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PROCUREMENT AND SUPPLIES PROFESSIONALS AND TECHNICIANS BOARD

6TH PROCUREMENT AND SUPPLIES PROFESSIONALS ANNUAL CONFERENCE6TH – 8TH DECEMBER 2015

AICC-ARUSHA

CHALLENGES RELATED TO THE LEGAL ASPECTS OF CONTRACTS

By Eng. Julius Mamiro

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PRESENTATION OUTLINE

Introduction Voidable contracts When a contract is in force What type of contract Management of delays Termination of contract Contract closure

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1.0 INTRODUCTION

Procurement contract management is the process of managing contract formation, execution and closure.

Section 10 of the Law of Contract Act Cap 345 defines which agreements are contracts. “All agreements are contracts if they are made by free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”.

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Procurement professionals are faced with a number of challenges starting from the drafting of contracts, execution and contract closure. These challenges include:

Entry into voidable contracts Uncertainty as to when a contract is in force Uncertainty on the type of contract Management of delays Termination of contract Contract closure

These aspects will be discussed in detail subsequently.

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2.0 ENTRY INTO VOIDABLE CONTRACTS

One area of concern in public procurement is the issue of void contracts. This is evidenced in the incompetence of contracting parties. The Public Procurement Regulations 2013, Reg. 116 (1) (b) states that:

“For the purpose of qualifying to participate in procurement proceedings, a tenderer shall …… (b) have legal capacity to enter into the procurement contract”

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A number of Procuring Entities have been entering into contracts with tenderers not incorporated under the Companies Act, 2002. In the Appeal Case No 34 of 2008 between Ndanu Real Estate Managers and Karatu District Council, the Public Procurement Appeals Authority (PPAA) observed the following: “According to the documents attached to the Appellant’s tender document, the Authority noted that Ndanu Real Estate Managers & Developers was a name registered under the Business Names Registration Act, Cap 213 (Revised in 2002). The Authority discovered that the Appellant was not a company registered under the Companies Act, Cap 212 and therefore lacked the legal capacity to enter into contract.

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3.0 ENTRY INTO FORCE OF A CONTRACT

The issue of when a contract is in force although very clearly explained under Cap 345, when it comes to public procurement it is not straight forward.

The PPA Sec. 60 (7) states that “Where a tender, offer or proposal has been accepted by the Accounting Officer, the procuring entity and the person whose tender, offer or proposal has been accepted shall enter into a formal contract for the supply of goods, provision of services or undertaking of works”.

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In construction contracts we have two ways of communicating ‘tender results’; through the letter of intent and the letter of acceptance.

3.1 Letter of IntentA letter of intent outlines the intent of one party relative to another i.e. the Procuring entity and the supplier. While not binding, a letter of intent can help clarify the points of a deal or provide protection should a deal collapse.

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3.2 Letter of AcceptanceThe Law of Contract Act Cap. 345 Sec. 7(a) states that: “In order to convert a proposal into a promise, the acceptance must be absolute and unqualified”. It is clear that the issuing of a proper letter of acceptance amounts to sealing a contract.

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4.0 WHAT TYPE OF CONTRACT

One area of contention in relation to works contracts is the issue of fixed and lump-sum (mile stone payment) contract price. The PPRA contract for smaller works defines the contract price as the price stated in the Letter of Acceptance and thereafter as adjusted in accordance with the provisions of the contract. Some of the provisions which impact on the initial contract price include:

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Clause 40.2: Bill of Quantities “The Bill of Quantities is used to calculate the Contract Price. The Contractor shall be paid for the quantity of the work done at the rate in the Bill of Quantities for each item”.

Clause 41.1: Changes in Quantities “If the final quantity of the work done differs from the quantity in the Bill of Quantities for the particular item by more than 25 percent, provided the change exceeds 1 percent of the Initial Contract Price, the Project Manager shall adjust the rate to allow for the change”.

