Entire Contract Principle in Construction Industry

Entire Contract Principle in Construction Industry Entire contract principle is an understanding and agreement that has always been a concern of many parties in the construction world. Construction activity is activities that constitute a complete unity and hard to be done partially. A variety of factors make a construction contract different from most other types of contracts.

These include the length of the project, its complexity, its size and the fact that the price agreed and the amount of work done may change as it proceeds. In Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717 Lord Diplock described a building contract as an entire contract for the sale of goods and work and labor for a lump sum price payable by installments as the goods are delivered and the work is done. Entire contract principle will involve all phases of construction in its implementation.Based on the case ever appears that the dispute that occurred within the entire contract principle much caused by the owner the dissatisfaction for work performed by contractors. Most cases that occur in the end won the owner as the party who feel aggrieved, but on the other side of the contractors also experienced the loss in no small amount. Hudson’s Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 475, 4.

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006, p 476, 4. 08) elaborates upon this proposition stating that “ the essence of a building contract is a promise by the contractor to carry out work and supply materials in consideration of a promise by the building owner to pay for it the great majority of building contracts in the traditional form consist of an undertaking to complete the work for a contract price either ascertained (in the case of a specification form of contract without quantities) or ascertainable (in the case of a measurement contract with quantities or schedules of rates) and are therefore ‘lump sum’ or entire contracts, in the legal sense”.We said ‘entire contract’ is a label to a committed and continuing relationship between solicitor and client, but not one where breach should mean the loss of all profit costs.

We said the circumstances were like Taylor v Laird (1856) 1 H&N 266, where a captain employed to explore and trade on the River Niger had refused to go further than a particular trading post, but succeeded in claiming his fees on the basis that these were payable on a monthly basis. And similarly, we argued that ur fees accrued as we spent time, as is normal with litigation retainers. Embarking on High Court litigation does indeed bear close parallels in other ways with the hazards of exploring Africa in the 19th century.

In my opinion case in entire contract principle was not much happening in the construction world today because most of the payments made by the owner to the contractor has been done on the basis of a progress payment where payment is not made just once.Payments made by the owner currently has been done based on the physical progress that has been carried out by the contractor at any stage of the stipulated time, and in general, payments made ?? as much as 4 times in its execution. Payment is made ?? mostly at the time contractor has achieved physical progress of 25%, 50%, 75% and 100% while requiring the retention fund amounting to 5% in the last stage payment.This is different in some cases that I found earlier, in which payments are made at the end where the contractors are expected to have been carrying out its work 100% and then suppose that at the time of the new physical progress achieved is 70% of contractors who instructed him to leave work and demanding payment in full of the items work that has been implemented. A construction contract is best described as a complex web of competing interests. A particular problem in construction contracts is that there is little interest in building long-term relationships.Among the issues that often arise in construction contracts is the meaning of words used by the parties in their written contracts. The process by which courts arrive at this meaning is called construing the contract.

The resulting meaning as determined by the court is called the construction of the contract. Lord Diplock in Pioneer Shipping v. BTP Toxide, The Nema [1982] AC 724 at 726 said that the object in construing any commercial contract is to ascertain: ‘What each [party] would have led the other to reasonably assume were the acts he was promising to do or refrain from doing by the words in which the promise were expressed.The entire contract principle is “an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder, was entitled to demand partial payment notwithstanding his own breach”: see Hudson’s Building & Engineering Contracts (Sweet & Maxwell 1995, 11th Edition at p 476, 4.

007). Thus, according to Hudson (at pp 476–477, 4. 008): the vast majority of priced building ontracts, sophisticated or simple, for the construction of a block of flats or a garden shed, will be construed as being entire, even where there is no express undertaking to complete, or whether the job is to be cost-based. Only contracts of a day-to-day jobbing character are likely to escape such an interpretation, which in the absence of express provision will depend on examination of the ‘matrix’ or ‘genesis and aim’ of the transaction between the parties.If we perform an initial analysis of the exposure of several cases that have been mentioned earlier, then it appears that most cases of entire contract principle occurs when a contractor is instructed to leave the job to him and tried to claim payment for the work that has been implemented. The duty of performance under many contracts is contingent upon the occurrence of a designated condition or promise.

