CHAPTER 1

INTRODUCTION TO CONTRACT ADMINISTRATION

WHAT IS A CONTRACT?
If A says to B, 'I will repair your house' and B makes no promise in return, there is no agreement. If
B says, 'I will pay you $1000', then there is still no agreement. Why? Because it takes two to make
an agreement. An agreement involves an exchange of promises or goods. A has not yet agreed to
accept $1000 for doing the work. If A says, 'I will accept $1000' there is agreement on price, but is
there a contract?

Unless there is agreement on all the essential terms, the law does not recognize the existence of a
contract. Is there agreement on the actual work to be done to repair the house? It may be that A and
B know exactly what work is necessary, for example repair of a leak in the roof. In that event, the
actual work to be performed is agreed and there may be a contract.
The contract consists of the following express terms:
A will repair B's house
B will pay A $1000
A will accept $1000
These terms are said to be 'express' because they are the actual words spoken.
The contract also includes two types of 'implied' terms. An implied term is one that 'goes without
saying'. The first type of implied term is implied from the circumstances — since A and B know
exactly what repair work, they are referring to, the implied term is: 'The work is the repair of the leak
in the roof'.
The second category of implied term is implied by law. The law implies certain terms in any contract
in which the express terms do not cover the matter. Some of the terms that the law would imply in
this contract would be:
• the work will be completed within a reasonable time
• payment will be made upon completion of the work
• the work will be done in a reasonably workmanlike manner
• B will give A reasonable access to the roof to enable A to carry out the work.
Terms may also be implied by statute, for example in New South Wales, the Building and
Construction Industry Security of Payment Act 1999 may give a right to progress payments each four
weeks. In most States of Australia there is legislation governing contracts for residential building
work. This legislation prescribes some of the conditions of contract, such as express warranties of
workmanship. Chapter 15 deals with such legislation. The contract is the sum of these express and
implied terms. There will be other implied terms, but unless there is a dispute it will not be necessary
to identify them.
An agreement that is legally binding is a 'contract'. But lawyers usually use the terms 'agreement' and
'contract' interchangeably. To confuse the matter more, lawyers often call an agreement that is not a
contract a 'void contract'. A void contract is not a contract at all.
Writing is usually not necessary to create a contract. Many everyday contracts are made without
words, for example when shopping at the supermarket or catching a bus. A contract made by spoken
and not written words is an 'oral contract'. A contract that is made without words is an 'implied
contract'. A contract may be partly oral, partly written and partly implied. That part which is not
implied is said to be 'express'.
Not all agreements are contracts. Agreements that are not contracts cannot be enforced by legal
process. Agreements may be unenforceable for a number of reasons. Some are where:
• the agreement was not meant by the parties to create a legal relationship (e.g., an agreement by
a parent to buy a child an ice-cream if the child behaves properly - it was never envisaged by
either party that breach would give rise to a right to sue for damages)
• one party did not have capacity to make a legally binding bargain (e.g. a minor, i.e. a person
under 18, or someone mentally handicapped)

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 • the promise of one party was made under duress (e.g. at knife point)
• the performance of the agreement would involve a crime or a tort
• the terms of the agreement are not sufficiently certain.

Much has been written about 'offer and acceptance' and 'consideration'. These are concepts that raise
the question of whether there is an agreement. If A offers to do certain work for $1000 and B says 'I
will pay you $500 for that work', there is no acceptance of A's offer and no agreement. B has merely
made a counter-offer. But if A says 'I accept your price', then there is agreement. On the face of it, the
agreement is legally binding and is therefore a contract. For one of the five reasons mentioned above,
the agreement may not be legally binding or it may be that the contract is unenforceable by one or both
parties. This would arise where a law bars action on the contract. For example, in New South Wales
the Home Building Act 1989 s. 10 prevents a contractor from suing an owner under a contract for
residential building work unless the contract is in writing. The owner is not barred from suing the
contractor. Similar legislation governing contracts for residential building work will be found in most
other Australian States

If A offers to do certain work for B and B makes no promise in return, there is said to be no 'consideration' and
hence no contract. Consideration is a legal doctrine that in practice is unlikely to cause concern. Atiyah (1986:
56) says: 'The conventional account of the doctrine of consideration no longer accords with the law actually
enforced in the courts'. While it is a good idea to read textbooks on the law of contract, care must be taken that
statements of alleged principle are not taken too literally. The law is continually changing and developing, and
a statement that is true today may not be true tomorrow.

Building contracts involve the provision of goods or services or both. The goods are usually building materials.
The services are usually labor and use of plant to effect work but they can include design services and
management services. Where the contractor does not contract to provide design or management services, the
contract is usually described as a 'traditional contract'. Where the contractor agrees to carry out design, the
contract is usually called 'design and construct' (known throughout the trade as D&C). Where the contractor
agrees to manage work by others, the contract is usually called a 'management contract'. There are almost infinite
variations between building contracts, but the variations are not departures from basic principles. If the basic
principles are understood, the significance of the variations will become apparent. The purpose of this book is
to give the reader grounding in the basic principles.

In the example above of a simple contract by A to repair B's roof, B may decide to have a written description of
the work incorporated in the contract. Such a description is called a 'specification'. B may also decide to have
conditions of contract covering such matters as insurance and other risks. B may draft specific conditions for
the particular contract or select a published standard set of general conditions of contract such as Australian
Standard AS2124.

