a specified period.

• Value contracts: A contract in which the purchase of goods or

services up to a total value is agreed.

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Types of Contracts
There are three broad categories:
• Fixed price or lump sum: involve a fixed total price for
a well-defined product or service.
• Cost reimbursable: involve payment to the seller for
direct and indirect costs.
• Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service.
Fixed Price Contracts

 Fixed price or lump sum contracts involve a fixed total

price for a well-defined product or service. These
contracts are particularly suited where supplies or
services can be clearly specified before tenders are
invited. The buyer incurs little risk in this situation.
 Fixed price contracts may also include incentives for
meeting or exceeding project objectives. They may also
include safeguards in the form of penalty clauses,
however these may be difficult to apply before the
consequences of delay are felt.
 An important consideration is that any changes to
resource requirements due to project revision (change) is
likely to lead to additional claims by, and extra payment
to the contractor.
Cost Reimbursable Contracts

 Cost reimbursable or cost-plus contracts involve payment to

the seller for direct and indirect actual costs. These contracts
are often used for projects that include the provision of goods
and services associated with new technologies. The buyer
absorbs more risk with the type of contract, which has three
forms:
• Cost plus incentive fee (CPIF): the buyer pays the seller for
allowable performance costs plus a predetermined fee and an
incentive bonus.
• Cost plus fixed fee (CPFF): the buyer pays the seller for
allowable performance costs plus a fixed fee payment usually
based on a percentage of estimated costs.
• Cost plus percentage of costs (CPPC): the buyer pays the seller
for allowable performance costs plus a predetermined
percentage based on total costs.
Unit Price Contracts

• Unit price contracts require the buyer to pay the seller a

predetermined amount per unit of service, and the total
value of the contract is a function of the quantities
needed to complete the work.
• Unit price contracts are also called a time and materials
contract, and may incorporate volume discounts.
• This type of contract is often used for services that are
needed when the work cannot be clearly specified and
total costs cannot be estimated in a contract. Many
contract programmers and consultants prefer to use unit
price contracts.
Contract Types Versus Risk

The figure below summarises the spectrum of risk to the

buyer and seller for different types of contract. Note that a
low risk option for a buyer will be high risk for the seller, and
visa-versa.
Source of Standard contract

• CIPS – Chartered Institutes of Purchasing & Supply.

• The Institute of Civil Engineering - the Association of Consulting
Engineers, the Federation of Civil Engineering contractors. These
are all used in the construction sector.
• The Joint Contracts Tribunal – Standard form of Building Contract
– including model form or call-off contracts, these standard
forms of documentation are used by the construction industry.
• The Freight Transports Association – conditions for carriage of
goods.
• Chartered institute of Building – used in commissioning and
facilities management contract.
• The New Engineering Contract – used in civil engineering,
building, electrical or mechanical works contracts.

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Advantages of Standard Contract
• Helps to reduce the time and cost in contract development,
particularly in detailed negotiation of terms and conditions.
• Avoids starting from the beginning each time, avoids” re-
inventing the wheel” each time.
• Model contract forms may be widely accepted by both buyers
and sellers across the industry or sector.
• Model contract forms are even handed and designed to be
fair to both parties in the contract.
• Model contract forms include standard clauses that can be
selected or deleted on an as required basis.
• Model contract form’s standard clauses are more likely to
contain the correct legal terminology without recourse to
third party experts.
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Disadvantages of Standard Contract
• Terms may be less advantageous, than may be
achieved through negotiations, particularly where
there is one party who is much stronger than the
other.
• The generic contract may be difficult to adapt to the
specific circumstances between two parties.
• Terms may not necessarily include special clauses or
requirements to cover a particular or unusual
situation.
• Legal advice and input may still be required,
particularly where significant variations to the norm
are required.
• There may be costs associated with training staff in
the detailed application of the model forms of
contract.
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