Legal Aspects of Contract Management

February 24, 2012 | Author: PM Hut | Filed under: Procurement Management

Legal Aspects of Contract Management
By Michael L Young

While procurement and contract managers are not expected to be legal experts, it is very difficult to manage a contract well without a basic understanding of the key elements to a contract and the meaning of significant terms and clauses.

The Australian public service has been highly criticized from being “risk averse” what does this mean for a contract manager? There is a distinction between a good contract manager and a bad contract manager:

  • A bad contract manager is not very well qualified and applies or thinks that they are following the rules for the sake of the rules even if it means a less than desirable outcome in business terms.
  • A good contract manager is well-qualified and asks how can we interpret the law responsibly and reasonably to ensure the best possible business outcome.

Law and rules were created to serve society rather than society serves the law and rules.

In this article I examine some of the legislative areas pertaining to contract management that every Contract Manager should be aware of:

Estoppel by Conduct

Estoppel by conduct is a form of estoppel relevant to contract managers, and is based on the concept that a party cannot deny a circumstance if their actions and statements are inconsistent. In other words, a contract manager can be estopped from demanding services to be delivered in accordance with a contract if they have previously:

  • Verbally accepted services that were delivered in a manner inconsistent with the contract,
  • Done nothing to correct services that were delivered in a manner inconsistent with the contract.

Common Law Provisions

There are also common law provisions which can impact on the form, legality and conduct of building contracts. These common law provisions include: ยท

The legal requirements for formation of a contract, including an offer, acceptance of the offer, payment of consideration, the legal intent to form a contract and the capacity of the parties to enter into a contract.

General obligations placed on both parties to a contract, for example that neither party should do anything that might prevent the other party from fulfilling their obligations under the contract.

Privity of Contract

The doctrine of privity of contract means that only the parties to a contract are legally bound by and entitled to enforce it. (Only they have rights within that contract). Consequently, a contract between A and B cannot impose obligations on C; conversely a contract between A and B cannot be enforced by C, even if the contact is intended to benefit C. This can be an issue where contracts are intended to benefit a third party and the third party is reliant upon this. Exceptions may be put in place to limit harsh results. The doctrine of privity of contract applies only to contractual rights and obligations, any non-contractual rights and obligations may not be enforceable.

Liquidated Damages

A sum of money (agreed-to and written into a contract) specified as the total amount of compensation an aggrieved party should get, if the other party breaches certain part(s) of the contract.

For example, if the builder fails to complete the contract within the specified time (including any agreed time extensions), the owner may be entitled to claim liquidated damages.

This benefits both parties for providing contractual certainty not requiring proof of loss simplifying disputes including performance providing a cap on liability. However, the quantified amount of liquidated damages must be a genuine pre-estimate of loss. If a court considers this amount to be excessive it may categorize it as being a penalty, leading to the clause becoming unenforceable and therefore the benefits will be lost.

As a contract manager you should always refer contract issues to your agency’s legal area, possibly just for a second opinion, to be sure that way you are interpreting a contract and the actions you wish to take are valid.

Michael Young is Principal Consultant with ‘Transformed’ - Project Management Unleashed. http://www.transformed.com.au

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