A and B might sign a document (a 'formal instrument of agreement') to record their agreement on the
specification and conditions of contract. This document is also called a contract. The term 'contract' is
used to describe the arrangement between the parties and also the document that evidences the
arrangement. The double use of the term can be confusing. One 'contract' may not be identical to the
other. The name given to a contract may be some indication of what the contract is about but care must
be taken because often a particular name is given to a contract to make it appear more attractive. For
example, some contractors call their own form of contract a 'Guaranteed Maximum Price Contract' but
usually there is no guarantee that the price will not increase. Sometimes contracts are named after the
nature of the work, for example:
• residential building
• domestic building
• civil engineering
• architectural
• air-conditioning
• maintenance

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• management
• design and construct (or turnkey, which means the same).

Sometimes contracts are named after the nature of the remuneration, for example:
• lump sum
• schedule of rates
• cost-plus fixed fee
• cost-plus percentage.

Sometimes contracts are named after the nature of the contractual relationship, for example:
• consultant agreement
• supply contract
• leasing contract
• subcontract
• head contract
• nominated subcontract
• concessional contract (e.g. BOOT - build, own, operate and transfer).

Sometimes contracts are given the name or acronym used by the publisher of the standard form of
general conditions incorporated in the contract, for example:
• AS2124 (published by Standards Australia)
• NPWC3 (published by the National Public Works Conference)
• CIC-1 (published by the Royal Australian Institute of Architects
• PC-1 (published by the Property Council of Australia)
• FIDIC (published by the International Federation of Consulting Engineers)
• C21 (published by the NSW Department of Public Works and Services).
Sometimes the name itself conveys nothing about the work, the remuneration, the contractual
relationship or the general conditions, for example:
• alliance contract
• guaranteed maximum price contract
• package deal
• negotiated contract
• managed contract
• novated contract.

Hundreds of different names are given to contracts. Sometimes, as a marketing ploy, someone will
invent a new name for the contract, which they then promote. Nothing should be assumed from the
name. The fine print should be examined to see exactly what it is that the contractor is promising to
provide. It may be all of management, design, construction, operation and maintenance or it may be
only one or two of these.
Let us go back to the question 'What is a contract?' While the answer to that question may be relevant
in an examination, in practice what you want to know is whether A and B have a contract. To find the
answer to that, first ask:
• Have A and B actually reached consensus on something?
• If so, have they agreed on all the essential terms?

If the answer to either is 'No' then there is almost certainly not a contract. If the answer to both
questions is 'Yes' then there probably is a contract unless the answer to any of the following questions
is 'No':
• Did A and B intend to create legal relations?
• Did both A and B have legal capacity?
• Was the agreement freely made (without duress)?
• Can the contract be performed without breaking the law?

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• Are the terms of the agreement certain?

If you only want the answer to 'What is a contract?' for the purpose of an exam, see the definition in
the next section.

THE ELEMENTS OF A CONTRACT

The following is a brief discussion of a field about which much has been written and many different views held,
and in which there are numerous court decisions. The rules governing contracts are mainly common law rules.
But it is important to note that statutes do in some cases affect the making and operation of contracts, for example
the Home Building Act 1989 (NSW) and similar legislation dealing with contracts for residential
building work in other States of Australia. Seven elements are generally regarded as essential to the
validity of a contract:
1 There must be an intention to create a legal relationship.
2 There must be offer and acceptance.
3 There must be valuable consideration.
4 The parties must have legal capacity to contract.
5 There must be a genuine consent by the parties.
6 The legality of the object of the agreement must be ensured.
7 The terms of the contract must be sufficiently certain.
Intention
The first important factor in the formation of a contract is the necessity for an intention by the parties to create
legally binding obligations. If the parties do not intend their agreement to constitute an agreement enforceable
at law, there is no contract. For example, a promise by a parent to take a child to the circus if the child mows
the lawn would not create a contract in law because it was not the intention of the parties that the promises
would create an obligation on which either could sue the other for damages for breach.
The intention may be expressed or implied. Courts do not consider all agreements to be intended as legally
binding. Generally, a distinction is made between commercial agreements, which are presumed to be legally
binding, and domestic or social agreements, which are not so intended.

If parties A and B enter into a contract whereby A agrees to build a fence for B, then B would expect to be able
to recover damages if A refused to pay B when B had finished the work. Both would expect the agreement to
give rise to legally enforceable obligations. But a person who failed to keep a dinner appointment could not be
sued for breach of contract even though the host may have incurred considerable expense in preparation.

A problem arises when one party intends that a statement will be legally binding and the other does not. In the
context of construction contracts, this commonly arises when one party asks the other for a quotation for a
variation. The term 'quotation' is ambiguous. On the one hand it can be an estimate; on the other it may be an
offer to perform the variation for the amount quoted. The contractor giving a quotation may intend it only as an
estimate; the person requesting the quotation may consider it an offer. It is important to use language that leaves
no doubt about the intention to create a legal relationship. Instead of asking for a quotation, it would be better
to ask for an estimate or a price.
Offer and acceptance
A second fundamental principle of a contract is that the parties should have reached agreement. An agreement
or contract comes about when one party accepts an offer made by another. Whether or not an offer has been
made and duly accepted is often difficult to establish. Generally speaking, if an agreement is to be legally
enforceable, it must be shown that an offer has been made and that such an offer has in fact been accepted,
whether expressly or implicitly in the terms in which it was made.

