Chapter Two

Introduction to the Law of

Contract
 Introduction to the Law of
Contract
1. Background
2. Definition & Types of Contract
3. Elements of Contract - Formation
4. Effects of Contract
5. Extinction of Contractual
Obligations
6. Proof of Contract
 Background
 a contract is an agreement or willful promise
enforceable at law.
 However, not all agreements or promises are
contracts. Some may lack enforceability at law.
 A construction contract is a product of an
agreement between the employer & the contractor
& it is enforceable at law.
 ‘Enforceable at law’ means that if the agreement
reached between the employer & the contractor
breached ( deviations occur from the
promises) by one of the parties, the aggrieved
party, either the employer or the contractor, may
bring a legal action against the other to demand the
enforcement of its rights with the support of law.
 Background…Continued
The general Law of Contract is governed
under the Civil Code from Article 1675-
Article 2026.
 Except otherwise provided by the
provisions of the Special Contracts, the
provisions of the general Law of Contract
shall apply.
The Special Contracts are provided
under;-
 the Civil Code;
 the Commercial Code;
 the Maritime Code; and
 Other special applicable laws;
 Background…Continued

Under the Civil Code

The following are illustrative of Special Contracts

provided under the Civil Code:

 Contract of Sales ( Article 2266-Article 2407);

 Contract of Donation ( Article 2427-Article 2470);

 Contract of Loan ( Article 2471-Article2489);

 Hiring Sale (Article 2412-Article 2415); NB: This is relevant

in case of hire purchase agreements with respect to
construction equipment & construction machinery.

 Contract of Supplies (Article 2416-Article 2426); NB: This is

relevant for the supply of Goods.
 Background…Continued
Contracts for the Performance of Services:
 Contract for Work & Labour (Article 2610-Article
2631); NB: This is relevant for Construction Services.
 Hiring of Intellectual Work (Article 2632-Article 2638);
NB: This is relevant for architectural, consulting
engineering services & other professional services.
 Contract of Work & Labour relating to Immovable
( Article 3019-Article 3040) ( NB: This has specific
relevance with respect to Building Contracts);
 Please, consider these types of contracts with that of
the provisions of the Administrative Contract below.
 Background…Continued

Administrative Contracts ( Article 3131-Article

3306); of the Civil Code; NB: Consider also the
compulsory application of the provisions of the Law
of Administrative Contract in case of Public
Procurement as per the Standard Conditions of
Contract developed by the Public Procurement
Agency(PPA) on the basis of its power provided
under Proc. No. 649/2009.
 Concession of Public Services; (Article 3207-Article 3243);

 Contract of Public Works (Article 3244-3296);

 Contract of Supplies ( Article 3297- Article 3306)

 Background…Continued
 Contract with respect to Compromise (Article
3307-Article 3324); (NB: This is important in
case of direct or assisted negotiation.)
Contract with respect to Arbitral Submission
(Article 3325-Article 3346); (NB: This is
important in case of resolution of construction
disputes by way of arbitration.)
 Definition & Type of Contracts
Definition of Contract
According to Article 1675 of the Civil Code:
 A contract is an agreement whereby two or more
persons as between themselves create, vary or
extinguish obligations of a proprietary nature.
The definition contains the following elements. These
are:
 That the contract is an agreement;
 The agreement is to be made between two or more persons;
 That the agreement is binding between such two or more
persons;
 The agreement is to create, vary & extinguish obligations;
 The agreement is to create obligations
 That the nature of obligations is proprietary;
 Definition of Contract…Continued
The construction contract clearly fulfils all the elements given to
the definition of contract.
 The Form of Agreement, in the construction contract, clearly presents
the Agreement reached between the employer & the contractor.
The most common contract relationships created by
modern construction projects are:
 The owner and design professional
The owner and contractor(s)
The owner and consultant(s)
The contractor and subcontractor(s)
The contractor and the surety
 In principle, contracting with oneself is
impossible. Is it possible by way of exception, to
contract with oneself? If yes, how? If not, why
not?
 Elements of a contract/Formation of a contract

Every contract is an agreement, but not

every agreement is a contract.
For a contract to be enforceable in front of
law, the following requirements must be
satisfied.
According to Article 1678 ( Elements of
Contract) of the Civil Code:
 Offer and acceptance (Agreement)
 Competent parties (Legal capacity)
 Consideration
 Legality of the object
Formalities (some contracts must be in writing or
in a form acceptable by law)
 Elements of Contract

.
Consent Legal capacity Legality of the object

Consideration Formalities

Contract
 1. Consent

Consents sustainable at law

Please, see Article 1678 (a) and Article 1679- Article 1710 of the
Civil Code)
Consent is a declared will of the individual to enter in to contract.
 It is the willingness of the parties to enter in to a legally binding
relation.
 Consent of the intended contracting parties decomposes in to :-
 Offer; and
 Acceptance;

If the parties don’t give their consents sustainable at law, a

contract wouldn’t be upheld. Here the emphasis is to make sure
that the parties making the agreement are doing it so with their
full consent. It is to iterate that the parties are willing to be
bound
 Offer
Offer is defined as a proposal expressing the declared
willingness of the offeror to enter in to an agreement, if
the offer is accepted.
An offer is an expression that one party is willing to be
bound by specific terms which are setout in the contract.
(For example a bid by a contractor promising to construct
a project constitutes an offer). We say a contract is
complete when an offer by one party is accepted without
condition by the other party and hence the two parties
are willing to be bound by their agreement.
According to the Civil Code, an offer or acceptance can
be made:
 In writing or orally
 By signs normally in use
 By conduct of the parties
 Acceptance
A contract does not exist until the offer is
accepted by the other party (for example when
the owner notifies the winning contractor that his
offer has been accepted a contract is formed). For
an acceptance to be deemed valid, it must be:
 Absolute - i.e. accepting all the terms of the offer
 According to art-1694 of the Code, an offer shall be
deemed to be rejected and a new offer shall be
deemed to be made where the acceptance is made
with reservation or does not exactly conform to the
offeror.
 There must be an indication of consent - i.e. silence
does not indicate acceptance
 The acceptance must be communicated to the offeror
 2. Capability

