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Contracts and Agreements

In
Construction Industry

10/17/08 1
Contents

Definitions of Contract
Legality of Contract

Key elements of Contract

Contents of Contract

Types of Contracts

Standard forms of Contracts

10/17/08 2
Contracts and Agreements

A contract is a bargain agreed between two or more parties


such as an employer and a contractor regarding the execution
of certain works
Experts who will prepare the contracts :-
Legal , Taxation , environment ,Engineering ….etc

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 To be legal
 The contract must fulfill certain requirements :-

 1-An intention : both parties must be wise and


intend their bargain to be enforceable at law.
 2-A genuine consent : must not be procured by
mistake , force ….undue influence ,
misrepresentation…
 3-Legality of the object : the parties must not agree
to something illegal or to break the law.
 4-Legal capacity of the parties to act : according to
the applicable law.

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Contracts in Construction Industry
 Key elements of contract :-

 1- An offer and an acceptance.


 2- An intention by both parties to the contract to create legal
relations.
 3- Considerations.
 4- The parties must have the capacity to contract.
 Capacity is concerned with legality.
 Authority is concerned with permission.
 5- The contract must be legal and possible.

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Contents of the Contracts

 An international contracts may contain


 the following :
 Dates ; Parties ; Preamble ; Definitions ;
Interpretations ; Warranties ; Obligations ; Price or
other considerations ; Payments terms ; Risks ;
insurance ; Responsibilities ; Liquidated damages ;
Disputes settlements and governing law ….etc

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Different Names of Contracts

 Supply Contracts.

 1-Construction contracts
 2-Commercial agency contracts.
 3- Sale of goods contracts

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Different Names of Contracts

 Management Contracts.

 1-Employment contracts
 2-Insurance contracts.
 3- Facility contracts

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Different Names of Contracts

 Service Contracts.

 1-Works and material contracts


 2-Transport contracts.
 3- Arbitration contracts

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Type of Contracts

 A variety of contractual arrangements are available


and the engineer will often need to carefully select
the form of contract which is best suited for the
particular project.

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Type of Contracts

Lump Sum Contract

The simplest type of civil engineering contract .


Without quantities , the the contractor will have to assess the
amount of works , the employer has essentially assigned all
risks to the contractor, then the contractor will give an offer
with high Price to allow himself a sufficient margin to cover
for any items that may have missed. Furthermore, there is
no satisfactory method of assessing the cost of variations.

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Type of Contracts

Bill of quantities Contracts / Re-measured


or unit Price contracts

• The most commonly used form of contract for works of civil


engineering.
• The quantities of the works can be computed with
reasonable accuracy from the drawings and associated
documents.
• The contractor is paid for the actual amount of worked
done.
• There is facility for dealing with varied or additional works.
• Most of contractor are familiar with this type of contract.
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Type of Contracts

Cost Reimbursement Contracts

• The employer pays to the contractor


actual costs of works plus a management fee
which will include the overhead charges ,
supervision costs and profit.

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Type of Contracts

Cost Plus fixed percentage fee contract

• For certain type of construction or extremely


pressing needs, the employer is sometimes forced
to assume all risks overrun.

Actual costs + fixed percentage an little incentive to


reduce job cost.

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Type of Contracts

Cost Plus fixed fee contract

Actual costs + fixed fee and will have Some


incentive to complete the job regardless the
duration of the project and the employer will
assume all risks overrun incentive to complete the
job quickly since its fee is fixed

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Type of Contracts

Cost Plus variable percentage contracts

 The contractor agrees to a penalty if the actual cost


exceeds the estimated job cost or a reward if the actual
cost below the estimated job cost.
 For taking the risks on its own estimate , the contractor is
allowed a variable percentage of direct job cost for its fee.
 The project duration is specified .
 This type of contract allocates considerable risks for cost
overrun to the owner .
 Provide incentives to contractor to reduce costs as much as
possible
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Type of Contracts

Target Estimate contracts

 Specifies penalty or reward to a contractor .


 The percentage of saving or overrun to be shared
by the owner and contractor.

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Type of Contracts

Guaranteed maximum Cost contracts

 As turnkey contract

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Type of Contracts

Procurement Forms

 Traditional Forms.

