Major Elements In Law: Offer, Acceptance, Consideration, Capacity, Intention To Create Binding Agreement

Offer

What Are The Major Elements Recognized In Law?

To determine whether there was a contract, there are major elements recognized in law for there to be a legally binding contract. These elements are offer, acceptance, consideration, capacity and intention to enter into a binding agreement. Other issues to consider in the determination of whether there is in existence a contract are concepts such as estoppel and privity of contract. The following paragraphs present a discourse in answer to whether there was a contract and when it was formed.

An offer is an unequivocal statement from the offeror of such terms that in case the offeree accepts, the intention is for the same to be binding. An offer happens where an offeror indicates a wish to enter into a binding agreement with the offeree on particular terms. Also, the offer must be made to another person and not to oneself. Conduct that should be distinguished from offers is advertisements (Partridge v Crittenden 1968) and tenders (Hughes v Airservices Australia 1997). Based on the fact pattern, it is clear that Agro Builders’ engagement of Ego Architects to prepare architectural drawings amount to a clear statement of their willingness to enter into a binding contract. Therefore, that was the offer.

After an offer has been made, it is imperative to establish whether the other party accepted the same. The offeree must accept the same terms and issues without which a contract cannot be deemed as legally binding (Construction Law Contracts 2011, p.2). For an acceptance to be valid, it must be directly relying on the offer. Furthermore, an acceptance of an offer may be reached by acceptance of the offer or by the parties’ conduct that suffices to show an agreement (UNIDROIT Principles 2010, art.2.1). The import of this statement is that even where there is no formal offer and acceptance, the performance of the parties of certain obligations is adjudged as an intention of being bound in a contract. Article 2.6 of the UNIDROIT Principles 2010 provides that an acceptance may be reached through statement, conduct, indication of assent or usage. Accordingly, when Ego Architects undertook to prepare the architectural drawings, there was an indication of willingness to be bound in a contract, hence the acceptance.

Consideration is paramount for parties to enter into a contract. This means that the offeror must receive something in return. The consideration must not necessarily be monetary as good service suffices (Construction Law Contracts 2011, p.3). Although inadequate, the contract may still be binding as the requirement is that consideration should be sufficient. Hence, the tree-stage payment basis for the drawings amounts to good and sufficient consideration.

Acceptance

In addition to the above requirements, it must be established that there was an intention to be bound by an agreement. For the contract to be effective, the engineer must write clear specifications usable under the prevailing site conditions (Construction Law Contracts 2011, p.4). According to the case of Victoria University of Manchester v Hugh Wilson & Lewis Womersley (1984, para.75), the best defence against legal claims is using language that is clear concise and consistent throughout the entire specification. The objective is producing a document that is unambiguous and that completely describes the building when read together with the drawings. This was also the holding in the case of Equitable Debenture Assets Corporation Ltd v William Moss Group Ltd (1984, para.21). The import of the preceding is that there must be an unequivocal intention to form a legally binding contract. The intention may be express or implied, which is the case in most commercial contracts, unless expressly excluded. As such, it may be implied from the conduct of Agro Builders and Ego Architects that there was an intention to create a legally binding agreement.

The other issue to consider is whether the parties to a contract have capacity to enter into the agreement. In general, parties must be above 18 years of age and also of sound mind and disposition to be held as having entered into a contract. With respect to corporations, the respective Acts of Parliament under which they are organized govern their conduct and ability to enter into contracts. The law governing Ego Architects is the Architects Act 1991 and for Agro builders, the Building Act 1993 and the Building and Construction Industry Security of Payment Act 2002. It is important to further note that according to the privity of contract doctrine, only parties to a contract are bound thereto (Construction Law Contracts 2011, p.6).

In summary, based on the above discourse, there was a contract between Agro Builders and Ego Architects. This is because the parties have capacity to contract and also demonstrated, through their conduct, an intention to enter into a legally binding agreement. Further, there was an offer, an acceptance and consideration. When, therefore was the contract created? The contract was necessarily created during the acceptance of the offer. That is when Ego Architects accepted Agro Builders’ offer to prepare architectural drawings.