Capability of parties
  Capacity means competence to enter in to a legally
binding agreement.
 Legal capacity is of two types: Personal (Own)capacity;
and Representative(Agent)capacity;
 The agreeing parties should be capable of contracting
and give their consents sustainable at law
 According to this provision, no agreement is deemed an
enforceable contract if any of the parties is incapable of
contracting. Capability of persons is defined in the
introductory part of this course as stated in Article
1678(a) of the civil Code. Just as an example, an
agreement with a minor (under the age of 18.) is not
deemed as an enforceable contract. As is agreements
with those considered mentally in competent, mentally
ill, under the influence of alcohol and other drugs
 Capability…continued
The following may not have (legal) capacity to enter
in to contract & bind themselves. These are:-
 Minors (under the age of 18);
 Companies adjudged or declared bankrupt;
 Judicially interdicted persons;
 Legally interdicted persons;
 Persons, whose civil rights are suspended by the judgment
of the court;
 Non-nationals, unless permitted by law or special
prerogative;
 Non-authorized Agents;
 Agents, whose Power of Attorney has been revoked;
 Agents , the Scope of their Power of Attorney does not
cover the intended transaction(ex. Tendering or
Negotiation or Contract Signing, .); and
 Others;
 3. Consideration
 Consideration is 'the price for the promise'. I.e it is what
one party can get from the other party in return for performing
contract obligations.
 Consideration involves a benefit moving from the offeree to the
offeror in exchange for the promise. Usually it is money or a
promise to pay money but it can also be some other benefit.
 Consideration must be: 
 Of some value, but not necessarily adequate
 Additional to the duty in the law
 Additional to previous contract agreements
 For a future act 
• If one party makes a promise and the other party offers nothing
in return for that promise, the promise is unenforceable due to
lack of consideration. This can best be exemplified by a charity
organization withdrawing its promise to do something without
expecting anything in exchange. The decision to keep the
promise is at the discretion of the charity organization.
 In case of a construction contract, if a contractor
 4. Legality of the object
 The objects of the contract is sufficiently defined and is possible
and lawful 
 The object of the contract is the obligation to perform
something. The lack of an object or an effective (defined,
possible, lawful, and freely determined by the parties) object
prevents the formation of contract, makes it non-existent, of no
effect, null and void. Impossible object can be objects that
couldn’t be fulfilled by an average person of the contracting
party’s capability (for example to sale a house which you don’t
have) while illegal objects are those which are not permitted or
are immoral to perform. Such activities may be like agreements
to commit crimes or civil wrongs, agreements which may injure
the state, drug lording/trafficking, promotion of corruption,
agreements which limit a person's ability to carry out trade, etc.
 Please, see Article 1678 (b) cum Article 1711, Article 1718 of the
Civil Code)
 5. Formalities
  Form may mean types of contract.
 Form may also mean the making of the contract orally or in
writing.
 In this case, form is related with the validity & proof of the
contract itself.
 Should the contract is to be made in certain prescribed form, it
means that contract should be made in writing. See Art. 1719
 The contract is presented in the form provided by law, if any
 If there is no special form provided by law, the parties can agree
the contract to be in the form that suites them. However, the law
usually stipulates special form for some trades. For example, a
contract involving an immovable object should be in a written
form and needs to be registered by the authorities. Similarly, any
contract involving public organizations should be in writing. As do
contracts of long time such as of guarantee, insurance contracts.
See Article 1727 of Civil code
 Formalities…continued

If the contract should be made in writing, the following

additional legal formalities have to be fulfilled, namely:
 There must be a special contract document prepared for that
purpose; (ex. Form of Agreement, which summarizes the whole
Agreement & sets out the whole contract document);
 On that document (including on the whole pages of all the
Contract Documents) the parties to the contract agreement shall
put their signature; see Art. 1728;
 In case of body corporate, their corporate seal has to be affixed
on all parts or pages of the contract documents;
 The contract agreement shall be attested, at least, by two
witnesses. The witnesses shall also sign the contract agreement
but only on the designated space in the contract agreement. (Ex.
On the last page of the Form of Agreement); see Art. 1729;
 Then, the contract said to be, legally, formed or created.
 Formalities…continued
Agreement (part 3 section 9 PPA 2006 Contract Form)
 Procurement Reference No: -----------------
 THIS AGREEMENT made the _____ day of _______, _____,
between _____________of _______ (hereinafter “the Employer”),
of the one part, and ____________ of ________ (hereinafter “the
Contractor”), of the other part:
 Whereas the Employer is desirous that the Contractor execute
______________ (hereinafter called “the Works”) and the
Employer has accepted the Bid by the Contractor for the
execution and completion of such Works and the remedying of
any defects therein for the Contract Price of the equivalent of
Ethiopian Birr ________ (___________).
 NOW THIS AGREEMENT WITNESSETH AS FOLLOWS:
 1.In this Agreement, words and expressions shall have the
same meanings as are respectively assigned to them in the
Contract referred to.
 2.In consideration of the payments to be made by the
Employer to the Contractor as hereinafter mentioned, the
Contractor hereby covenants with the Employer to execute and
 Formalities…continued
 The Employer hereby covenants to pay the Contractor in
consideration of the execution and completion of the Works and the
remedying of defects therein the Contract Price or such other sum
as may become payable under the provisions of the Contract at the
times and in the manner prescribed by the Contract.
 The Contract Price or such other sum as may be payable shall be
paid __________ percent in Ethiopian Birr.
 IN WITNESS whereof the parties thereto have caused this
Agreement to be executed in accordance with the law specified in
the Special Conditions of Contract on the day, month and year
indicated above. 
 Signed by ___________________________ (for the Employer)
 Name:______________________________
Position:__________________________
 Signed by ___________________________ (for the Contractor)
 Name:______________________________
Position:___________________________
Witnesses
1. ----------------------- 
2. -----------------------
 Effects of Contract
Effects of contract may have two dimensions;
 The time when the contract is considered bound by the contracting
parties; and
 The fulfillment or performance of the set of promises prescribed in
the contract;
 The first dimension relates to the effectiveness of the contract,
whereas the second is related to the performance of obligations of
the contracting parties under the contract.
 Effectiveness of the Contract (Time Dimension)
 This may be expressed in the following three ways: Contract is
effective and thus is binding on the contracting parties from the
moment of the conclusion of the contract;
 Contract can be considered effective after some days are passed
from the conclusion of the contract; and
 Contract can be considered effective after the performance of some
actions by the contracting parties; ex. Making advance payment a
condition precedent for the effectiveness of the contract. Securing
approval of the contract by higher authorities; Other pre-conditions, if
any; This has a time dimension.
 Effects of Contract…Continued