 Responsibility for the design lie with the employer (


consultant) , thus the contractor is only responsible
for construction only

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Type of Contracts

Procurement Forms

 Design - Build Forms.

 Package deal Between the employer and the


contractor whereby the contractor also undertake
all of or a proportion of the design of the works

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Type of Contracts

Procurement Forms
Design - Build Forms.
 Develop contract ( employer led design)

 Design – Build ( 1- stage) ( employer led design)

 Design – Build ( 2- Stage ) ( contractor led design)

 Turnkey .

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Type of Contracts

Standard Forms
British Forms
 GC – Government contract.

 ICE- Conditions

 FIDIC - Conditions

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Type of Contracts

Standard Forms
FIDIC Forms
 New Red Book (1999) Design works by employer

 New Orange Book (1999) Plant and Design – Build ,

Design works by contractor Conditions


 The Silver Book (1999) – EPC – Turnkey.

 The Green Book - Short form of contract.


 The White Book ( 3 rd 1998) for pre- investment , feasibility

studies, design and administration of construction and


project management

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Type of Contracts

Standard Forms
American Forms
 AIA – American Institution of Architect.

 AGC – Associated General Contractors.

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Claims & Disputes
In
Construction Industry

10/17/08 25
Claims & Disputes

“ The means available to the parties to adjust the


contractual and economic relationship between
them to meet changing conditions”

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Contents

Introduction
 Definitions.

 Classification and legal basis of claims.

10/17/08 27
Contents
Section 1 - Classification by subject.
 Existence of contract.

 Documentation.

 Execution of works.

 Payments.

 Prolongation.

 Default……etc.

Notification.
Presentation.
Establishment.
Examination.

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Contents
Section 2 – Claims concerning the existence of a contract.
 General.

 Recognition of a valid contract.

 Capacity.

 Agency.

 Intention to create legal relations.

 Consideration.

 Agreement.

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Contents
Section 2 – Claims concerning the existence of a contract.
 Offer and acceptance.

 Offers.

 Revocation.

 Acceptance.

 Counter-offers.

 Acceptance subject to conditions.

 Letter of intent.

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Contents
Section 3 – Claims arising from documentation.
 General.

 Contract / Policy.

 Errors and discrepancy.

 AD-HOC Conditions.

 Counter-offers.

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Contents
Section 4 – Claims in connection with execution of works.
 Contractor to satisfy himself.

 Work to be the satisfaction of engineer.

 Damages to the works.

 Issue of further drawings , Instructions.

 Nominated Subcontractor.

 Defects.

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Contents
Section 5 – Claims concerning payment Provisions.
 General.

 Valuation of contract works.

 Valuation of Varied works.

 Issue of further drawings , Instructions.

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Contents
Section 6 – Claims concerning Time.
 General.

 Evaluation of delay claim.

 Disruption..

Case : Claim in respect of acceleration of works.

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Contents
Section 7 – Claims arising from default, determination.
 Liquidated damages.

 Determination.

 Frustration.

 War Clauses

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Contents
Section 8 – Presentation and Payments
 Presentation of a claim.

 Format of a claim.

 Negotiations.

 War Clauses

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Contents
Section 9 – Alternative Dispute Resolutions ( ADR).
 Mediation.

 Conciliation.

 Disadvantages of ADR.

 Adjudication.

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Details for the Course

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Contents

Introduction
 Definitions.

 Classification and legal basis of claims.

10/17/08 39
Introduction
Impact of Claims

3) Cause budgetary difficulties to employer

5) Cause financial difficulties and restrictions of Cash flow ,


loss of liquidity to the contractor

So , it would be to the benefit of the whole industry if the


impact of claims was reduced”

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Introduction
“Claims are a fact of life”

“ Claims are here to stay “

How we can reduce the impact of claims

Coordination between the Engineer and contractor to mitigate


the effects of claims

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Definition

A Claim

• A demand , a request , for something presumed


entitlement to which.

• A contractor consider ( Rightly or Wrongly) he is entitled to


which.

• Agreement has not yet been reached.