Dorter (1990, p.156) defines a variation as an alteration that either adds or omits the specific terms of a contract or the physical work that a contractor should perform. In Re Chittick and Taylor (1954), the Canadian Court laid down principles for determining whether changes to contracts constitute variations. In Australia, the case of Barter v Mayor of Melbourne (1870) held that extra works constitute those that were not catered for under the contract or contemplated during execution thereof.

Consideration

In principle, the absence of a contractual provision that reserves to the principle a power of directly altering the contractual works does not oblige a contractor to acceding to requests by the principle to depart from the scope of works enumerated in the contract. Any insistence by the principle of such a departure may entitle the contractor to treating such as a repudiation of the contract. This was the holding in the case of Ettridge v Vermin Board of the District of Murat Bay (1928). Questions regarding the particular parameters of a variation are of construction, which can only be determined by referring to the express wording of the particular provision in the contract. This was observed in the case of Balfour Beatty Power Construction Australia Pty Ltd v Kidston Goldmines Ltd (1989).

The general rule of carrying out a variation is that it must be in writing (Baker & McKenzie 2013, p.54). Clause 36.1 of the AS 4000 provides that a variation order must be written. However, under the provisions of clause 23 of AS 2124 and NPWC a variation does not need to be in writing. As a general rule of English law, parties are granted freedom of contracting and are entitled to expressing the same in writing, verbally or in the course of their dealing. The Court of Appeal in the authoritative pronouncement of Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd (2016) upheld this position of English law. The court averred that although it would be practically beneficial for contracting parties to restrict the manner in which they vary terms, reconciling that with the fundamental English principle of freedom of contract would be difficult. Accordingly the Court stated that there is nothing barring parties from verbally varying the terms of a written contract.

Therefore, based on the discussions above-presented, verbal agreements are capable of varying the terms of a written contract. However, it is important to note that the written terms are still valid since they make it difficult for contracting parties to prove the oral agreement.

The basic hierarchy of documentation is the duly signed Agreement, followed by the Conditions of Contract and the special conditions attendant thereto. The Drawings (including survey, engineering, architectural and other drawings) are then followed by the specifications (engineering, architectural, and others), which are in turn followed by the Bill of Quantities wherever applicable and other documents deemed as requisite for works execution (Construction Law Contracts 2011, p.10).

Intention to Create Legally Binding Agreement

The general law applicable in construction contracts documentation is the law of contracts and decisions of the court. The two groups of contracts that are used in construction are standard form and non-standard form contracts.

In Edgeworth Construction Ltd v ND Lea & Associates Ltd (1993), the Supreme Court held that a seal attests to the preparation of a document by a qualified engineer but does not guarantee the accuracy thereof. Such a stamp should be deemed as a sign of reliance and indicates that other individuals may place reliance on the fact that designs, judgements or opinions were made by an engineer who is held to high standards of ethical conduct, skills and knowledge. Accordingly, stamping the specifications “approved” has the effect of telling others that they can, with a high level of confidence, rely on the contents of the specifications in furthering their projects. However, because the successful outcome of projects is dependent on numerous factors beyond the help of the engineer, such engineer cannot guarantee absolute success. Accordingly, such stamping of specifications is not a warranty of correctness and should not be treated as such.

Since the Agro Builders’ contract is for construction of prison facilities. It may be classified as a huge or major project. As such, this paper prescribes the use of non-standard form contracts as one of the means of avoiding the problems of amendments during the continuance of construction. Due to the complex nature of huge projects, it is important to write specific contract provisions and subject the same to extensive negotiations. However, since the project at hand may also qualify as one that is not very huge, it may utilize a standard form contract. Examples of such contracts include the Australian Building Standards Contract forms and the Australian Standard AS2124-1992 standard form contract. The rule in using such contracts is to understand the terms and tailoring the same to suit the specific needs of particular projects before adopting them (Construction Law Contracts 2011, p.13). The Court in the Silent Vector Pty Ltd t/as Sizer Builders v Squarcini (2009) judicial pronouncement observed that parties of standard form contracts must be careful to clearly and consistently add, amend or delete some clauses. The Court further noted that failure by parties to adhere to the above principle was the cause of uncertainty in this realm of commercial law.    