Performance of the Contract (Discharge Dimension)

 This concept is related to the Latin maxim: pacta sunt servanda- one
who enters into a contract is legally bound or agreement to be kept.
Effects of contract may bring:-
1. Contractual effects; and /or
2. Legal effects;
 Contractual Effects
 The discussion refers the contractual provisions (Sub-clauses) of the
MDB-FIDIC Harmonized Edition Contract Conditions & the Civil Code.
 According to Article 1731 of the Civil Code:
 A contract lawfully formed shall be binding on the parties as though they were
law;
 The contents of the contract shall be determined by the parties subject to the
mandatory provisions of law;
 The lawful or valid formation of contract is related with the fulfillment
of all the four elements of contract, namely, capacity, consent, object,
and form, if any.
Validly formed contracts are binding on the contracting parties, as
they were law.
It means that contracts are producing rights, obligations & privileges
& there with remedial rights to & liabilities against the contracting
parties.
 Effects of Contract…Continued
Major Areas of Effects of Contract
 Effects of contract basically concerned with the
following four issues. These are;-

i. Interpretation of Contract; - (Article 1732-Article

1739 of the Civil Code);

ii. Performance of Contract; -Article 1740-Article 1762

of the Civil Code);

iii. Variation of Contract; - (Article 1675 & Article 1763-

Article 1770 of the Civil Code);

iv. Non-performance of Contract; - (Article 1771-

Article 1805 of the Civil Code)
 Effects of Contract…Continued
i- Interpretation of Contract
 Interpretation, generally, means the process of
determining the true meaning of a written document.
Interpretation is a judicial process, affected in
accordance with a number of rules & presumptions.
 Conditions of contract, based on the principles of
interpretation of contract, are interpreted, depending
on the circumstances:
 Interpretation may be classified in to:- Formal
interpretation; and Informal interpretation;
 Effects of Contract…Continued
. Interpretation of
Contract

Formal Informal
Interpretation Interpretation
By the By the
By the contract By the
By arbitral Conditio
ing Engineer
the tribunal ns of (FIDIC
Contract parties Clause20.1)
court (FIDIC cl. (Civil Code By the
20.6) (FIDICClaus
Art. 3307-
e1.2)
3324 )
Adjudicato
r
(Article 25-26
 Effects of Contract…Continued

ii- Performance of Contract

Performance of Contract may mean the carrying out or discharge of
the obligation under taken by the contracting parties under the
contract.
 for example, the Contractor & the Employer, under the construction
contract i.e.
 promise dimension; and
 consideration dimension.
 The effect of contract is fulfilled by performance of the very
contractual obligations of the contracting parties.
 It means that :
 the Contractor has executed the works within the time for completion, within
the cost agreed, as per the quality specified; and
 the Employer has paid fully the Contract price, and any other sums agreed
under or implied from the contract, to the Contractor;
 Both parties have discharged their obligations, as agreed. They have
given full effect to the contract.
 Effects of Contract…Continued

iii- Variation of Contract

Variation of Contract could be done:-
 By the contracting parties, contractual variation, (as a rule); or
 By the Court, judicial variation, (as an exception);
 Variation of Contract by the Parties
 The contracting parties, in principle, are free to create & vary their
contractual agreement. (See Article 1675 of the Civil Code).
 Variation of contract & its effect are regulated under the Conditions
of Contract. See Sub-clause 13-Variations & Adjustments; Harmonized
Edition;
 Variation of contract, under the construction contract, may result
from:-
 Requirement change by the employer,
 Design change by the engineer;
 Proposal by the contractor;
 By variation, parties are giving a modified effect to their contract &
perform the Contract, as varied.
 Judicial Variation of Contract (Article 1763-Article 1770 of the
Civil Code)
 Invalidation of contract!
 Reasons to invalidate ,Void and voidable contracts
 Mistake (see Art. 1697-Art. 1703 of the Civil Code)
 Mistake is defined as a misunderstanding of or erroneous
belief about a matter of fact or a matter of law.
 Mistake is, therefore, divided in to: Mistake of law; and
Mistake of fact;
 Mistake of law could be:-Mistake of the law of the country;
or Mistake of foreign law;
 Mistake of fact could be, common, bilateral or unilateral
mistake, and related to the following factual
circumstances:
 Mistake as to the subject matter of the contract;
Mistake as to the possibility of performance of the
contract;
 Needs to be fundamental that the plaintiff wouldn’t have
entered the contract had it not been for the mistake
Not mistakes to the motives that led to the
 Invalidation of contract!