A condition is an act or event, other than a lapse of time that affects a duty to render a promised performance that is specified in a contract.A condition may be viewed as a qualification placed upon a promise. A promise or duty is absolute or unconditional when it does not depend on any external events. Nothing but a lapse of time is necessary to make its performance due. When the time for performance of an unconditional promise arrives, immediate performance is due. A dependent or conditional promise is not effective until the occurrence of some external event that the parties have specified.

An implied condition is one that the parties should have reasonably comprehended to be part of the contract because of its presence by implication. The failure to comply strictly with the terms of a condition will not prevent recovery if there has been substantial performance of the contractual obligation. Courts created this doctrine in order to prevent forfeitures and to ensure justice. Where recovery is permitted for substantial performance, it is offset by damages for injuries caused by failure to render complete performance.Courts determine whether there has been a breach or a substantial performance of a contract by evaluating the purpose to be served; the excuse for deviation from the letter of the contract; and the cruelty of enforced adherence to the contract.

If the deviation from the contract were accidental and resulted in only a trivial difference between what was required by the contract and what was performed, the plaintiff will receive only nominal damages. Some cases below will be able to provide an overview how the dispute is going on in the application of this principle during the entire contract.Case is such: 1. Ming & Co v Leong Ping Ching [1964] 30 MLJ 312 (Malaysia) A contract for the construction of an extension to a maternity home in Kuala Lumpur at a price of $28,500 was concluded by an exchange of correspondence. Following disputes about the time being taken to complete the work, although no completion date was agreed, the defendant owner alleged that the contractors had abandoned the contract and that she was entitled to complete the work. The plaintiff contractors claimed that they were entitled to a quantum meruit of $11,119 of which $9,000 had been paid.

The defense was that this was an entire contract and, on the authority of Sumpter v Hedges 1898, Digest 161, the plaintiffs could not sue on a contract which they had abandoned. Gill J held; ‘The answer to that is that in the first place the plaintiffs did not abandon the work, and, in the second place, this was not an entire contract. An entire contract is one in which the entire completion of the work by the contractor is a condition precedent to payment.

In my oppinion, a contract in respect of which progress payments 2. Kunchi Raman, K P v Goh Bros.Sdn. Bhd. [1978] 1 MLJ 89 (Malaysia) The plaintiff, K. P. Kunchi Raman, entered into a labor-only contract with the defendant for the laying of water pipes between Mak Mandin and Prai, and Mak Mandin and Jalan Raja, Butterworth, including the reinstatement of a cycle track.

The contractor claimed $11,656 as the balance payable to him under the contract. The defendant counter claimed for the repayment of $55,024 for unsatisfactory work already completed, and failure to complete all items of contract work, amounting to failure to complete the contract.Gunn Chit Tuan J in the High Court held that the contract was an entire contract, but that the doctrine of substantial performance should be applied’….

considering the nature of the defects, the cost of rectifying them and the balance of the work undone. I was inclined to the view and found that in all the circumstances of this case the plaintiff had substantially completed the contract. For that reason I held that the defendant was not entitled to repayment of the said sum of $55,024 paid to the plaintiff who was entitled to claim for any balance due to him for work done’.This would have resulted in the plaintiff’s claim succeeding and the defendant obtaining nothing. However, the defendant was entitled to damages for the defective work and for completing the contract and since this entitlement exceed the plaintiff’s claim, following Hanak v Green 1958, the defendant was entitled to judgment for $6,047. 3.

Hoenig v Isaacs [1952] EWCA Mr. Isaacs was meant to decorate and furnish Mr. Hoenig’s flat for ? 750. When the work was done, there were problems with a bookcase and wardrobe, which would cost ? 55 to fix. Mr Hoenig refused to pay the ? 350 outstanding.Somervell LJ noted each case turns on the construction of the contract.