An offer is a proposal by one party to enter into a legally binding contract with another. It may be made orally,
in writing, or implied by conduct. Sometimes, in the making of a construction contract, there are so many matters
to be agreed, so many queries from one party to the other, so many changes in drawings and so many individual

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promises that it is not possible to say just when the contract came into existence. It may be impossible to identify
offer and acceptance in the terms envisaged by the classical law of contract. The execution of a formal written
contract document (often called a 'formal instrument of agreement'), expressed to contain the whole agreement
between the parties, is one way of overcoming the problem. If both parties have signed a written contract, it is
not necessary to identify offer and acceptance.

In other instances, the courts have found the existence of a contract from the fact that the contractor has carried
out work at the request of the other party even though the parties have not agreed on some issues and no formal
offer and acceptance can be identified. It is not uncommon for the parties to still be arguing about the terms of
a contract long after the contractor has started work. Since the recognition in Australia by the High Court (Pavey
and Matthews v. Paul [1986] 162 CLR 221) of the doctrine of unjust enrichment, there has been less need for a
contractor to prove the existence of a contract.

An offer may be made to an individual, to a group of persons, to a company or to the world at large (Carlill v.
Carbolic Smoke Ball Co. [1893] I Q.B. 256). But it is ineffective until communicated, and accordingly cannot be
accepted by persons or companies to whom it is not made or by persons ignorant of the offer. For example,
assume someone offers a reward for information about the whereabouts of a missing person. Assume that
information is given by someone (the informant) that leads to finding the missing person. The informant will
not automatically qualify for a reward. To recover the reward by a legal action, the informant must establish a
contract and to do that the informant must establish that the informant acted on the faith of or in reliance on the
offer (i.e. that before giving the information, the informant knew of the offer of a reward). See The Crown v. Clarke
[1927] 40 CLR 227.

An example of an offer made to a number of people is an invitation to tender. It may be may be open tender
(capable of acceptance by anyone) or it may be an invitation to a few selected contractors. The offer is accepted
separately by each contractor who lodges a tender. The principal inviting tenders may impose conditions on
acceptance, for example that acceptance can only be by way of a written tender lodged in a tender box at a
certain place by a certain date. An invitation that imposes conditions on acceptance can only be accepted by
complying with the conditions.

An offer (e.g., an invitation to tender) may lapse if not accepted by a certain time or date. Generally speaking,
an offer can be revoked at any time before acceptance. When a party makes an offer of settlement, the offer is
commonly said to remain open for acceptance until a certain date.
An acceptance is a final and unqualified expression of assent to the terms of an offer. A qualified acceptance is
a rejection of the offer and the making of a counter-offer. For example, if a contractor offers to carry out a
variation for $1000 and the principal responds: 'Your offer is acceptable provided that no extension of time is
applicable', the principal has rejected the contractor's offer and made a counter-offer. The principal cannot
thereafter drop the condition and accept the contractor's original offer. The original offer has ceased to be
available for acceptance the moment the contractor receives the principal's qualified 'acceptance'. Legally, the
principal's qualified acceptance is no acceptance.

Acceptance is generally not effective to conclude a contract until it has been communicated to the offeror and
the offeror may either expressly or by implication indicate that acceptance is to be communicated in a particular
manner. If that manner is employed, acceptance will usually be effective whether or not it is actually received
by the offeror. Assume that a tenderer has lodged a tender for $100 000 to carry out contract work and then
discovers that the contractor has made a mistake in pricing. The contractor writes to the principal, 'I made an
error in my tender. My price is now $110 000, not $100 000'. That represents a withdrawal of the tender of $100
000 and the proposing of a new tender of $110 000. Assuming that the letter is received by the principal after
the closing date of tenders, it is then an informal tender and must not be considered by the principal. It would
be the same whether the new price was greater or less than the original tender price.

If the principal had posted a written acceptance of the tender of $100 000 before the principal received the
contractor's letter varying the price, then there would be a contract for $100 000, but if the contractor's letter

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varying the price was received by the principal before the principal posted the letter of acceptance, there would
be no contract. Acceptance of the tender of $100 000 after it has been withdrawn by the contractor's letter
correcting the error would be no acceptance at all. The moment the principal receives the contractor's letter
correcting the contractor's error, the original tender of $100 000 is no longer open for acceptance. An exception
would be where the contractor was contractually bound to keep open the tender of $100 000 for a particular
period.

The general rule is that an offer that can be accepted by posting an acceptance is accepted at the moment the
letter of acceptance (duly stamped) is placed in a post box. The fact that delivery of the letter is delayed or even
that the letter is never delivered does not terminate the contract which was made at the moment of posting. The
general rule is that acceptance sent otherwise than by post is effective at the time it is received by the offeror.
For example, an acceptance by fax is effective when the offeror's fax machine prints it out. The situation is not
so clear when an acceptance is sent by email or an oral message left on the offeror's answering machine.
However, acceptance appears to have been made when the email first appears on offeror's screen or when the
offeror first listens to the voice message. To remove ambiguity over these technologically new situations,
legislation is being considered in each State and the Commonwealth of Australia. Finally, the person accepting
the offer must know of its existence, otherwise there is no contract.

Letters of intent
The term 'letter of intent' is ambiguous and best not used. If a contractor has lodged a tender and the principal
says, 'I intend to accept your tender', it could be:
1 that the principal accepts the tender and is saying the equivalent of 'I accept your tender'
2 that the principal does not intend the statement to create any legal relationship and is merely expressing the
principal's current state of mind, which could change at any time (the equivalent of 'My present leaning is
towards accepting your tender but I want to consider the matter further before making any final decision')
3 that the principal intends unequivocally to accept the tender and will be doing so in writing or by signing a
formal contract
4 that subject to certain things happening, the principal will accept the tender (i.e. the principal is not reserving a
discretion to reject the tender)
5 that the principal intends something else.