Articles 2.20 to 2.22 of the UNIDROIT Principles deal with the resolution of disputes that arise between standard form and non-standard form contracts. For standard form contracts, the dispute resolution mechanism used is arbitration and mediation. The rationale for adopting arbitration is attributed to the length of time it takes for a claim to even get to hearing in the court process. Arbitrations are quicker to determine. Nonetheless, this is a historic position as court processes are also fast now days. Accordingly, parties to a dispute must elect the method of dispute resolution they deem as both cost effective and fast. The Building and Construction Industry Security of Payment Act 2002 provides for adjudication as an interim avenue for parties to resolve particular disputes. It is noteworthy that courts have considered the possibility of judicial intervention in adjudication determinations in the nature of judicial review. The two cases of Grocon Constructors Pty Ltd v Planit Cocciardi Joint Venture & Ors (2009) and Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd (2009) considered that possibility. In a nutshell, the import of the two decisions above-named is that an adjudicator’s decision is susceptible to the writ of certiorari.

Capacity

In Victoria, the following model is used in commercial arbitrations of a domestic nature. First, parties are accorded freedom of choosing an expert whit a particular expertise who answers questions that are pinned on factual assumption sets that are competing. Secondly, there is a requirement for a joint expert’s conference, which is the meeting of the chosen experts before trial. In those meetings, experts exchange finalized expert reports for the purpose of resolving points of difference. The remaining differences are then articulated briefly giving reasons for the same. The differences that remain are usually explored during trial using the concurrent evidence technique (Monichino 2012, p.8). Therefore, a project manager needs to choose the right expert for their case and arrange for the expert conference. The purpose of this arrangement is to obtain the final expert reports.     

In Australia, the courts use the concurrent evidence method as above-mentioned to assess expert evidence. The other name used to refer to this method is ‘hot-tubbing’. The practice involves the concurrent hearing of expert evidence in disputes of any specific field (Wilson, Sharp, Gilchrist, & Fitzgerald 2013, p.692). An example of a case where expert witnesses were hot-tubbed is Hunt v Optima (Cambridge). That case involved the hot-tubbing of engineers and the architect as experts based on a defects schedule that related to grave defects in blocks. In Stratton v Patel (2014), there was a restaurant with a schedule of defects and electrical and mechanical engineering experts were hot-tubbed.   

The courts use section 79 of the Evidence Act 2008 (Dasreef Pty Limited v Hawchar 2011, p.602-605). That section provides for five factors to be considered for expert witness to be admissible. The factors include, but not limited to, relevance (as under s.55), necessity of specialised knowledge, and an application of the expert opinion on the facts. In case the expert evidence is admissible, the court is conferred with the discretion of limiting or excluding that evidence by virtue of sections 135-136. The case of ASIC v Rich (2005) is an example of a case where the expert evidence was excluded for non-compliance with section 79 of the Evidence Act and excluded by import of section 135. The other law governing expert evidence in court is the Supreme Court Rules Order 44. Rule 44.03 enumerates the requirements that must be complied with by an expert report. The final law that the courts use in dealing with expert witnesses is the Expert Witness Code of Conduct otherwise known as Form 44A. This code insists that an expert has an overriding duty of impartially assisting the Court and the fact that he or she is not an advocate of the party that retains them.