Where there is substantial performance of the contract, then money must be paid. The work was done, and then there was merely a damages claim in respect of the faulty bits. Denning LJ gave judgment as follows. This case raises the familiar question: Was entire performance a condition precedent to payment? That depends on the true construction of the contract. In this case the contract was made over a period of time and was partly oral and partly in writing, but I agree with the Official Referee that the essential terms were set down in the letter of 25th April, 1950.It describes the work which was to be done and concludes with these words: The defendant paid ? 150 on 12th April, 1950, and another ? 150 on the 19th April, 1950.

On 8th August, 1950, the plaintiffs said that they had carried out the work in absolute compliance with the contract and demanded payment of the balance of ? 450. On the 30th August, 1950, the defendant paid ? 100, but said that there were defects and omissions in the work and that he would call in someone else to make them good and deduct the cost from the plaintiffs’ bill. He did not do this but entered into occupation of the flat and used the furniture.The plaintiffs then brought this action for the balance of ? 350. They denied that there were any defects at all.

The Official Referee found that there were defects in three of the items of furniture and that the cost of remedying them was ? 55. 18s. 2d. He deducted that sum from the ? 350 and gave judgment for the plaintiffs for ? 294. 1s.

l0d. The question of law that was debated before us was whether the plaintiffs were entitled in this action to sue for the ? 350 balance of the contract price as they had done. The defendant said that they were only entitled to sue on a quantum meruit.The defendant was anxious to insist upon a quantum meruit, because he said that the contract price was unreasonably high. He wished therefore to reject that price altogether and to pay simply a reasonable price for all the work that was done.

This would obviously mean an inquiry into the value of every item, including all the many items which were in compliance with the contract as well as the three which fell short of it. That is what the defendant wanted. The plaintiffs resisted this course and refused therefore to claim on a quantum meruit. They said that they were entitled to the balance of ? 50 less a deduction for the defects. In determining this issue the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the Courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions.The promise to complete the work is therefore construed as a term of the contract, but not as a condition.

It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or alternatively set them up in diminution of the price.The measure is the amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good; see Mondel v Steel and the notes to Cutter v Powell in the 13th Edition of Smith’s Leading Cases II.

, 19-21. It is of course always open to the parties by express words to make entire performance a condition precedent. A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion.Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money: but he is not entitled to the retention money until the work is entirely finished, without defects or omissions. In this case the contract provided for “nett cash as the work proceeds and balance on completion.

” If the balance could be regarded as retention money, then it might well be that the contractor ought to have done all the work correctly, without defects or omissions, in order o be entitled to the balance. But I do not think the balance should be regarded as retention money. Retention money is usually only 10 per cent, or 15 per cent, whereas this balance was more than 50 per cent. I think this contract should be regarded as an ordinary lump sum contract. It was substantially performed. The contractor is entitled therefore to the contract price, less a deduction for the defects. Even if entire performance was a condition precedent, nevertheless the result would be the same; because I think the condition was waived.

It is always open to a party to waive a condition which is inserted for his benefit. What amounts to a waiver depends on the circumstances. If this was an entire contract, then when the plaintiff tendered the work to the defendant as being a fulfillment of the contract, the defendant could have refused to accept it until the defects were made good, in which case he would not have been liable for the balance of the price until they were made good. But he did not refuse to accept the work.

On the contrary, he entered into possession of the flat and used the furniture as his own, including the defective items.That was a clear waiver of the condition precedent. Just as in a sale of goods, the buyer, who accepts the goods, can no longer treat a breach of condition as giving a right to reject but only a right to damages: so also in a contract for work and labor, an employer who takes the benefit of the work can no longer treat entire performance as a condition precedent, but only as a term giving rise to damages. The case becomes then an ordinary lump sum contract governed by the principles laid down in Mondel v Steel and Dakin v Lee.The employer must therefore pay the contract price subject to a deduction for defects or omissions. 4. GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] The Commonwealth of Australia (“the Commonwealth”) and the two Australian software companies BHP Information Technology Pty Ltd (“BHP-IT”) and GEC Marconi Systems Pty Ltd (“GEC Marconi”) entered into back-to-back-fixed price contracts for software development and systems integration in the Australian Diplomatic Communication Network, a network for communication to and from Australia? overseas missions. The contract between the Commonwealth and BHP-IT was the “Head Contract”, the contract between BHP-IT and GEC Marconi the “Sub-Contract”.