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In a number of cases, Procuring Entities have been arguing that their contracts are fixed and therefore the final contract figure will not change. Best practice depict otherwise as it can be shown from the following quotation: …….”Whilst it can be said that the contractor ought to deliver up the structure for the price regardless of the difficulties it faces in doing so and the costs it incurs, there is no reason why what is not priced for and what ought ordinarily should be priced for should not be paid for. Were it otherwise, the employer obtains a quantity of work beyond what it has strictly speaking agreed to be paid for”. (WILMOT-SMITH, 2014, p.74)

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Therefore in contracts where you have bills of quantities, there is a concealed price increase/decrease if the work is not sufficiently described.

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5.0 MANAGEMENT OF DELAYS

Contracts, especially construction contracts will in most cases be subject to unforeseen conditions which will lead into delays. This is why most contracts are very clear on how delays will be dealt with.

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5.1 EXTENSION OF TIME

 “The benefit to the Contractor of an EOT is only to relieve the Contractor of liability for damages for delay (usually LDs) for any period prior to the extended contract completion date. The benefit of an EOT for the Employer is that it establishes a new contract completion date, and prevents time for completion of the works becoming ‘at large’ (Society of Construction Law, 2002, p.10).

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To elaborate this we will refer to Peak Construction Ltd v McKinney Foundations Ltd (1970) 1 BLR 111.The Facts:

Peak Construction (Liverpool) Ltd (‘Peak’), the head contractor, contracted with the employer, Liverpool Corporation (‘the corporation’) for the erection by Peak of certain high rise buildings. McKinney Foundation Ltd (‘McKinney’) was the nominated subcontractor for the foundations. By chance, in early October 1964 it was discovered that a grave fault existed in one of the building’s perimeter piles. Delays, mostly on the part of the corporation meant that an expert was not engaged until February of the following year. As a result of the delay, the corporation sought Liquidated Damages from Peak. Peak, in turn, sought Liquidated Damages for that entire period from McKinney.

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Ruling:Whether Peak was entitled to Liquidated Damages; the Court of Appeal held that Peak was not entitled to recover Liquidated Damages from McKinney as the corporation was not entitled to recover those Liquidated Damages from Peak. The Court of Appeal found that at least part of the 58-week delay had been caused by the corporation itself, and the extension of time clause in the head contract did not enable the corporation to extend time for its own delays.

 Edmund Davies LJ at page 126 said that: “The stipulated time for completion having ceased to be applicable by reason of the employer’s own default and the extension clause having no application to that, it seems to follow that there is in such a case no date from which liquidated damages could run and the right to recover them has gone.”

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5.2 CONCURRENT DELAYS

According to Osborne Clarke (2007), the phrase “concurrent delay” is commonly applied to three situations: The Contractor is delayed by a "Relevant Event" listed in

the conditions of contract.  This entitles him to an extension of time.  Later, he suffers a problem of his own making, which, without the extension of time due to him as a result of the first problem, would have delayed him.  It does not however add to the existing delay.

The Contractor is delayed by two problems at the same time, one of which is a Relevant Event, one is his own fault.  They both cause a similar delay over the same period.

The Contractor suffers a delay that does not entitle him to an extension of time and during the period of that delay; a Relevant Event occurs that would have delayed him if he was not already in delay.

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In the first situation the Contractor becomes entitled to an extension of time on the occurrence of the Relevant Event.  That entitlement cannot be taken away, and so he is protected from the consequences of the second delay.

The second situation was considered in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd:

“…it is agreed that if there are two concurrent causes of delay, one of which is a relevant event, and the other is not, then the contractor is entitled to an extension of time for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event”.(Mr Justice Dyson in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd)

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The third situation was considered by HH Judge Seymour in The Royal Brompton Hospital NHS Trust v Hammond."…it is, I think, necessary to be clear what one means by events operating concurrently. It does not mean, in my judgment, a situation in which (work already being delayed, let it be supposed, because the contractor has had difficulty in obtaining sufficient labour) an event occurs which is a Relevant Event and which, had the contractor not been delayed, would have caused him to be delayed, but which in fact, by reason of the existing delay, made no difference.  In such a situation although there is a Relevant Event, 'the completion of the Works is [not] likely to be delayed thereby beyond the Completion Date'. The Relevant Event simply has no effect upon the Completion Date".