Fraud (Deception) (see Art. 1704-Art. 1705 of the Civil

Code)
 Fraud means a false representation, by means of a statement,
conduct made knowingly or recklessly in order to gain a
material advantage.
 Fraud is divided in to:- Decisive fraud; and Incidental fraud;
 Principal or decisive fraud Vs Incidental fraud (could have
contracted but at a higher cost)
• Only principal frauds can lead to invalidation of
contract, incidental fraud can only lead to
compensation (See Art. 1696 cum Art. 1704(1) of the Civil Code).
 Deceit by a third party is no ground to invalidate a contract
unless the contracting party knew the fraud and took
advantage of it.
 May have a three fold effect
 Invalidation of contract
 Compensation of injured party
 Penalty under penal code
 Invalidation of contract!
 Duress (see Art. 1706-Art. 1709 of the Civil Code)
‘Duress’ is the compelling of a party to consent
to a contract by threats of grave imminent harm
to such party or his ascendants, descendents or
spouse
Impending danger may relate to life, person,
honor or property
Duress by a third party is ground to invalidate
but plaintiff may have to pay for damage
Duress can have threefold aspect
A contract aspect leading to invalidation
A tort aspect leading to compensation for
damages
A penal aspect leading to punishment under
the Penal Code
 Invalidation of contract!
False statement
– false information to another where he
knows that the latter acts upon the
information
– Can be caused by silence
Unconscionable contracts
– If made by taking advantage of his want,
simplicity of mind, senility or manifest
business inexperience
– Can’t be claimed on the sole reason that
it favors one party.
 Discharge of Contract!
Performance
– Contract should be substantially completed unless
specially required
– Eg. Construction contracts are said to be complete
at Substantial Completion with provisions for defect
correction within the liability period.
– Meaning of ‘substantial completion’ may be defined
in the Contract (for example completion of all the
terms of the contract to the required standard)
Agreement
• Mutual agreement (agree to cancel the contract)
• By Novation (to vary the contract)
• By accord and satisfaction (even though there is
variation to performance required)
 Discharge of Contract!

Frustration
 (contract was executable at the time of
agreement but subsequent events (out of
control of both parties) made it impossible
(not harder or more expensive))
• Force majeure (war, earth quake, natural hazard)
Breach
 (failure to carry fundamental obligations
under the contract)
– Leads to compensation and/or termination
– Famous in construction as liquidated
damage
 Types of Contract

Contracts may be classified based on

certain criterion.
• For example, in terms of:-
 Reciprocity of rights & obligations;
 Time parameter for the performance of
the
assumed respective obligations;
 Form requirement;
 The presence of freedom of negotiation
or not;
 Obligation of result or diligence; and
 Other criterion;
 Types of Contract…Continued
Contracts for the execution of civil
engineering works are of following type:
 (a) Lump sum contract

 (b) Unit rate contract/Unit Price or Bill of

Quantity
 (c) Lump sum and schedule contract

 (d) Cost plus fixed fee contract

 (e) Cost plus percentage of cost contract

Construction Project Delivery System
 Design-Bid-Build (D-B-B);
 Design-Build (D-B);
 Construction Management (CM At Free &
At Risk);
 Design .Build- Operate (D-B-O);
 Design-Build-Operate-Maintain (D-B-O-M);
 Design-Build-Finance-Operate (D-B-F-O);
 Full Delivery or Program Management;
 Build-Own-Operate (B-O-T);
 Build Own Operate Transfer(B-O-O-T);
 GroupWork & Presentation
Assignment (35%)
1. Employer.s Obligation: its Regulation
under the MDB-FIDIC & PPA Conditions of
Contracts & the Applicable Law: with
special emphasis to Design, Site &
Takeover
2. Time: its Regulation under MDB-FIDIC &
PPA Conditions of Contracts & the
Applicable Law: with special emphasis to
Delay & Disruption Claims
3. Variation: its Regulation under MDB-
FIDIC & PPA Conditions of Contract and
the Applicable Law
 GroupWork & Presentation
Assignment (35%)
4.Quality & Quality Deviation: its Regulation
under MDB-FIDIC & PPA Conditions of Contracts
& the Applicable Law
5. Cost & Cost Overrun: its Regulation under the
MDB-FIDIC & PPA Conditions of Contracts & the
Applicable Law: with special emphasis to Price
Adjustment
6. Payment : its Regulation under MDB-FIDIC &
PPA Conditions of Contracts and the Applicable
Law
7. Claims & Disputes: their Regulation under
MDB-FIDIC & PPA Conditions of Contracts and
the Applicable Law: with special Emphasis to
Adjudication
 GroupWork & Presentation
Assignment (35%)
8. Contractors Obligation: its
Regulation under the MDB-FIDIC
& PPA Conditions of Contracts &
the Applicable Law: with special
emphasis to Design,
construction, Quality, Cost, Time
 Contract

Local Construction
 Public Condition of Contract
• The Standard Conditions of Contracts
in use in Ethiopia i.e. the Conditions
of Contract:
» Of the MoWUD( Ministry of Works & Urban
Development); and
» PPA (Public Procurement Agency) under
the Ministry of Finance & Economic
Development).
• The PPA Conditions of Contract is
issued in January 2006 and 2011.
• it is applicable to all possible sorts of
public procurement.
• The 2006 PPA GCC is composed of 62
46
Clauses
 Public Condition of Contract
– It contains the following five parts.
– General; (Clause 1-Clause 26)
– Time Control; (Clause 27-Clause 32)
– Quality Control; (Clause 33-Clause
36)
– Cost Control; (Clause 37-Clause 54)
– Finishing the Contract; (Clause 55-
Clause 62)