The actual software was to be developed by GEC Marconi, but special boundary security devices (“STUBS devices”) were to be supplied by the Commonwealth to BHP-IT, which in turn would supply them to GEC Marconi for integration with the software being developed by GEC Marconi.The parties were obliged to perform their obligations in accordance with a special Implementation Plan, which provided for 5 successive development phases or “milestones”, at the achievement of which by GEC Marconi BHP-IT had to make the corresponding progress payments. The dispute arose when GEC Marconi served a notice of termination of the Sub-Contract on BHP-IT on the ground of alleged failures on the part of BHP-IT to comply with its contractual obligations.

In particular, GEC Marconi complained that BHP-IT had failed to provide the STUBS devices as required by the Sub-Contract, and refused to pay GEC Marconi for its achievement of the fourth milestone again as required by the Sub-Contract. BHP-IT did not deny these facts but contended that the Sub-Contract had been amended by agreement to remove the obligation to provide the STUBS devices and to substitute them with emulation software; as to its refusal to pay for the fourth milestone, it argued that GEC Marconi was not entitled to be paid as it had not complied with the requirements of payment under the Sub-Contract.GEC Marconi commenced a legal proceeding against BHP-IT before the Federal Court of Australia, which led to a number of cross-claims, first, by BHP-IT against GEC Marconi and, secondly, by the Commonwealth against BHP-IT. Both the Head Contract and the Sub-Contract were domestic contracts and as such governed by Australian law. Nevertheless, on a number of occasions the Court, apparently with the intent to further corroborate its deliberations, also referred to foreign sources – mainly to U. S. nd English law – as well as to international instruments such as the UNIDROIT Principles of International Commercial Contracts and – though to a lesser extent – the Principles of European Contract Law. Thus, with respect to BHP-IT? s objection that the Sub-Contract had been amended, the question arose as to whether the existence of a “no oral modification” clause in the Sub-Contract precluded, as GEC Marconi argued, the making of an oral or implied variation agreement, or whether in any case a party could by its conduct be stopped from invoking the “no oral modification” clause, as BHP-IT argued.

In rejecting GEC Marconi? s argument and deciding in favor of BHP-IT, the Court referred, among others, to Article 2. 18 [Art. 2. 1. 18 of the 2004 edition] of the UNIDROIT Principles, which, while as a rule giving effect to contract clauses imposing a writing requirement for subsequent modifications, provides that a party may be precluded by its conduct from invoking such clause to the extent that the other party has acted in reliance on that conduct. Likewise, in rejecting BHP-IT? argument according to which the Sub-Contract contained an “entire obligation”, i.

e. the first four milestone payments were conditional upon complete performance of the contract, so that GEC Marconi, having failed to achieve the fifth and final milestone, was obliged to refund the previous four milestone payments it had received, the Court referred among others to Comment 2 to Article 6. 1.

4 of the UNIDROIT Principles, stating that, while as a rule if the performance of only one party? obligation by its very nature requires a certain period of time, that party is bound to render its performance first, circumstance may indicate the contrary, e. g. where the contract provides for payments to be made in agreed installments throughout the duration of the work. Finally, with respect to BHP-IT? s contention that in terminating the Sub-Contract GEC Marconi had breached an implied contract term requiring it to act honestly, fairly and reasonably, and to GEC Marconi? objection that, a duty of good faith, even if generally implied by law, could not be implied in the contract in the case at hand on account of the so-called “entire agreement” clause contained in the Sub-Contract, the Court, while pointing out that in Australian law there was no such mandatory rule of law imposing on the parties the duty of good faith and fair dealing, such as § 1-102(3) of the United States Uniform Commercial Code or Articles 1. of the UNIDROIT Principles and 1:201 of the Principles of European Contract Law, concluded that the duty of good faith and fair dealing was to be considered an implied term of all contracts, and the mere fact that the contract contained a “entire agreement” clause was not sufficient to preclude such an implication. 5.

