Definition

A contract is a formal, legally binding agreement: an agreement between parties, creating mutual obligations that are enforceable by law. In the context of construction, it is a legal document where the Contractor agrees to construct what is required, and the Client agrees to pay for those services.

The Parties to a Contract

  • Main Contract: In a traditional construction contract, the only two parties who sign and are legally bound by the agreement are the employer (the client or owner) and the main contractor.
  • Subcontracts: The parties to a subcontract are the main contractor and the specialist subcontractor.
  • Third Parties: Other professionals, such as the architect, engineer, or quantity surveyor, may be named in the contract documents and assigned administrative duties, but they are not actually parties to the construction contract and cannot directly benefit from or sue under it. They are engaged through separate consultancy agreements.

Key Elements of Contracts

For a contract to be legally valid and binding, several fundamental principles or elements must coincide:
  • Offer: A specific proposal or promise detailing exactly what will be provided, made with the intent to be bound once accepted.
  • Acceptance: The final, unqualified agreement by the receiving party to the exact terms of the offer.
  • Consideration: Something of value exchanged between the parties. In construction, this is typically the employer agreeing to pay the contractor in return for carrying out the defined scope of work.
  • Certainty of Terms: The agreement must not be vague or incomplete; essential terms like the scope of work (the "what"), time for performance (the "when"), and contract sum (the "how much") must be clear.
  • Intention to Create Legal Relations: Both parties must have a mutual intent to carry out their promises and be legally bound.
  • Capacity: The parties must have the legal capacity (in terms of age, mental ability, and corporate authority) to enter into an agreement.
  • Legality: The object of the contract must be legal, possible to perform, and not against public policy.

Legislation

Contracts are always subject to the governing legislation of the jurisdiction in which they operate.
General Compliance and Changes in Law Construction contracts generally mandate that the contractor must comply with all applicable national or state statutes, ordinances, laws, regulations, and by-laws. Under these legal frameworks, contractors are typically responsible for giving necessary notices, paying all required taxes, duties, and fees, and obtaining the required permits, licenses, and approvals for the works.
Because legislation can fundamentally impact a project's cost and timeline, standard international contracts (like FIDIC) typically include "Changes in Law" clauses. If new laws are introduced, existing laws are repealed or modified, or official governmental interpretations change after the base date of the contract, the contractor may be entitled to an extension of time and an adjustment to the contract price to account for any resulting increase or decrease in costs.

References 

  • https://legal.thomsonreuters.com/blog/the-principles-of-contract-law/
  • https://www.law.cornell.edu/wex/contract
  • https://ogc.asu.edu/contracts/contracts-background-definition