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Classification and legal
basis of claims
Four legal and one non-legal concepts

3) Under Contract – there is a remedy in particular conditions for that


claim as issuing drawings in certain date and the employer fails to
meet it in its time ( remedy designed in contract).
4) Out of contract – a term of the contract had been breached But
where the remedy is not designed in the contract. If the claim is valid
then it may be settled by amicably or by applicable law stated in the
contract.
5) Where no contract exists then legal system called “ Quantum meruit”

Actual Cost + Part of profit.

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Classification and legal
basis of claims
Four legal and one non-legal concepts

4) Claims under the law of tort of the applicable law.

5) Ex-gratia Claims – no legal basis but rather some


commercial sense in making a settlement

The scope of study is concerning with :-

• Claims under contract have remedy.


• Claims under contract have no remedy then applicable
law will be applied.

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Classification and legal
basis of claims
We can divide the claims into three types :-

• Contractual claims : which have a basis in the contract it


self.

• Extra – contractual claims : which have no basis in the


contract but where entitlement Stems from the law then
will be settlement in arbitration or in litigation.

• Ex-gratia claims : which the contractor has no contractual


provision to rely on and No breach or tort by the employer.

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Contents
Section 1 - Classification of Claims by subject.
 Existence of contract.

 Documentation.

 Execution of works.

 Payments.

 Prolongation.

 Default……etc.

Notification.
Presentation.
Establishment.
Examination.

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Section 1 : Classification of claims
by subject
Existence of Contract

“ the contract must be binding ( offer , acceptance,


consideration) “
If not the contract will be void by a court.

Economic duress make the new rates imposed by any parties


during execution of the contract are void

the dispute is which is right the contract is binding or void

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Section 1 : Classification of claims
by subject
Documentation

 Shortcomings of documents as important information may


not have been referred in tender.
 Correspondences passing between tender and
acceptance may not have included in the contract.
 Ambiguity and discrepancies between documents

This may lead to Claims

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Section 1 : Classification of claims
by subject
Execution of Works

 Supply of information / delay in giving


 Variation
 Risks / responsibility for .
 Defects

This may lead to Claims

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Section 1 : Classification of claims
by subject
Payments

 Valuation of contract works ( Progress of works)


 Valuation of varied works( under which item it is executed.

This may lead to Claims

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Section 1 : Classification of claims
by subject
Prolongation

Delay for which the employer is responsible

 Delays in giving drawings and information in consequence


the contractor incurs extra cost, the works will be slowed
down as if it was stopped, this reduce the productivity of
contractor.

This may lead to Claims

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Section 1 : Classification of claims
by subject
Prolongation

Delay for which the employer is not responsible

 Exceptionally inclement weather , Strikes …. Then


according to FIDIC the contractor is entitlement to an
extension of time but not to Compensation.

This may lead to Claims

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Section 1 : Classification of claims
by subject
Default

 Failure to complete within the stipulated time for which


provision is made for liquidated damages

This may lead to Claims

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Section 1 : Classification of claims
by subject
General Terms

Presentation

 The contractor must clear the “ merit of the claim”

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Section 1 : Classification of claims
by subject
General Terms

Establishment

 For the contractor to state the reasons why he considers


himself entitled

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Section 1 : Classification of claims
by subject
General Terms

Examination

 The technique to be employed in examining claims ,


check the facts ( documents which constitute the contract)

The end of section

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Contents
Section 2 – Claims concerning the existence of a contract.
 General.

 Recognition of a valid contract.

 Capacity.

 Agency.

 Intention to create legal relations.

 Consideration.

 Agreement.

10/17/08 57
Contents
Section 2 – Claims concerning the existence of a contract.
 Offer and acceptance.

 Offers.

 Revocation.

 Acceptance.

 Counter-offers.

 Acceptance subject to conditions.

 Letter of intent.

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Section 2 – Claims concerning the
existence of a contract.
General

Claims are mostly concerned with “ entitlements and


liabilities “ , for such claims the contract must be come into
existence and legally valid, but the existence of a valid
contract may be disputed as :

 An employer issues a letter of intent and denies that a


binding contract exists.
 A contractor denies that a variation or a supplementary
contract is binding.