47
Public Condition of
Contract

General
(Clause 1-Clause 26)

48
 Priority / Precedence
• All efforts should be made for the documents to be
supportive of each other.
– If discrepancy [most GCCs –PPA-also usually clearly
stipulated in the PCC] provide provisions for overruling:
– Agreement
– Letter of acceptance
– Contractor’s bid
– Special Conditions of Contract
– General Conditions of Contract
– Specifications
– Drawings
– Bill of Quantities or Activity Schedule
• .ContractProferentum
• Ruling law - the law of the country the work in
executed.(FDRE)
– International contractors prefer international laws and chamber of
arbitrations.
49
 Communication

• Overruling language: As much as possible, in

the lang the two parties understand most.
– If there are more than one lang used, the
overruling language needs to be stated
• Communications shall be effective only when
in writing.
• A notice shall be effective only when it is
delivered

50
 Employer
• Has responsibilities to:
• Pay the due payments for the contractor;
• Provide the site and right of access to it in
due time;
• Look into the statutory aspects of the
construction such as permission to
construct, custom clearance etc;
• Employer’s personnel and other contractors
to cooperate with contractor;

51
 Power of Engineer

• His authorities can be limited [by specifying

matters he needs to get approval from the
Employer on PCC)
Care must be taken not to stifle the engineer’s
performance by overly limiting his authorities
Most issues limited are:
Consenting with contractor to the sub-
letting of part of the works
Certifying additional cost determined
Awarding an extension of time

52
 • Issuing variation, which exceeds XXX
amount
• Issuing variation, if the sum of all
variations issued has exceeded X% of the
Contract Price;
• Certifying payment if the contract price
will be exceeded;
• Issuing any taking-over certificate;
• Authorising the use of provisional sums in
excess of the monetary limit for variations;
• Certifying additional payment
• Issuing Defect Liability Certificate
– Risky (emergency) situations are
always exempted 53
 Engineer’s approval
• In most cases the Engineer’s approval
doesn’t relieve the contractor of his
duties.
• Even the engineer’s approval of as built
drawings may not relieve the contractor
of his duties if work wasn’t executed
accordingly

54
 Sub contract
• Subletting
• Usually not allowed to sublet the whole work
• Is to be held responsible for the performance of his
subcontractors;
• Require Engineers approval and without the
approval of the Employer in writing.
• Some countries specify trade contracting in the first
place (to encourage SMMEs)
• Subletting doesn’t include provision of labor, supply
of material according to spec, subcontracting to a
pre-declared contractor

55
 Risks
• Employer's (Excepted) force majuere risks
• War, hostilities, rebellion, revolution
etc
• entitle the contractor for Excusable
delays or Excusable compensable
delays
• Contractor is not normally required
to insure for such risks
• However, some of these risks are
insurable (eg defaults from designer),
• Employer can insure for such risks but
can also provide the premium to
contractor to insure together with 56
contractor’s risks
 Insurance of work
• Under PPA, Contractor need to insure
– Loss of or damage to the Works, Plant, and
Materials;
– Loss of or damage to Equipment;
– Loss of or damage to property (except the
Works, Plant, Materials, and Equipment) in
connection with the Contract; and
– Personal injury or death.

57
 Further Requirements
• Evidence requirment.
• Adequacy ( notification of changes)

58
 Cost of Insurance
• Premium is an amount to be paid for a
contract of insurance
• Contractor’s should include cost of
insurance in their tender
• they should be provided details of
information , excess levels etc

59
 Excess / Deductibles
• Purpose of specifying excess levels in
tender documents
• Excess level affect the premium
• Common bases for pricing
• Excess levels requires the insured to
suffer the first part of any claim . Makes
him take care and exclude trivial claims
which incur insurers administration costs
greater than value of claim

60
 others
• Remedy on contractor’s failure to insure
• Insurance in the joint names
• Cross liability clauses
• Indemnity

61
 Site inspection & Tender
sufficiency
• Contractor encourage to inspect site before
tender and satisfy himself:
– necessary information, so far as is practicable, having
regard to considerations of cost and time, as to risks,
contingencies and all other circumstances which may
influence or affect his Tender
• form and nature thereof, including the sub-surface
conditions,
• the hydrological and climatic conditions,
• the extent and nature of work and materials necessary for
the execution of the Works
• the means of access to the Site and the accommodation he
may require,
• Availability of resource and skill
• No enough resource and time to carry out thorough
investigation
– Employer is asked to make available information
• Usually collected for design purpose (design (review)
report) 62
• The omens on interpretation lies on the contractor
 Site inspection & Tender
sufficiency
• Tender submitted is assumed to
made with due consent and
satisfaction of contractor
– If an unusually adverse conditions occur
(which couldn’t have been foreseen by a
knowledgeable contractor), contractor
can be compensated for time or/and
cost.
– Interpreting ‘unusually adverse
condition’ is a major matter of dispute
63
 Time

Time Control
(Clause 27-Clause 32)

64
 Program
• Often submitted before signing
Agreement Form and needs to be
approved by Engineer
• Mobilization (if applicable) and detailed
work programme.
• The details and time for submission to be
stated in the special condition of contract.
• The Engineer’s approval of the Program
shall not alter the Contractor’s obligations

65
 Extention of Time
 Disruption Claims
 Prolongation Claims
 Acceleration
 Concurrent Delays
 Successive Delays
 Critical and Non Critical Activities
 Time at Large