Summary

The general rule in law with regard to witness testimony is that witnesses are required to give evidence of fact. Such evidence must be given as the witnesses know them as opposed to hearsay (what others have said to them), which is excluded. Likewise, as a general rule, a witness is precluded from giving opinions, inferences or opinions in evidence (Ward 2008, p.1083). The exception to this rule is, of course, expert witnesses, whose testimony is adduced in court as evidence based on opinion. This is a development in English law that has progressively been allowed in courts. The use of the word “opinion” raises issues since it means opinions that are based on the experiences of human judgement. The opinions of an expert witness are usually based on knowledge of the specific issues being reviewed. However, in practice, such knowledge must necessarily be qualified as barely adequate since it is very rarely that an expert witness will have possession of all the intimate and complete details of all the facts of the relevant case. The expert therefore makes general “educated guesses” from what is actually known to what can be speculated from the knowledge of a case. This, necessarily, is the danger of using expert witnesses. Furthermore, experts charge heavily for statements and comprehensive final reports. Expecting an expert to retract from such an opinion during the exchange of final reports is counter-intuitive.

Section 9 of the Act provides for the right to progress payment, which is calculated with respect to the reference date. In this case Agro Builders needs to understand the procedure for payment under the Act and the requirements for the same. Section 14 provides for the process for lodging a payment claim. According to that section of the law, the claim must be in the prescribed form containing the prescribed information. Also, it must contain the related services or construction work to which the payments relate. It must contain the amount of the payment that has become due and must state that it is being made under the Act. Section 14 (4) provides for the period within which to serve the payment claim as either three months from the date of the reference or such period as is prescribed in the contract, whichever is greater.  

Section 14 of the Act provided that the Respondent to a claim must serve a payment schedule within 10 days, which schedule details the items disputed and what is to be paid. Failure by the respondent to adhere to that section makes them to lose their right of disputing the payment. Despite the clear provisions of the Act above, the court held that there is a possibility of expending the period in case the respondent engages in conduct that is deceptive and misleading. This was the position in the case of Bitannia Pty Ltd and Anor v. Parkline Constructions Pty Ltd (2006). During the time of this case, the applicable law with respect to misleading conduct was section 52 of the Trade Practices Act 1974, now governed by section 18 of the Australian Consumer Law (Ulbrick 2009, p.23).

Verbal Agreements and Written Contracts

The case of Dualcorp Pty Ltd v Remo Constructions Pty Ltd (2009) involved a payment claim that dealt with the same works, which had been already dealt with by a prior adjudication. The court held that that did not constitute a valid claim for payment. In another case of Kittu Randhawa v Monica Benavides Serrato (2009), the court held that if a party cannot disprove delivery, there is a presumption that effective delivery of notice occurred. In the judicial pronouncement of Zebicon Pty Ltd v Remo Constructions Pty Ltd (2008), the question before the court was with respect to the exact date that the payment claim was served. Oral evidence was presented indicating that the payment claim had been faxed and, further, a satisfactory transmission report. The court held these to be sufficient proof that the claim was duly served. In the case of Rubana Holdings Pty Limited v 3D Commercial Interiors Pty Ltd (2008), the court held that in case of cessation of work or termination of contract, reference dates do no cease. The same court in the preceding case held that for payment claims to constitute as valid, they need not be signed.

References

Statutes

Architects Act 1991 (Vic) 

Australian Consumer Law (ACL) contained in Schedule 2 of the Competition and Consumer Act 2010 (CCA)

Building Act 1993 (Vic)

Building and Construction Industry Security of Payment Act 2002 (Vic)   

Evidence Act 2008 (Vic)

Supreme Court Rules

Trade Practices Act 1974 (Cth)

Cases

ASIC v Rich [2005] NSWSC 149

Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd and Ors (1996) 12 BCL 317

Balfour Beatty Power Construction Australia Pty Ltd v Kidston Goldmines Ltd [1989] 2 Qd 105

Barter v Mayor of Melbourne (1870) 1 A.J.R. 160

Bitannia Pty Ltd and Anor v. Parkline Constructions Pty Ltd [2006] NSWCA 238

Cubic Transportation System Inc v State of New South Wales & 2 Ors [2002] NSWSC 656 revised – 27/02/2003