In view of the ambiguities, a letter of intent frequently leads to the unintentional creation of a contract, to a
liability based on misleading advice, or to a liability for restitution based on unjust enrichment. The letter is
intended to convey something to the recipient, but the intention of the sender and the understanding of the
recipient may not be the same.
A letter of intent is usually used where the principal intends a tenderer to start taking steps that would assist in
the early commencement of work. The tenderer is likely to incur expense in getting ready and may even forgo
other work so that the tenderer will be able to carry out the contract. A principal is better advised to make an
offer, for example:
I intend to accept your tender but I am not presently able to do so. Pending acceptance of your tender, you can
commence preparations for the work. If for any reason I decide not to accept your tender, I will notify you to
stop and I will pay a reasonable price for work done in preparation or $100 000, whichever is the less. If your
tender is accepted, your preparatory work will be taken to be work under the contract and included in the contract
price. Such a letter removes the ambiguity and puts a ceiling on the liability of the principal. Since this is an
offer, the tenderer is not bound to accept it and is entitled to decline to start any work without an unequivocal
acceptance of the tender.

Consideration
Consideration is said to be the third essential element necessary to constitute a legally binding contract. There
are, however, contracts that have been enforced even in the absence of what is generally regarded as
consideration.
Consideration is something of value (it need only be a promise), which is given by each party to the other at the

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time of making the contract. In other words, there must be a benefit and detriment accruing to the party making
the promise. Consideration is also referred to as the price paid for the promise. A contract can only be binding
on the parties if there has been consideration given by each party to the other. The law will not enforce a promise
by a party who has not received something of value or the promise of something of value in return. The law will
not investigate the fairness of a bargain or adequacy of consideration, provided that it is of some value. A
contract for the sale of a valuable diamond ring for $1 could be enforceable.
The consideration given must be possible of performance and should be present or future.
In some circumstances the Contracts Review Act 1980 (NSW), or similar legislation in another Australian States,
could provide relief where the applicant for relief is an individual as distinct from a contracting company. Under
s. 9 of the Act, matters to which the court or tribunal must have regard include:
• inequality in bargaining power
• unreasonable contract conditions
• relative economic circumstances, educational background and literacy of the parties
• the intelligibility of the language used in the contract
• undue influence, unfair pressure, or unfair tactics
• injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
In those cases where the Act applies, if the court or tribunal concludes that the contract was unjust, harsh or
oppressive, it can refuse to enforce all or any part of the contract or vary the contract in whole or in part. A
variation can be made retrospective (s. 7).

An example of where a contract is void for want of consideration will be found in Atlas Express v. Kafco Importers
and Distributors Ltd [1993] 3 WLR 339 discussed in section below. Another example would be where a contractor
says that certain work is not part of the contract and the contractor will not carry out the work unless the principal
agrees to pay extra. Assume that the principal does agree to pay extra but the particular work is in fact not a
variation but work that the contractor was required to perform for the original contract price. In that instance,
the contractor has provided nothing to the principal which the contractor was not already bound to provide. The
contractor has provided no consideration to the principal in return for the principal's promise to pay extra. The
principal should be able to avoid the 'contract' to pay extra. The principal's grounds would be that the 'contract'
to pay extra was void for want of consideration.

Capacity of parties
Not all persons who want to enter into a contract are able to do so. In law, a company formed and registered
pursuant to an Act of Parliament is regarded as a 'person'. The Interpretation Act 1987 (NSW) s. 21 provides that
in any Act 'person' includes an individual and a corporation, the singular includes the plural and vice versa, and
a reference to gender includes any gender. Similar legislation exists in other jurisdictions. Lawyers generally
use the words 'company' and 'corporation' interchangeably when referring to a company formed by individuals
(the shareholders) and registered under an Act.
A business name, however, is not a person. A contract cannot be made with a business name. The contract must
be made with the company or persons carrying on business under the name. Mr John Smith and Mrs Mary Smith
may decide to carry on business using the business name 'Smith Constructions'. They should contract in the
name 'John Smith and Mary Smith trading as Smith Constructions'. If a contract has as the name of the contractor
'Smith Constructions', it will probably be a contract with Mr and Mrs Smith, but ambiguity may arise. Anyone
using a business name must register it in the Register of Business Names. This is a public register that anyone
can inspect to find out who is the proprietor of a business name.
All companies must put the Australian Company Number (ACN) on all contracts. If the name on a contract is
not the name of an individual or a government, look for the ACN. If there is no

ACN then be on notice that there may be a potential problem. Under the Goods and Services (GST) legislation,
the ABN (Australian Business Number) is most important. An individual may have an ABN but cannot have an
ACN. A company will almost invariably have both and the ABN will include the ACN.
Usually, enemy aliens and unincorporated associations have no capacity to bind themselves in contract. An
unincorporated association exists where two or more persons form an association with common aims, for