66
 Extention of
Time...Continued
• Usually incorporate possibilities of
extension of the intended completion time
• Otherwise, given the possibility of
change clauses, time may be put at
large
• Under time at large condition,
Contractor expected to complete
work in a reasonable time

67
Quality Control
(Clause 33-Clause 36)

68
 Execution of the work
• Contractor is obliged to perform the work, with
due diligence, with strict conformity of the
contract (provided that it is legally and physically
possible) and to the satisfaction of the Engineer
• Work to be in accordance to the drawings and
specifications
• If specs and drawing are generic, work and material to be
of the highest quality-that approved by the Engineer
• Contractor should care for the work executed
and keep it safe
• The contractor controls the resources and runs
the execution of the work;
• The site operations, construction methods and programms
of execution should be left for him;
– However, Engineer can disapprove programs and
construction methods if feels doesn’t conform with contract or
safety;
69
 Key Resource Deployment
• Contractor is expected to comply
with:
– Key personnel requirements
– Key equipment requirements
– Make workmanship to the quality
specified
– Use the appropriately specified
materials
– keep the operations safe, etc
• The Engineer is at liberty to
disapprove: 70
Workmanship and Material
• Contractor is expected to execute
the work
– Using quality material and
workmanship specified for
– If, upon inspection, work is not to
quality specified contractor will be
asked to rectify
• Cost of inspection could be covered by
contractor if work was faulty

71
Cost Control
(Clause 37-Clause 54)

72
 Contract Type
• An Admeasurements Contract with a Bill
of Quantities
• A Lump Sum Contract with an Activity
Schedule

73
 Change in BOQ
• Rate will be adjusted if the
increment or decreament of quantity
exceeds:
– in the Bill of Quantities for the
particular item by more than 25%
– the change exceeds 5% of the Initial
Contract Price.
– Both condition have to be satisfied
• The rationale for this is that the basis of the
tender is no longer be valid if the quantities
either increase or decrease substantially. 74
 Change in
BOQ...Continued
• Clients prior approval is required if thereby the
Initial Contract Price is exceeded by more than
15 %, .
• The Contractor will submit detail costbreak down
if requested by the Engineer.

75
 Variation
• Increase or decrease the quantity of any
work (other than by re-measurement).
• Omit any such work.
• Change the character or quality of any such
work.
• Change lines, levels, dimensions.
• Execute (necessary) additional work.
• Change the sequence or timing of
construction.

76
 Variation...Continued
• Variation should be within the scope of
the work
• Provide provision for procedures and
conditions to fix rates of altered items
• In most cases, Engineer given the
authority to give change orders and
fix rates
• Note: A contractor is not required to
sign, approve or even agree to a variation
order. It is an order to do certain works.

77
Variation...Continued
• the Contractor shall provide a
quotation for carrying out the
Variation
• If the Contractor’s quotation is
unreasonable, the Engineer may
order the Variation and make a
change to the Contract Price
• Provisions for contractor to
disagree but still execute

78
 Payment
• Contractor shall submit to the Engineer
monthly statements .
• The Employer shall pay the Contractor
within 30 days.
• Interest(at prevailing bank interest rate)
for delayed payment by the client
• Minimum interim amount shuld be
specified

79
 Payment Form
• Work Done
plus Variations
plus Dayworks
plus Contract Price Adjustment (CPA)
less Retention
plus Materials on Site (MoS)
less Advance Payment repayment
plus Any other amount

80
 Compensation Events
 Failure to give possession of site
 Delay in issuing drawing
 Adverse physical, political or economical
conditions
• Delay in Advance payment .
 The effects on the Contractor of any of the
Employer’s Risks.
• Contractar to uncover or to carry out
additional tests upon work, which is then
found to have no Defects.

81
 DayWork
Variations where it is necessary or
desirable to instruct work on a daywork
basis e.g emergency work, or other works
where BoQ rates do not apply or cannot
be extrapolated.
• Daily records.
• Monthly statement.

82
 Contract Price Adjustment
Sub-Clause 47.1.
Increases or decreases to be determined
in accordance with Part II (Particular
Conditions).

 recommended for projects lasting over

one year

83
Methods of Calculating CPA
• The most common methods are
– Proven Cost Method
– Formula Method

84
 Cost Control
• contractor is required, at tender stage, to
detail those elements of his costs which
he requires to be subject to CPA.
• These details include the actual cost and
supplier of the various elements upon
which the tender was based.
• The contractor is then reimbursed the
difference between these “Basic Costs”
and the "Actual" invoiced cost of those
same items when they are purchased.
85
 Proven Cost Method
Description Unit Qty Basic Price Current Price
Difference CPA
Cement qt 200 300.00 400.00
100.00 20,000.00
Diesel l 1000 10 15 5.00
5,000.00
Total CPA for this Month (Birr)
25,000.00

86
 Formula Method

Pn= a + b Ln/Lo + c Mn/Mo + d

En/Eo + etc.
Where: Ln, Mn, En, etc., are the current cost
indices
Lo, Mo, Eo, etc., are the base cost indices

 PPA uses formula method of CPA

87
 Formula
Method...Continued
• Base date = 28 days prior to the deadline
for bid submission
• The sources of indices shall be those
listed in the Contractor’s Bid, as approved
by the Engineer.

88
 Retention
 5% limit.
 Withhold 10% of IPC until 5% limit
reached.
 50% released at Taking Over.
 50% released at Defects Liability
Certificate.
 The contractor can replace it with
Retention Money Guarantee.

89
 Advance Payment
• Interest free Up to 30% to the Contractor
for mobilization and front end expenses
for that specific project
• Repaid by deductions from IPC’s.
• Exact terms and conditions of this loan
contained in Particular Conditions and the
Appendix to Tender.
• The retention on each IPC is calculated as
a % of the total value of work done
(including variations, dayworks and CPA) .