Dasreef Pty Limited v Hawchar [2011] HCA 21; 243 CLR 588

Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69

Edgeworth Construction Ltd. v. N. D. Lea & Associates Ltd. [1993] 3 SCR 206; (1994) 66 BLR 56

Equitable Debenture Assets Corporation Ltd v William Moss Group Ltd (1984) 2 Con LR1

Ettridge v Vermin Board of the District of Murat Bay [1928] S.A.S.R. 124

Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 

Grocon Constructors Pty Ltd v Planit Cocciardi Joint Venture & Ors [2009] VSC 426

Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd [2009] VSC 156

Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558

Hunt v Optima (Cambridge) [2013] EWHC 681

Kittu Randhawa v Monica Benavides Serrato [2009] NSWSC 170

Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWR 504

Northern Sandblasting Pty Ltd v Harris [1997] HCA 39

Northern Territory of Australia and Others v. Arthur John Mengel and Others F.C. No.95/017 [1994] HCA 37; (1995) 129 ALR 1, (1995) Aust Torts Reports 81-335 (1995) 69 ALJR 527

Partridge v Crittenden [1968] 1 WLR 1204

Re Chittick and Taylor (1954) 12 W.W.R. 653

Rubana Holdings Pty Limited v 3D Commercial Interiors Pty Ltd [2008] NSWSC 1405  

Stratton v Patel [2014] EWHC 2677   

Transit New Zealand V Pratt Contractors [2002] 2 NZLR 313

Victoria University of Manchester v Hugh Wilson & Lewis Womersley (1984) 2 Con LR 43

Zebicon Pty Ltd v Remo Constructions Pty Ltd [2008] NSWSC 1408

Other Sources

Ulbrick, D 2009, ‘Tradies and the Trade Practices Act’, BCL, vol. 25, p.8

Wilson, D., Sharp, C., Gilchrist, S. & Fitzgerald, N., 2013, ‘Hot-tubbing Experts: Is There Scope for the Use of Concurrent Expert Evidence?’, Journal of Intellectual Property Law & Practice, vol. 8(9), pp.691-699

Ward, R 2008, ‘Hazard of an expert witness-an Australian Experience’, In Institution Of Chemical Engineers Symposium Series (Vol. 154, p. 1081). Institution of Chemical Engineers; 1999

Monichino, A SC 2012, ‘Aspects of Expert Evidence: Briefing of Experts and Finalising the Report’, Paper presented to the IAMA “Expert Evidence Fundamentals: Tips and Traps” Seminar on 8 October 2012

Baker & McKenzie, 2013, Variations: A Comprehensive Overview, Construction Australia, viewed 10 May 2017, https://docplayer.net/4082750-Construction-australia-variations-a-comprehensive-overview.html

Warren, M 2010, ‘Good Faith: Where are we at?’ Melb. UL Rev., vol. 34, p.344

Dorter, J 1999, ‘Variations’, BCL, vol. 15 p.156

Bell, M 2003, ‘From an Invitation to Treat To an Invitation to Tread… Warily-Public Sector Tender Processes’, BCL, vol. 19(2), pp.89-106.

Merity, P 1999 ‘The Return of Conscience: Section 51AC of the Trade Practices Act 1974’, BCL, vol. 15, pp.304-313.

Niemann, R 2002, ‘Recent Aspects of Good Faith,’ BCL, vol. 18, pp.103-110

Mead, P 1996, ‘The Recovery of Economic Loss Arising from Defective Structures – Policy, Principle and the Amorphous Notion of Proximity as a General Concept’, BCL, vol. 12, pp.9-26.

Construction Law Contracts 2011, Swinburne University of Technology, School of Civil Engineering and Science, Lecture Notes, Module 4, HES6793.

Trade Practices Act 1974 (Cth)

International Institute for the Unification of Private Law (UNIDROIT) 2010, UNIDROIT Principles of International Commercial Contracts, viewed 9 May 2017 https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2010