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example a tennis club, but do not have the club registered as a corporation. The association consists of those
persons who form it and is not a separate entity from the persons making it up. A contract can be made by the
members of the club or by several members acting as trustees, but the club is not a legal person, it is merely the
name given to the relationship between the members.
Generally speaking, a contractor should not enter a building contract with a person under 18. There is a real risk
that the contractor will be unable to enforce the contract. The Minors (Property and Contracts) Act 1970 (NSW)
covers the capacity of persons under 18 to contract. While they can be bound by certain contracts for necessaries,
they can, at their election, avoid liability under other contracts. Similar legislation exists in other States of
Australia.
Where a contract is entered into with an intoxicated person, one under the influence of drugs or with a degree
of mental disability proven to have affected the person to the extent that the person could not understand the
nature of what he or she was doing, that person will often be entitled to avoid the contract. Bankrupts have a
limited right to contract, but a building contract should never be made with someone who is bankrupt. In certain
circumstances a bankrupt's trustee has a statutory right to intervene and disclaim certain contracts
Once a company becomes insolvent (bankrupt), an order for winding up is usually made by a court. After that
the directors are replaced by a liquidator and only the liquidator can make contracts on behalf of the company.
Similarly, when an administrator is appointed to a company, any dealings must be with the administrator rather
than the directors. A receiver is a person appointed by a creditor or creditors to receive (for the benefit of a
specific creditor or creditors) all moneys paid or payable to a company and the receiver is usually given sole
right to manage the company. A company under administration or receivership may sometimes trade its way
out of trouble, but more often administration or receivership precedes winding up the company.

In the field of residential and specialist building work in Australia, there is usually State legislation restricting
the capacity to contract. For example, under the Home Building Act 1989 (NSW) contractors doing residential
building work and contractors doing specialist work (plumbing, gas-fitting and electrical work) are restricted in
their capacity to contract. Section 4 provides that they must not contract unless they hold an appropriate licence.
Section 10(3) provides that:
A person who enters into a contract in contravention of this Division or who contracts to do work under a Contract that
does not comply with this Division:
(a) is not entitled to damages or any other remedy in respect of a breach of the contract committed by another
party to the contract; but
(b) is liable for damages and subject to any other remedy in respect of a breach of the contract committed by the
person.
An unlicensed contractor may possibly recover in an action for restitution based on unjust enrichment (Pavey and
Matthews v. Paul [1987)]162 CLR 221). The reason is that the action for restitution (frequently called a quantum
meruit claim) is not based on any contract and is not a claim for damages.

Consent of parties
An underlying concept of a contract is that the parties have voluntarily consented to make a legally binding
agreement. An 'agreement' made at the point of gun is made under duress and is not a contract. Duress need not
be physical force. The facts in Atlas Express v. Kafco Importers and Distributors Ltd [1993] 3 WLR 339 provide a
illustration of how duress can cause an apparent contract to be void. The plaintiff, a carrier, agreed with the
defendant to deliver baskets to Woolworths at £1.10 per basket. The carrier discovered that the price was
uneconomic. When the carrier arrived at the defendant's premises to collect the baskets, the carrier brought a
revised form of contract, which had written on it a charge of £4.40 per basket. The carrier said to the defendant
that if the defendant did not sign the new contract, the carrier would not deliver the baskets. The defendant could
have refused to sign but it would have been difficult if not impossible to get another carrier in time to deliver
the baskets to the defendant's customer, Woolworths, to meet the delivery dates, which the defendant had agreed
with Woolworths. Had the defendant defaulted under the contract with Woolworths, the defendant would
have been in serious financial difficulties. The carrier had
the defendant 'over a barrel'. The defendant signed the new 'contract', but after the baskets
had been delivered, refused to pay more than the originally agreed £1.10 per basket. The

8
carrier sued for the difference between that amount and the amount in the second 'contract' .

The court found that the defendant's apparent consent to the second contract was induced by economic duress,
which, in the circumstances, negated the defendant's apparent consent. Hence there was no second contract. It
is not a requirement of the common law that the contract price should be reasonable. Consequently, the carrier
was bound to the price agreed of £1.10 per basket even though that price may have been uneconomic. Sometimes
there will not be consent by one party because that party is mistaken as to the terms of the agreement. For
example, the principal to a construction contract may ask the contractor for a price for a variation. The contractor
may nominate a price, which the contractor mistakenly believes is for labour and materials but not for the costs
of the delay to the time of completion of the project consequent on the delay that the variation will cause. The
principal may believe that the price includes delay costs. In that event, there would not be an actual meeting of
minds. Generally speaking, however, the mistake of one party will not suffice to render the contract void, and
in this instance the contractor's mistake would not entitle the contractor to avoid the contract.
It is not uncommon for a party to a contract to be mistaken as to certain of its terms. Where that mistake has not
been caused by any misleading or deceptive conduct of the other party, the mistaken party will usually have no
remedy. Where the mistake has been caused by misleading or deceptive conduct of the other party, the mistaken
party may have a remedy in law even if the contract is binding (e.g. s. 52 of the Trade Practices Act 1974).

Legality of object
Some contracts will be regarded at law as illegal. These include agreements to commit a crime or tort, hinder
justice, act immorally or restrain trade in breach of the Trade Practices Act, and some wagering contracts.
The mere fact that in the course of the performance of a construction contract a contractor has or will breach a
law does not mean that the contract is void. In the performance of a construction contract, a contractor may
breach a condition of the development consent or a provision of some act governing safety, protection of the
environment or other matter. The contractor may be prosecuted and may also be in breach of contract, but the
contract is not illegal or unenforceable.

Certainty
Even though parties have apparently agreed and have acted as if there is a contract, there may be no contract
because the alleged contract lacks sufficient certainty and completeness. For example, a contract to build an
office building for $1 million, without any agreement on the size, location or anything else to identify better
what is to be built for $1 million, would be void.

