Formation of Construction Contract

1. BACHELOR OF QUANTITY SURVEYING(HONS)
CONSTRUCTION LAW
(LAW 63804)
Jackson Ting Shii Hang 0324326
Koh Wen Qi 0323355

2. B. FORMATION OF CONSTRUCTION CONTRACT
1. Tenders as Offers
2. Qualifications in a Tender Submitted
3. Acceptance of Tender
4. Letter of Intent
5. Essential Terms of Agreement
6. Letter of Award

3. Offers
◈No contractual relationships bounded until the offer is accepted
◈The Client / Builder might be just an invitation to treat
◈The contractual relationship is made when the offer is accepted
◈Once the contract is signed , parties in contract has their rights and obligations
against each other
◈Both parties have to follow the duties or responsibilities stated in the contract

4. Qualifications in a Tender Submitted
◈ Tenderers may consider certain aspect of the design to be unnecessarily
costly or commercially inefficient undue risk
◈ All the required tender documents should be included to be used in the
future
◈Tenderer may seek to qualify the tender by excluding or amending certain
conditions to increase the attractiveness of his tender
I.E
Holland Hannen & Cubitts Ltd v Rural District Council (1964)

5. “
Acceptance
◈Acceptance means accept the offers made by offeror
◈ Usually a period of time will be given called as tender validity period
◈Acceptances is used to indicate that the parties intend to be bound only under a
formal contract when it is prepared and signed
◈ The acceptance of an offer must be unconditional and must be communicated in
order to form a contract which bound two parties with a contractual relationship

6. Letter of Intent
◈By issuing LoI, which means employer intends to award the contract to the
selected contractor.
Intends = Future action/Not yet
◈LoI usually set out the initial terms which allow the work to proceed, provided
both parties agreed on the terms and conditions.
◈Both parties can continue with negotiations on the detailed terms later.
◈In contract law, LoI is non-binding, can’t enforceable.
◈In CIPAA, LoI can be classified as written contract depends on the wording.

7. Letter of Intent
Purpose:
◈In the event of urgency, employer wants the contractor
to commence some preparation works first.
◈LoI provides the contractor with some degree of
assurance to persuade him to commence the mobilization
of resources for the project.
◈Contractor may place orders for materials which requires
long lead time, such as M&E equipments (lift, escalator).

8. Case Law
Turiff Construction Ltd v Regalia
Knitting Mills (1971)
• LoI should be treated as an
expression of a party’s intention
to enter into a contract at a
future date
• LoI can have no binding effect
except in certain express term
• So, how the terms spelled out
is important, it may create
certain legal obligations
between the parties
Monk Construction Ltd v Norwich Union Life
Assurance Society (1992)
• A maximum expenditure of £100k was
inserted in the LoI but in fact the total cost of
the work undertaken was £4m.
• The parties agreed that extra work had been
ordered since the letter of intent was sent.
• It was held that as some of the essential
terms of the contract had not been agreed,
no contract had come into being.
• Therefore the contractor was entitled to his
own payment on the over expenditure..

9. Example of Letter of Intent
◈This simple letter is not a
valid contract, however it is
some form of agreement or
treat it as an instruction.

10. Essential Terms of Agreement
◈In construction contract, an agreement requires the parties, price, time and
description of works (scope of works) as the minimum necessary for a contract to
be workable.
◈Without both parties mutual agreement on the essential terms, the contract is
not workable.
◈Case Law : Lord Blackburn in Rossiter v Miller (1878)
If the essential terms of the agreement remain to be decided afterwards, there is NO
contract.

11. Letter of Award
◈Issued by the employer once both parties have agreed on the principal terms of the
contract.
◈It may be issued although not all terms have been agreed between the parties, eg:
the definitions of milestones within a program, insurance and performance bond.
◈LoA incorporates all the terms and conditions, takes longer time to be prepared.
◈Usually drafted by lawyer/consultant.
◈Usually incorporated as part of the contract document.
◈Once contractor accept and sign LoA, the offer is valid.

12. SCOPE OF
WORKS
(with specifications,
drawings etc)
PARTIES TO THE
CONTRACT
(name, business address)
Typical Contents in the Letter of Award
CONTRACT
SUM
DOCUMENTS
(invitation to tender, tender
submitted and
any addendums)
COMMENCEMENT &
COMPLETION DATE
PERFORMANCE
BOND
INSURANCE
COVERAGE

13. –Parties to the contract
◈ When any dispute arises, only parties to the contract can look for their rights and obligations.
–Scope of works and documents
◈The parties to the contract need to aware of what they offer and what works should be carried out.
–Contract sum
◈Pricing risks may arise due to inflation, so it is important to state clearly whether the price is to be
fixed, re-measured, price adjustment for fluctuation etc.
Importance of the typical contents

14. –Commencement and Completion Date
◈The owner affords the contractor sufficient site possession to enable the works to proceed & the
completion date to ensure that this obligation is discharged on that date.
◈The site possession date and the construction period determine the operation of contractual
mechanisms for timely delivery of the works, including the operation of the LD provisions.
–Performance bond
◈If the works do not proceed by a designated date, the contractor would be deemed to commit a
breach which need compensation.
Importance of the typical contents

15. Example of Letter of Award

16. Example of Letter of Award
c

17. “
Question 1
In construction industry , we always issue a Letter of
Award to notify the bidder who won the tender.
What is the purpose to issue Letter of Award to the
bidder?

18. “
Answer for Question 1
◈ The letter will typically contain details of the amount of the award, the date
of the award, and when the contract will be signed. A notice to proceed may
also be included detailing the date on which a contractor may begin work.
◈ The aim of the letter is to give the successful bidder reassurance, and to
allow them to begin preparations, whilst refraining from any commitment to
legally binding obligations.

19. “
Question 2
It is common tenderers are always asked to pay
certain amount of money so called tender deposit.
What is the use of this deposit?

20. “
Answer for Question 2
◈ The main objective is to make sure that if the bidder is successful and the
tenderer is ready to award the contract to the bidder, the bidder should not
back out on any pretext.
◈ When the bidder is successful, he is asked to deposit this amount. The main
objective of taking this deposit is to ensure that the bidder supplies the
tendered items as per the terms and conditions of the bidding documents.
◈ The most preffered mode is through Bank Guarantee.

21. “
Question 3
If a letter of intent sent to a contractor only includes
an instruction to carry out works (construct a
building) with no basis for the rates of the materials,
what should the basis for the rates upon payment?

22. “
Answer for Question 3
◈ Where a letter of intent includes only an instruction to undertake work, the
contractor’s financial entitlement of payment should based on quantum
meruit.
◈ This is a payment which the work merits or in other words a fair and
reasonable payment (market price).
◈ This was illustrated in the case of British Steel Corporation v Cleveland
Bridge (1984).

23. “
Question 4
What is the importance of commencement and
completion date in Letter of Award?

24. “
Answer for Question 4
◈ The owner is obliged to afford the contractor sufficient site possession to
enable the works to proceed & the completion date to ensure that this
obligation is discharged on that date and works expected to be done.
◈ The site possession date and the construction period determine the
operation of contractual mechanisms for enforcement of timely delivery of
the works, including the operation of the liquidated damages provisions.

25. THANK YOU !