10/17/08 59
Section 2 – Claims concerning the
existence of a contract.
Example :- British Steel Corporation v Cleveland bridge

 Cleveland bridge were contractors for building with space


frames roof in Dammam.
 They contacted BSC Company to supply Steel nodes
required and issued a letter of intent.
 As the work is urgent , BSC started immediately and in the
fact completed all 137 nodes.
 The negotiations on the terms of a contact were still
continuing , agreement on terms was never reached.

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Section 2 – Claims concerning the
existence of a contract.
Example :- British Steel Corporation v Cleveland bridge

 BSC Sued for 200,000 Pounds as value of nodes.


 Cleveland Bridges Claimed 800,000 Pounds for damages
due to late of delivery nodes.

What is held ?

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Section 2 – Claims concerning the
existence of a contract.
Example :- British Steel Corporation v Cleveland bridge

 It was held there was no contract .BSC were entitled to


200,000 Pounds as value of nodes.
 The above case on the basis of quasi- contract and is
called “ Inchoate contract”

“ Inchoate contract “ is one where the process leading


to agreement has been started but not completed . And
it is accordingly not binding in law

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Section 2 – Claims concerning the
existence of a contract.
Recognition of a valid contract

For binding contract there are three essential requirements :

 Intention to Create legal relations


 Consideration ( terms of payments).
 Agreement.

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Section 2 – Claims concerning the
existence of a contract.
Capacity

For a contract to be binding , the parties must each have the


capacity to contract.

“ The capacity “ is fundamental and is concerned with


legality. “ The Authority “ is concerned with permission.
In business an individual may have the legal capacity to
contract but not the authority of his employer

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Section 2 – Claims concerning the
existence of a contract.
Agency

An agent is a person with the power to change the legal


position of another person known as his “ Principle”.

in short an agent has the authority to change

Types of agency

 Actual agency or authority


He has written permission to act.

 Apparent agency or authority


He has the authority by conduct to act .

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Section 2 – Claims concerning the
existence of a contract.
Intention to create legal relations

 An intention by parties to contract to create legal relations,


and to be legally bound by the contents of the contract.
 Contents of a contract must be clearly apparent.
 A contract can be enforced be a court.
 If the parties intended their promises to be binding as a
natural of consequence of this , the court will provide
remedies for the breaking of binding known as breach of
contract.

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Section 2 – Claims concerning the
existence of a contract.
Consideration

 The legal word for the money that is paid for the supply of
the goods or services which is called :-

“Terms of payments”

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Section 2 – Claims concerning the
existence of a contract.

Agreement

 The final essential requirement for a valid contract is


agreement.
 The agreement must be on all material points.

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Section 2 – Claims concerning the
existence of a contract.

Offer and Acceptance

 Agreement is normally analyzed in terms of “offer and


acceptance” , due to the communication between parties
it called legally “ Bilateral Contract”.

 The other is called “ Unilateral Contract” does not need


communication ,or negotiations for acceptance.

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Section 2 – Claims concerning the
existence of a contract.

Offer

An offer , in order to be capable of acceptance must indicate


an intention to be bound.

Invitation to treat does not necessary constitute an offer.

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Section 2 – Claims concerning the
existence of a contract.

Revocation

An offer may generally be revoked at any time before it is


accepted.

Example , “ Tender Bond ” will be loss in case of


withdrawal the offer

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Section 2 – Claims concerning the
existence of a contract.

Acceptance

 For acceptance of an offer to lead to a binding contract ,


the acceptance must state which offer is accepted.

 The acceptance of an offer must be unconditional.

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Section 2 – Claims concerning the
existence of a contract.
Counter -offer

Counter offer Kills off the original offer.

Example :
 The contractor sent an offer to the employer.
 The employer reply and change the terms of payments for
the offer, then the last is called counter offer and kills the
first.
 The contractor sent another offer in replying , then it is
called “ counter –counter offer” an kills the “counter –
offer”

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Section 2 – Claims concerning the
existence of a contract.
Acceptance Subject to Conditions

 If an acceptance is made “ Subject to conditions “ as


receiving certain information being received.

 Then the contract would arise on the receipt of such


information

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Section 2 – Claims concerning the
existence of a contract.
Letter of intent

 It is important to emphasize that the effect of a letter of


intent depends on the wording of the letter rather than its
heading.