A contract to do an unlimited quantity of work for a fixed price would be void for the same reason, uncertainty.
A contract to do a fixed quantity of work without agreement on the price might be saved from being void by an
implication of a reasonable price. The law will frequently fill gaps in the agreement between the parties and
thereby save the agreement from being void. A typical example is where the parties have not agreed on a time
for doing something. The law will imply a term that the obligation must be performed within a reasonable time.

Another example is where there is an apparent power in a contract for one party or the principal's representative
to order unlimited contract variations. If there was no limit on variations which could be ordered, the contract
would be void because of uncertainty. The law saves the contract by implying that the variations must be
reasonable. The fact that a contract is void does not necessarily mean that the contractor has no right to payment
for work done. The award of a quantum meruit (a legal term for a reasonable price for work done) by way of
restitution for unjust enrichment
GENERAL COMMENTS ON CONTRACTS
Oral and written contract
Unless specifically required by law, contracts do not have to be made in writing or be evidenced in writing. In
fact, the majority of contracts are formed orally. However, in the context of construction contracts, it is most

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imprudent to rely on oral contracts because proving the content of an oral contract is often difficult. It is for this
reason that the parties to a contract should make the terms of the contract in writing. In some cases, statute law
(usually in the field of residential building work) now requires that for a contract to be enforced, it must be
wholly in writing or evidenced in writing. For example, contracts which in New South Wales are required by
statute to be in writing include contracts for the sale of land and buildings (Conveyancing Act 1919 [NSW], s. 23C),
contracts for residential building work and specialist building work and contracts to vary any such work (Home
Building Act 1989, s. 7).

The significance of a written contract

A written contract usually supersedes all previous agreements, correspondence and so on. What is written is
what is meant. Such is the finality of a signed contract that a complete understanding of all the contract
conditions by both parties is essential.
Except where otherwise required by statute, documentation is not necessary for a contract to exist, but once a
written, signed contract is finalized the law will attach full significance to it. The law requires that the content
of the contract must be observed or the party breaching the contract must pay any damages incurred by the other
party as a consequence of the breach. In rare instances a court (or an arbitrator in an arbitration) will order
rectification of a mistake in a written contract. For example, if both parties have agreed on a price of $100 000
and, in error, a nought is left out of the written contract (so the price appears as $10 000), the court may, on the
application of either party, order that the contract be rectified by adding the missing nought. However, where
only one party has made a mistake, the courts will not order rectification. For example, if a tenderer leaves a
nought off the tender price so that it is $10 000 instead of $100 000 (as intended by the tenderer) and, in
ignorance of the mistake, the principal accepts the tender, a court will not order rectification.

Principal's point of view

A person wanting to have a building built expects reasonable certainty as to cost, time and finished product. The
person wants professional consultants to translate the brief adequately into drawings and specifications, a
contractor who can carry out the work in a satisfactory manner, proper documentation, and the professional
administration of the contract.

The formulation of a construction contract must be a team effort. Good legal advice must be part of the input.
When entering into a contract the best way of assessing the adequacy of the document is to assume that there
will be disputes between the contracting parties during and at the end of the contract. Contracting parties should
examine how each party would stand in those disputes under the terms of the contract. To be in the best
bargaining position, all contract matters should be fully and consistently documented as work proceeds.

When a document is ambiguous, the courts apply a rule of interpretation known as the 'contra proferentem' rule.
The rule is that the ambiguous term will be given that meaning which favours the party who was not responsible
for the drafting or selection of the ambiguous document. In other words, the ambiguity will be construed as
contrary to the interests of the party responsible for the ambiguity. In residential building work, the form of
contract is usually drafted or selected by the contractor, hence the owner gets the benefit of the ambiguity. In
commercial building work, it is usually the owner who drafts or selects the form of contract, hence the contractor
gets the benefit of the ambiguity.
General conditions of contract usually adopt the formula 'if event A occurs then B will apply'. Rarely do they
say what will happen if A does not occur — B may apply or it may not. Ambiguities are more common than is
generally appreciated. Usually, the courts try to find an interpretation that will support the effectiveness of a

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contract, but if the ambiguity is in a clause that attempts to exclude one party from liability, they adopt a more
restrictive approach.

ACTS AND REGULATIONS

Building and construction contracts are formed, administered and discharged within the boundaries of common
law and statute law. Common law is judge-made law based on that originally developed in England, and
subsequently in Australia, over many centuries. Statute law (legislation) is law made by a parliament or pursuant
to a power given by a law made by a parliament. Each parliament has a specific jurisdiction. Chapter 15 deals
specifically with legislation. Since (except for Commonwealth Acts) legislation is different in each Australian
State or Territory and from time-to-time new legislation is made and old legislation is amended or repealed, it
is beyond the scope of this book to list all relevant legislation. A regulation is made by the Governor on the
recommendation of a minister pursuant to a power given in an Act.

The Trades Practices Act 1974

The Trades Practices Act 1974 is an Act of the Commonwealth Parliament of Australia. It binds the Commonwealth
Government, statutory bodies created by a Commonwealth statute and companies created pursuant to a
Commonwealth or a State Act, but not statutory bodies created under a State Act or State governments. The
main purpose of the Act was to eliminate restrictive business practices, namely price fixing, collusion and
restrictions on competition, and to provide protection to the public. The effect of the Act on building and
construction contracts includes the area of price fixing and collusion among contractors and subcontractors. The
Act promotes open competition without undue restrictions and limitation.