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6.0 TERMINATION OF CONTRACT

A contract may be terminated under two circumstances: Termination for Convenience and Termination for Default.

6.1 Termination for convenienceMost contracts include a condition which enables the employer to terminate the contract for its own convenience, without there having been any default by the contractor/supplier either because the employer is unwilling or unable to continue. Where the employer terminates for its own convenience, it must make payment for all goods, works or services satisfactorily completed prior to termination and any other expenses incurred by the supplier. Some conditions of contract including the FIDIC Form for works designed by the employer prohibit the employer from re-letting the outstanding contract works.

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This is in line with the finding in Abbey Development Ltd v PP Brickwork Ltd [2003] Adj.L.R. 07/04. In that case Abbey engaged PPB as a labour only

subcontractor for brickwork and blockwork. Clause 2 of the subcontract conditions empowered Abbey to increase or reduce the quantity of work. Judge Lloyd held that this clause did not enable Abbey to determine the entire subcontract. At paragraphs 45 to 47 His Honour Judge Lloyd said this: “..........A contract for the execution of work confers on the contractor not only the duty to carry out the work but the corresponding right to be able to complete the work which it contracted to carry out. To take away or to vary the work is an intrusion into and an infringement of that right and is a breach of contract”.

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"46. Provisions entitling an owner to vary the work have therefore to be construed carefully so as not to deprive the contractor of its contractual right to the opportunity to complete the works and realise such profit as may then be made…………”.

"47. ….The basic bargain struck between the employer and the contractor has to be honoured and an employer who finds that it has entered into what he might regard as a bad bargain is not allowed to escape from it by the use of the omissions clause so as to enable it then to try and get a better bargain by having the work done by somebody else at a lower cost once the contractor is out of the way (or at the same time if the contract permits others to work alongside the contractor)."

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6.2 Termination for defaultMost contracts include a condition which enables the employer to terminate the contract. However, proper procedures should be followed to avoid wrongful termination.

In Mvita Construction Ltd v Tanzania Habours Authority, it was held that: “When an event occurs that gives rise to the right to forfeit, the power of forfeiture must be exercised within a reasonable time or the employer will be deemed to have waived its right unless the event is a continuing breach of contract”.

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The issue of claim for Liquidated Damages also needs special attention. Once a contract is terminated, the primary contractual obligations, including the obligation to complete by a certain date, are discharged.The rationale behind liquidated damages ceasing to be applicable post termination is that because the primary obligation to complete by a given time has been discharged, so too has the secondary obligation to pay liquidated damages for its breach.

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7.0 CONTRACT CLOSEOUT

“A completed contract is one that is both physically and administratively complete. A contract is physically complete only after all deliverable items and services called for under the contract have been delivered and accepted by the grantee.Contract close out is implemented as per PPRA Standard Tendering Document Smaller Works (2014) clauses: (58) Completion Certificate, (59) Taking Over and (60) Final Account. Most of our contracts do not reach the stage of final account. This is mainly attributed to the incompetence of some Project Managers. The effect of this is the withholding of the contractor’s retention money and sometimes the performance security indefinitely. This is a big burden to our contractors.

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8.0 CONCLUSION

The big challenge facing procurement professionals is the lack of understanding of the legal aspects of contracts. It is important to note that contracts are legal documents and the courts of law have the final word when it comes to their interpretation. PEs should be aware of the legal implications of their commissions and omissions when making major decisions in contract administration. It is therefore important that PEs use the services of the legal professionals when making major decisions in contract administration.

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THANK YOU