It may lead to “ mini contract “

The End of Section

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Contents
Section 3 – Claims arising from documentation.
 General.

 Contract / Policy.

 Errors and discrepancy.

 AD-HOC Conditions.

 Counter-offers.

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Section 3 – Claims arising from
documentation
General

In preparing and examining claims it is essential to bear in


mind that one is concerned with what the documents say
and what provide, not with what on thinks they should
have said or what must been intended.

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Section 3 – Claims arising from
documentation
Contract / Policy

For employer and according to his policy to provide for “


Price fluctuation “ in contract .

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Section 3 – Claims arising from
documentation
Errors and discrepancies

Discrepancies between different documents “ Drawings


and Specifications …. ) , generally
 Drawings should be regarded as stating what is required.
 The Specifications stating the quality of workmanships
and materials.
 The Conditions of Contract stating the obligations of the
parties and the allocation of risks between them .
 The Bill of Quantities determining the amount to be paid.

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Section 3 – Claims arising from
documentation
AD-HOC Conditions

 Conditions of Contract are usually one of the “ Standard


Forms” as “ FIDIC, ICE, JCT….. ”
 In most cases some ad-hoc conditions are needed to
drafted to the particular requirements of a given job.
 Great care is needed in drafting such ad-hoc conditions
and must ensure that they are contractually do not conflict
with the Standard Clauses.

The End Of Section

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Contents
Section 4 – Claims in connection with execution of works.
 Contractor to satisfy himself.

 Work to be the satisfaction of engineer.

 Damages to the works.

 Issue of further drawings , Instructions.

 Nominated Subcontractor.

 Defects.

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Section 4 – Claims in connection with
Execution of the Works
Contractor to satisfy himself

 It is requirement that the contractor satisfies himself about


what he is undertaking .
 ICE Clause 11 stated “ he is deemed to have inspected
and examined the site and its surroundings and to have
satisfied himself before submitting his tender as to the
nature of the ground and subsoil.
 If the Contractor requires more information and considers
there is insufficient time in the period allowed for tendering
he must ask for an extension of the tendering period .
 The contractor must make his own enquiries consult,
geological survey , ask Soils experts, and if he does not ,
he carries the risk according to FIDIC , ICE

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Section 4 – Claims in connection with
Execution of the Works
Work to be the satisfaction of engineer

 The work has to be the satisfaction of the engineer and


must be according to .
iv. Specification .
v. Drawings
vi. Employer requirements

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Section 4 – Claims in connection with
Execution of the Works
Damages to the works

 During construction the Contractor is responsible for


making good any damage to the works and will will
depend on the actual Contract.

Issue of Further drawings and instructions

 The Engineer is required to issue Further drawings and


instructions from time to time during the course of the
work.
 In any event an Engineer who delays issuing further
drawings and instructions then he is putting his Employer
at risk.

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Section 4 – Claims in connection with
Execution of the Works
Nominated Subcontractor

 Nominated Subcontractor Pose very considerable problems,


the machinery for their operation in both JCT and ICE.
 The alternative of separate direct Contract may overcome
some problems , but substitute others ( difficulty of coordination
and control, and the effect of delay)

Defects

 “Defects” in the sense used in maintenance clause , means


materials and / or workmanship.
 The Contractor Is therefore technically in “ Breach” and is
entitlement to remedy such breach until the end of
maintenance period or “ defects liability Period”

 The End of Section


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Contents
Section 5 – Claims concerning payment Provisions.
 General.

 Valuation of contract works.

 Valuation of Varied works.

 Issue of further drawings , Instructions.

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Section 5 – Claims concerning payments
Provisions
Valuation of Contract works

Two schools in respect of valuation of Contract Works.

 One considers that the rates in the B.O.Q are applying


whatever the quantities.
 Second considers that some adjustment of the rates up
or down in case of changing the quantities.
Standard Forms of Contracts ( ICE) dealt with these matters

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Section 5 – Claims concerning payments
Provisions
Valuation of Varied Works

Standard Forms of Contracts ( FIDIC) make some


reference to the applicability of B.O.Q Prices to Similar
Conditions

The End of Section

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