A most important provision of the Act is s. 52 (in Part V) which provides that: 'A corporation shall not, in trade
or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive'. Section 82 of
the Act provides that 'A person who suffers loss or damage by conduct of another person that was done in
contravention of a provision of Part IV or Part V may recover the amount of the loss or damage by an action
against that other person or against any person involved in the contravention'.
To cover individuals, State Government corporations and business enterprises not bound by the Trade Practices
Act, each Australian State has enacted legislation in terms almost identical to ss. 52 and 82 of the Trade Practices
Act. In New South Wales the provisions are in ss. 42 and 68 of the Fair-Trading Act 1987. Hence a person or a
government department can be liable for misleading or deceptive conduct in trade or commerce. With
government departments, the problem is to show that the conduct was in trade or commerce as distinct from in
the course of government.

A BRIEF HISTORY OF BUILDING CONTRACTS

The earliest recorded reference to a building contract comes from one of the laws of Hammurabi, the Babylonian
conqueror: 'If a contractor builds a house for a man this man shall give the contractor two shekels of silver as
recompense. If a contractor builds a house and does not build it strong enough and it collapses and kills the
owner the contractor shall be put to death'. In the Middle Ages, design and construction responsibilities were
divided. The building designer was a clergyman and only paid rare visits to the building site. Master masons
carried out the work on the actual site.

Lump-sum contracts were common in the Middle Ages for the erection of major works such as castles or palaces.
For such works it was common to draw up a separate contract for the main trades. The mason was bound to a
completion date and had to offer a bond to guarantee ability to carry out the works. The principal often co-opted
the services of a consultant architect to ensure that the contractor carried out work in accordance with the
contract. The architect's name was written into the contract as agent for the principal. At the end of the sixteenth
century a new personality appeared in the French building industry. This was the entrepreneur, a person who
stood between the principal and the other tradesmen. The entrepreneur was more of a businessman than a
contractor.

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By the end of the eighteenth century the building industry in Britain was in such chaos that a series of
government inquiries led to public tendering based on gross tendering on a competitive basis. One principal
tradesman had to be placed in charge of the whole contract. Associations of builders, architects and other pro-
fessionals were formed in Britain in the latter part of the nineteenth century. Distinct roles and functions of
contractor, architect, engineer, quantity surveyor and so on, laid down at this time, persisted until the late 1960s.
By then, lump-sum contracting by competitive tender was standard industry practice, with sequential and
separate responsibility for design and construction. In the first half of the twentieth century, the domestic spec-
ulative builder combined design and construction activities together to offer a 'package deal' which later became
known as the 'design and construct' delivery method. In the twenty-first century, traditional roles are once again
being intermingled, with many new groups entering the building process and complex contractual relationships
replacing the more secure and time-tested lump-sum contracting arrangements.

There are two basic types of standard form of general conditions used in Australia for major works. The two
types reflect the different approach of architects compared to engineers. In the first category is the JCC Contract
published in 1993 by the Royal Australian Institute of Architects (RAIA), the Building Owners and Managers
Association of Australia (BOMA) and the Master Builders Associations (MBA). This contract had its origins in
earlier contracts such as MBW1 1978 and E5b 1970 and before that, in the English RIBA contract (now the JCT
Contract). But it is only used for architectural works and has not gained acceptance in the government sector.
Where quantities are used, there is provision for a bill of quantities but not a schedule of rates.

In 1997 the RAIA published yet another form of general conditions of contract, known as CIC-1, in an attempt
to provide a more efficient form of conditions of contract than JCC. In 1998 the Property Council of Australia
published another form of general conditions known as PC-1. In Australia, as in England, there is a second type
of standard form of general conditions favoured by engineers. In England it is the ICE Conditions (now in the
sixth edition) and the New Engineering Contract (NEC) 1995. In Australia it is exemplified by the Standards
Association's general conditions AS2124. These general conditions can be traced back through CA 24
(published by the Standards Association in 1973) to earlier editions of the ICE Conditions. The FIDIC (4th
edition, 1987) conditions are also based on the English ICE Conditions. These are used widely in international
contracts. In 1973 the National Public Works Conference (a conference of the Public Works authorities of the
States, the Commonwealth, the Northern Territory and the Australian Capital Territory) published NPWC1.
This contract was intended for government construction work. Some members of the Conference did not adopt
it. The current edition is NPWC3-1981. In 1981 there was a move in the construction industry for uniformity of
general contract conditions. It was seen that the Standards Association offered the best neutral ground for the
various interested groups to push their respective cases. A drafting committee was established by the Standards
Association. It included representatives of the AFCC, MBFA, RAIA, ACEA, NPWC, Elcom NSW, PWD NSW
and BISCOA. The committee decided to adopt NPWC3 rather than AS2124-1978 as the base document and it
proceeded to amend NPWC3 to make AS2124- 1986. However, the much sought after uniformity was not to
be. As soon as the final document was published, various vested interests attacked it. Some said it was biased
in favour of the contractor. Others said it favoured the principal. Some forecast disaster for consultants acting
as superintendent, while others spoke of great changes in risk allocation. AS2124-1986, however, is widely used
by engineering consultants and is increasingly being recommended by architects to their principals. It is fre-
quently used for trade contracts in construction management projects.