TAN HUNG NGUYEN & ANOR v LUXURY DESIGN HOMES PTY LTD & 2 ORS [2004] NSWCA 178 Supreme Court of New South Wales – 11 June 2004 Tan Hung Nguyen (‘Tan’), a registered proprietor of land in Burraneer, and Luxury Design Homes Pty Ltd (‘Luxury’), a licensed builder, entered into a building contract for the design and construction of a house. The building contract was a standard form Department of Fair Trading home building agreement which provided for payment by progress installments at the completion of specified stages of work.At the expected date for practical completion the work was only 45% completed.

A dispute arose as to defective and unfinished work and Tan refused to pay a progress claim. The building contract contained two relevant clauses. Clause 11 of the building contract provided for the payment of a progress claim to be “…merely a payment on account”. Clause 24 of the building contract expressly dealt with the circumstances in which the contract might be ended by the owner due to identified default of the contractor.Tan submitted that the building contract was an “entire contract” notwithstanding the fact that the contract provides for progress payments. An “entire contract” is one in which the consideration for the payment of money or for the rendering of some other counter-performance is entire and indivisible.

The result being, that Luxury would not be able to recover anything because the work was not completed according to its terms. The issue here Was the building contract an “entire contract”?Hodgson JA and Einstein J held that the correct conclusion is that the contract was not an entire contract because, by its very terms, it contemplated an entitlement on the builder’s part to receive payment despite failure to substantially complete the works. Clause 24 made express provision for the rights of the parties in the event that the contract was determined prior to completion. The inclusion of Clause 24 in the Contract meant that the parties did not intend it to be an entire contract.McColl JA restated the general principles holding that if a contract or obligation is to be found to be entire notwithstanding that the contract or obligation provides for payment by installments, the contract on its proper construction must indicate that the installments are nonetheless conditional upon complete performance of the contract or obligation.

Einstein J at paragraph 75 and 76 stated: “There are no words in the building contract expressly making entire performance a condition precedent.In Hoenig v Isaacs [1952] 2 All ER 176, Lord Denning made the point that it was always open to the parties by express words to make entire performance a condition precedent. ” The impact for this case is stands for the proposition that a contract will only constitute an “entire contract” if payment is made conditional upon complete performance of the contract. In that case, the contractor will be entitled to payment only if the work is completed according to the terms of the contract. 6. BP Exploration Co (Libya) v Hunt (No 2) [1983] 2 AC 352 Mr. Hunt owned an oil concession in Libya.

He contracted with BP to exploit the oil. The contract said (1) Hunt would transfer BP half the concession (2) BP would transfer Hunt ‘farm in’ contributions in cash and oil (3) BP would explore for and develop the oil (4) BP provided all funds until the oil was found, and (5) the profits would be shared, but 3/8 of Hunt’s share would go to BP until 125% of the farm in contributions and half the costs of BP were covered. A massive oil reserve was found in 1967. However, in 1971 the Libyan government was overthrown and replaced by Colonel Gaddafi. It took over BP’s half share.BP had already covered half its costs.

Two years later, it expropriated Hunt from his share. BP claimed the contract was frustrated, and claimed for a just sum of money to be awarded under the Law Reform (Frustrated Contracts) Act 1943, section 1(3). Robert Goff J held the contract was frustrated in 1971 and under the Law Reform (Frustrated Contracts) Act 1943, section 1(3) awarded BP $35. 4m plus interest.

He held there are two steps in a section 1(3) claim. First, identify the value of the benefit, which could be the value of the services performed or the end product of the services.Regard can be had to the value of services when no end product results or where the end product has no objective value, but where the end product is destroyed by fire, there is no claim under section 1(3) because the value has been reduced to zero by the frustrating event. The effect, therefore, was to lead to the same result as in Appleby. The second step is to assess what is a ‘just sum’.