90
 Advance
Payment...Continued
• Unconditional Bank Guarantee in a
form and by a bank acceptable to the
Employer, denominated in Ethiopian Birr in
the amount of the advance payment.
• The Guarantee shall remain effective until
the advance payment has been repaid
• The Contractor is to use the advance
payment only to pay for Equipment, Plant,
Materials, and mobilization expenses
required specifically for execution of the
contract(supported by invoice)
91
 Any Other Sum
• Interest on late payments.
• Claims. Clause
• Bonus Payments (if applicable).

92
 Liquidated Damages

• Sub-Clause 49.1.
• Pre agreed amount stated in the Appendix
to Bid
• Types of damages by the client
– The additional cost of supervision consultants.
– Benefit obtained from completion of the
project

93
Finishing the Contract
(Clause 55-Clause 62)

94
 Completion
• Contractor shall request the Engineer to
issue a certificate of Completion of the
Works.
• The Employer shall take over the Site and
the Works within seven days of the
Engineer’s issuing a Certificate of
Completion

95
 Hand over
• Upon substantial completion, contractor can ask
for taking over certificate
– Work need to pass inspection and contractor
promises to rectify defects and complete
outstanding works during defect liability period
• Taking over can be partial
• Final certificate is issued after defect liability
period
– Contractor is supposed to hand in as built
drawings and maintenance manual the work

96
 Final Payment
• Final payment
• Payments after certification of
acceptance-after defect liability
period
• Net balance including retention
money
• Due within reasonable days of
submission of final statement

97
 Termination
• Contracts can be terminated if one side
defaults to annul/nulify the contract.
– PPA
• Not planned or unauthorised stopage by
contractor (for 28 days)
• Instruction by engineer to delay the work that
stood long (more than 28 days)
• Liquidation (other than reconstruction or
amalgamation) or bankruptcy by Employer or
Contractor;
• Certified payments not made for a long time (more
than 90 days after certification)

98
 Termination
• PPA’s provisions
– The Engineer gives Notice that failure to
correct a particular Defect is a fundamental
breach of Contract and the Contractor fails to
correct it within a reasonable period of time
determined by the Engineer;
– Failure to maintain a required Security
– Delay more than by the number of days for
which the maximum amount of liquidated
damages can be paid.
– If the Contractor, in the judgment of the
Employer has engaged in corrupt, fraudulent,
collusive or coercive practices in competing for
or in executing the Contract.
99
 Termination payments
• Termination payments
• If a project is terminated due the
Employer’s defaults
• Payments are to be made as if
contract is discharged
• Compensations for the losses
(including losses in benefits) are also
paid

100
 Adjudication
• Procedures in PPA
– Adjudicator to be proposed by the Procuring
entity in the BDS
– If bidder doesn’t agree can reject, then can be
assigned by a specified Appointing body
– Contractor should forward issue to
adjudicators within 14 days
– Adjudicators should give opinion within 28
days
– If no party refers the case to arbitration within
28 days, decision by the adjudicators to be
binding and final
– Irrespective of decision, cost of adjudicator to
be shared 101
 Contract

International Construction
Contract
 Introduction
This part of the Course deals about international
construction contract based on the FIDIC
international Conditions of Contract.
 The specific FIDIC conditions of contract to be
referred shall be that of the MDB Harmonized
Edition, 2006.
The delivery method adopted by the said
conditions of contract is that of design, bid &
build (DBB).
This condition of contract has been approved by
all major international financial and
development institutions.
Structure of the MDB Harmonized Edition
The said condition of contract is divided in to 20
major clauses & 177 sub-clauses;
 Introduction
The Legal Part
The Contract Agreement;
The (latest) Minutes of Meeting, if any;

The Letter of Acceptance(Award);

The Tender ( NB: Including the Appendix to

Tender, if any);
The Special Conditions of Contract;

The General Conditions of Contract;

Others, if any;
 Introduction
The Commercial Part
The Performance Security Form;

The Payment Security Form;

The Advance Payment Guarantee Form;

The Bid Security Form;

The Insurance Forms;

The Retention Money Security Form;

Others, if any
 Introduction
The Technical Part  
The Technical Specifications;  
The Drawing;
The Bill of Quantities;
Others, if any;
 The Contract Agreement shall also
declare the priority of the Contract
Documents i.e. which Contract Document
shall have precedence or priority over
the other in case of ambiguity or
discrepancy between or among the
relevant Contract Documents.
 MDB FIDIC Harmonized (Edition 2006)
The major clauses are the following:
 Clause 1: General Provisions
 Clause 2: The Employer
 Clause 3: The Engineer
 Clause 4: The Contractor
 Clause 5: Nominated Subcontractors
 Clause 6: Staff & Labour
 Clause 7: Plant, Materials &Workmanship
 Clause 8: Commencement, Delays & Suspension
 Clause 9: Tests on Completion
 Clause 10: Employer’s Taking Over
 Clause 11: Defects Liability
 Clause 12: Measurement and Evaluation

 Clause 13: Variations & Adjustments

 Clause 14: Contract Price & Payment
 Clause 15: Termination by Employer
 Clause 16: Suspension & Termination by Contractor
 Clause 17: Risk & Responsibility
 Clause 18: Insurance
 Clause 19: Force Majeure
 Clause 20: Claims, Disputes & Arbitration
MDB FIDIC Harmonized (Edition 2006)