In the early 1990s, some sections of the construction industry persuaded Standards Australia that the risk
allocation in AS2124- 1986 should be changed to transfer more risk to the principal. The result was a new
edition, AS2124-1992. But AS2124-1992 not only changed risk allocation but also included many ambiguities.
Hence many users of AS2124-1986 (mainly the NSW Department of Public Works and Services [DPWS] and
Sydney Water) decided to stay with AS2124-1986. AS2124-1992 was not as well received by the industry as
its predecessor. Since then, Standards Australia has published a number of other contracts, none of which have
received widespread acceptance.

A major change, which occurred in the 1970s, was the recognition of management as a function distinct from

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design and from construction. This gave rise to 'construction management' and 'project management'. The first
major 'Construction Management' and 'Fast Track' project in Australia was the construction in the mid-1970s of
Westmead Hospital by Concrete Constructions Pty Ltd for the NSW Public Works Department (PWD). In
essence, it was a cost-plus contract with one head contractor and numerous subcontractors. The largest
Construction Management Contract in Australia was the new Parliament House Project in Canberra in the mid-
1980s. Again, this was essentially a cost-plus contract with one head contractor and many subcontractors.

The first major Australian Construction Management Contract to use the 'agency arrangement' (described in
detail later) was the Darling Harbour Project for the Darling Harbour Authority in Sydney in the mid-1980s.
Leighton Contractors Pty Ltd contracted to construct the project by letting, as agent for the Darling Harbour
Authority, 'Trade Contracts' to many different contractors for separate aspects of the work. Leighton Contractors
were paid progressively a percentage of the cost of the Trade Contracts and for that percentage, they managed
the construction for the Authority. The 'agency arrangement' proved very popular for projects where completion
in time for the Australian Bicentenary celebration was important. While there have been standard forms of
building contracts for over a hundred years, and the benefits of standard forms are well known, in recent years
in Australia there has been a push by the legal profession to abandon the use of standard forms. One reason for
this is the desire of the legal profession to expand into one of Australia's biggest industries. The larger legal
firms have established 'Construction Law Divisions' which specialize in drafting construction contracts. Each
has its own 'standard forms'. Now that lawyers are allowed to advertise, they more aggressively promote their
own forms.
FUNDAMENTALS OF CONTRACT ADMINISTRATION
Once a successful tenderer is selected, it is common for the principal to send a letter of acceptance. A contract
that is not required to be evidenced in writing can be accepted orally. Sometimes a letter of intent will
unintentionally create a contract. Frequently a principal or a contractor will want the contract to be evidenced
by a more formal document signed by both parties. Such a document is called a 'formal instrument of agreement'.
There is an unfortunate practice in the private sector of the principal telling the contractor to proceed before the
contract is evidenced in writing. The principal then attempts to negotiate the conditions to finally bind the
parties. It is too late. A contract usually exists and if it does not, the contractor would have a right to be paid a
reasonable price for all work done (a quantum meruit) on the basis of the principal's instruction to proceed. The
claim would not be based on a contract but on the doctrine of unjust enrichment.

It is probably professionally negligent to advise or allow a principal to let a contractor start work before all the
terms the principal wants have been agreed in writing and signed by the contractor. Once there is a contract, the
contractor can refuse to agree to any additional conditions. This does not mean that a formal instrument of
agreement must be signed but that there must be correspondence evidencing the terms of the contract. Some
principals have a practice of not having a formal instrument of agreement. The success of contract administration
depends on an effective communication between all the parties involved. This involves establishing
relationships between the parties, defining responsibilities and determining the most appropriate administrative
procedures. The contractual parties must ensure that the lines of communication are established and kept open
throughout the contract period. The fundamental aspect is to create a workable relationship between the
contractual parties. This involves the determination of rules and procedures to be followed in the administration
of the contract.

Fundamentals of contract administration for principals

Effective administration of construction contracts is a prerequisite for achieving successful project outcomes.
The fundamentals of contract administration relevant to the principal are:
• to appoint suitable consultants
• to define project scope
• to set the key project objectives of cost, time and quality
• to assist in formulating a project brief
• to select the most appropriate method of project delivery
• to ensure accuracy and completeness of tender documentation

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• to award a contract to the contractor on fair and equitable conditions of contract
• to appoint an experienced superintendent for administering the contract during the construction stage
• to avoid making changes to the design unless knowing the cost and time impact of such changes
• to pay the contractor strictly in accordance with the contract
• to monitor progress and the use of a contingency
• to resolve issues as early as possible before they develop into major problems
• to document actual progress in terms of cost, time and the use of resources to be able to defend against a potential
claim from the contractor
• to advise the contractor in writing of any deviation from contract conditions and to request compliance with same
within a specified period.

Fundamentals of contract administration for contractors

The fundamental aspects of contract administration from the contractor's point of view are:

• to execute the project strictly in accordance with the contract conditions

• to award subcontracts on fair and equitable subcontract conditions
• to monitor and control progress of subcontractors
• to pay subcontractors on time
• to minimise overall project time, thus reducing site overheads
• to balance increased direct costs of additional resources on critical activities, against possible saving in site
overheads
• to advise the principal early in the project that the program is arranged to maximise use of resources and any
additional work required
• to allow sufficient time to rearrange activities, acquire additional resources, perform additional planning, fabrication,
etc.
• to manage extensions of time and a prolongation of overhead costs
• to recommend to the principal not to make any changes to the design
• to document the actual progress compared with a program to identify areas of progress loss
• to take immediate action on contractor-caused problems and immediately advise the principal of other problems
• to instruct all internal staff to carry out work as specified in the contract documents, unless written instructions
have been given by the principal's representative.

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