Robert Goff J said it was the sum that would lead to ‘the prevention of the unjust enrichment of the defendant at the [claimant’s] expense’.The Court of Appeal upheld the decision of Goff J. Lawton LJ said that judges under the Act have complete discretion to award what they think is fair, and found he got ‘no help from the use of words which are not in the statute’, such as “unjust enrichment”. From the few cases mentioned above it appears that the entire principle of contract in the construction world today is no longer relevant. Some cases entire contract that has been mentioned above occurs largely in construction activities with the degree of difficulty that is not too high and the value that is not too big.It is very logical at this time where the contractor will not use methods in carrying out self-finance projects that will be done. One very basic thing is that if the financing is done entirely by the contractor then automatically it will burden the capital liquidity that can be used to finance other projects will also be implemented. It is also quite a concern is that contractors will not likely bear the risk alone, with the principle of entire contract as happened in the cases that have been described earlier, then the new contractor will receive payment for work already completed at the time of execution of the work is completed overall.

Payment method used today is a progress payment in which payments made by the owner to the contractor not only done at the end of the work, but carried out several times base on the physical progress that has been achieved by the contractor. It certainly will reduce the risk to be borne by the contractor on the job that cannot be claim by the contractor to the owner. Basically, this method can also provide benefits to the owner where they still can control each stage of the work carried out and also can stimulate physical progress undertaken by the contractor in the field.For the work with a level of complexity that is not too high then the principle of entire contract is still very possible to be implemented, eg home renovation or repair work on damaged components. Just as with what we do daily when we will make payments at the time the work is completed and has been properly executed approved by us as the owner. As what is known with the case of entire contract occurs more frequently in contract sales of goods where the value of the contract is not too great with the complexity that is not too high anyway.For construction contracts, if the principle of entire contract remain to be implemented then it will directly burden the contracting party as the party would carry out such work, as what usually happens, the contractor can definitely be withdraw down payment that can sometimes be regarded as a first term whose value ranges between 10% – 20% of the total project value. The value is estimated to have been able to finance the initial activities to be performed by the contractor.

This method also can sometimes be detrimental to the owner if they cooperate with the contractors who are not responsible who then left the job at the time of down payment has been paid to him. At a later stage then the contractor can file a claim for the work that has been implemented, and the billing interval is usually carried out with two systems is to base on a progress billing or base on time. Most methods of payments made over the which tend to base payments on the progress which indicates that the amount of payments made will be in accordance with the proportion of jobs that have been implemented.But the payment method that feels most secure when it is a performance bond. A performance bond is a written form of security from a surety (bonding) company to the owner, on behalf of an acceptable prime or main contractor or subcontractor, guaranteeing payment to the owner in the event the contractor fails to perform all labor, materials, equipment, or services in accordance with the contract the face value of the performance bond. Generally the surety companies reserve the right to have the original prime or main or subcontractor remedy any claims before paying on the bond or hiring other contractors.

Conclusion From several explanations that have been mentioned earlier it appears that the principle of entire contract was no longer relevant to the the current construction world conditions. The complexity of construction work plus the higher the greater the level of capital that makes many people avoid the entire contract principle in the construction world. Contractor as the party that helps the owner to realize the physical infrastructure or buildings to be built would be more harmed if the principle of entire contract used in the construction world today, especially for projects with a great value.Degree of Owner Satisfaction will also cause the application of the principle of entire contract is difficult to do. Payment is made only at a time that demands satisfaction fully owners would harm the contractor if it turns out there are defects that make the owner feel aggrieved. With the enactment of the principle of entire contract in the the construction world were also basically only benefits the contractor, but the owner as the owner of the work will also benefit where the likelihood of the contractor to leave the job half way through will be reduced.Most of the cases where the contractor left the job they feel frustrated due to insufficient capital or the number of design changes to be applied in the field. With the progress payment mechanism then automatically be encouraged contractors to perform their jobs more quickly and optimally.

Finally construction contract cannot be equated with a contract sale of goods that apply the entire contract principles therein. The complexity and high levels of capital and highly owner satisfaction will be the main cause of the difficulty of enforcement of contract principle in the entire construction of the world today.