Contract

Definition

A contract is an agreement made between two or more parties that creates legally binding obligations between them. The contract sets out those obligations and the actions that can be taken if they are not met.

General

Contracts are covered by contract law. Specialist advice should be sought to ensure that the legal ramifications of any proposed contract are fully understood.

The law governing any contract will depend on the applicable jurisdiction. Nevertheless, there are generic principles which are universal in application. There must be:

  • an ‘offer’ made by one party which is ‘accepted’ unqualified by the other party;
  • an intention to create legal relations between the parties and for the parties to be bound by these obligations;
  • a consideration passing from one party to the other in return for the provision of goods or services covered by the contract;
  • definite terms, so that it is clear as to what conditions the parties are agreeing;
  • legality, with only properly incorporated firms or competent persons entering into the contracts.

A contract is required where the resource management plan requires goods or services from outside the host organisation. The resource management plan should set the high-level requirements that the contract needs to implement. For instance, if the plan states that risk should be shared equally between both parties, the contract needs to be appropriately drafted to make sure that this happens.

In many industries a range of standard forms of contract is available. For example, the Joint Contracts Tribunal (JCT) and the New Engineering Contract (NEC) family of contracts provide standard forms of contract that can be utilised in engineering and construction.

The strength of using a standard form of contract is that it will generally take account of established best practice within the particular industry. The weakness is that it may not fully address all the areas within the resource management plan.

Where alterations are made to a standard contract, it then becomes a bespoke contract. A bespoke contract is one that is drafted to suit the specific procurement circumstances. Its strength is that local requirements can be reflected, but this must be traded against the time and cost of producing the document.

The contract itself should contain enough information for the intentions of the parties to be clear. These intentions are set out in the ‘contract conditions’ and include items such as:

  • general information (e.g. who the parties are, description and location of the works or services, legal system that the contract will use, etc.);
  • provider’s responsibilities for design, approvals, assignment of such responsibilities, subcontracting;
  • time: schedule, milestones, completion date;
  • quality: testing, defect rectification;
  • payment: certificates, release of monies;
  • compensation events, change requests, dealing with unforeseen circumstances;
  • property: who owns what during the course of the contract, transfer of intellectual property (IP) and copyright;
  • assignment and management of risk; the need for insurances;
  • how disputes will be managed (e.g. non-performance).

A Statement of Work (SoW) can form a useful annex to the main body of a contract to define the detail of deliverables, timescales and management procedures. It should be noted that such a SoW needs to be drafted to not conflict with the main body and precedence needs to be stated.

The procurement process provides the framework within which all contracts related to the work are managed. In the P3 environment the P3 manager must ensure that the contract is properly executed and placed under version control.

In most circumstances, experienced procurement specialists will be competent to write or check contract documentation, including ensuring that there is a clear hierarchy of conditions and precedence, a clear mechanism for performance management, change management and an exit strategy. This means that the need for advice from lawyers can be restricted to unusual or complex issues.

The P3 manager needs to ensure that the contract is duly executed during the course of the project. This means ensuring that the various legal obligations are discharged by both parties as agreed.

Written contracts can never reflect all possible events. For instance, if a provider is late delivering a particular item of equipment, the P3 manager must decide if the penalties in the contract should be applied. It could be that the provider was waiting for information from another party. Alternatively, the provider may have no legitimate excuse, but the P3 manager may decide not to apply the penalty in order to encourage positive future engagement.

The P3 manager needs to constantly balance the legal environment of the contract with the realities of relationships with providers.

Where multiple contracts exist, the need for coordination is paramount. For instance, if one provider is held up by another provider, is it entitled to an extension of time and does it have a claim against the client organisation? These points should be considered and the contracts drafted accordingly.

Where a provider is allowed to sub-let part of its work, it is generally good practice that the contract between the provider and subcontractor is of a ‘back to back’ type (i.e. the same philosophy is used in the subcontract as the main contract).

The P3 manager should ensure that the team is aware that contractual obligations can be created inadvertently by poorly worded communications and/or inappropriate actions. Case law has shown that changes to contract have occurred even though no legal instruction was issued. This point should be considered as part of the communication management plan.

At the end of the contract, the P3 manager needs to confirm that all the legal obligations created under the contract have been duly discharged. Items such as equipment warranties and defect liabilities need to be administered for months, if not years, after the contract is concluded. The responsibilities for administering such long-term liabilities need to be considered.

 

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