The said condition of contract

has been supported by two
appendices. The appendices are
related to Dispute Board.
These are:
 General Conditions of Dispute
Board Agreement; and
 Procedural Rules; i.e. in relation
to the Dispute Board;
 Contractual Terminologies
A given legislation defines certain terms in terms of the
contextual application of that same term in that given legislation.
The purpose of that definition is to delimit the scope of
application of that relevant term & the interpretation of same.
Undefined terms may carry their normal meaning.
 On the same principle, the MDB Conditions of Contract have
defined, under its Article 1.1: Definitions, certain contractual
terms
Such contractual terms have been divided in to the following 6
parts:
 The Contract;
 Parties & Persons;
 Dates, Tests, Periods & Completion;
 Money & Payments;
 Works & Goods;
 Other Definitions; like Contractor’s Documents, Country,
Employer’s Equipment, Force Majeure, Laws, Performance
Security, Site, Unforeseeable & Variation;
 Such contractual terms contain documentary, party related, time,
financial, work & other dimensions.
 Obligations of the Contractor
The obligations of the contractor, under the
MDB Conditions of Contract, may be
generalized as follows.
 Completion obligation;
 Quality performance obligation;
 Timely performance obligation;
 Obligation to provide securities, indemnity
& insurance;
 Obligation to supply information & notice;
 Administrative obligation;
 Obligation up on or after completion;
 Let examine each of the contractor’s
obligations, in turn.
 1. Completion Obligation
i. Basic Obligation
1. Clause 4.1 During Performance Period
 Completion of the whole of the Works in accordance with
the Contract up to Take Over(Clause 10) of theWorks;
2. Clause 11.1 During Defects Liability Period
a. Executing outstanding works; and
b. Remedying of defects & damages in the works;
ii. Extent of Completion Obligation
1. Clause 15.1 to execute variations orders;
2. Clause 17. 4 rectification of losses or damages to the
works arising out of the Employer.s Risks;
3. Clause 7.6 executing remedial or urgent works;
4. Clause 9.1 cum Clause 8.2 (a) carrying out of works to
achieve tests on completion for the purpose of Taking
Over (Clause 8.2 (b));
 Completion Obligation…Continueed
iii. Excuses from Completion Obligation
 Clause 19. 7 due to legal or physical impossibility; see also Article
1678 (b) (lawful & possible) cum Article 1715 (1) (.possibility to be
performed) of the Civil Code
 Clause 17. 3 in case of the occurrence of the Employer’s Risks;
 Clause 8.8 in case of suspension of the Works by the Employer;
 Clause 16.1 in case of legitimate suspension of the Works by the
Contractor;
 Clause 16.2 in case of termination of the Contract by the
Contractor due to the default of the Employer;
Clause 15.5 in case of termination of the Contract by the Employer
for its convenience; see also the concept of employer.s termination
of contract for its convenience under Article 3180 of the Civil Code;
 Clause 8.11 in case of termination of the Contract for the whole of
the Works due to prolonged suspension caused by the Employer;
Clause 19.6 in case of optional termination of the Contract by the
Contractor or by the Employer due to prevention of performance by
force majeure; see the legal concept & scope of force majeure
under Article 1792-Article 1794 of the Civil Code;
 2. Quality Performance Obligation
Clause 4.1 & Clause 7.1 using materials, plant
& workmanship as provided in the Contract
specifically in the Technical Specifications;
 Attributes of quality to be embedded in the
Works in terms of;
 Clause 7.1 (a) in case of Plant;
 Clause 7.1 (c) in case of Materials;
 Clause 7.1 (b) cum Clause 6.1 in case of
Workmanship;
 No excuse for defective
performance/execution of the Contract/
Works;
 3. Timely Performance Obligation
Scope of the Obligation
 Timely & effective mobilization by the is required;
 Please, also consider the prior performance obligation of the
employer (like providing site & access there to, effecting
mobilization advance, if agreed, effecting notice to proceed, if
required under the contract,.) for the Contractor to duly
mobilize & commence works;
 Commencement Clause 8.1 (Commencement of the Works);
 Progress: Clause 8.1 cum Clause 8.6 (Rate of Progress);
please, also consider the obligation of the Engineer to issue
working drawings, certifying payments, approving variations.;
 Completion: Clause 8.2 (Time for Completion); please, also
consider effects of delay & disruption by the employer, third
parties and/or the Engineer & other grounds;
 Passing of Tests on Completion: Clause 9 (Tests on
Completion); please, also consider the possible contractual
obligation of the employer in doing some of the required tests
on completion by itself and/or providing some input to the
contractor to undertake the tests on completion;
 Timely Performance Obligation…
Continued
Excuses from Timely Completion Obligation
Clause 8.4 due to Extension of Time for Completion;
 Clause 8. 5 due to Delays caused by authorities;
 Clause 8.8 cum Clause 8. 9 due to Suspension of Work & its consequences;
Clause 8.11 due to prolonged suspension; (NB: If the performance of Work
resumed after such prolonged suspension.)
Clause 16. 1 (h) due to suspension & deceleration of the Works by the Contractor
due to payment problems;
 Other specified grounds entitling the Contractor to extension of time for
completion:
 Clause 1.9 (a) due to delay in issuing drawings or instructions by the Engineer;
 Clause 2.1 (a) due to initial delay caused by the Employer in providing
possession of Site;
 Clause 4.7 (a) due to setting out;
Clause 4.12 (a) due to unforeseeable physical conditions;
 Clause 4.24 (a) delay encountered by the Contractor due to the discovery &
reporting of Fossils;
 Clause 7.4 (a) due to testing as instructed by the Engineer or for which the
Employer is responsible under the Contract;
Clause 10.3 (a) due to interference with the Tests on Completion by the
Employer;
Clause 13.7 (a) due to adjustment for changes in legislation;
 Clause 17.4 (a) due to consequences of Employer’s Risks;
 4. Obligation to provide Securities, Indemnities & Insurance
Securities
 Clause 4.2 in relation to Performance Security;
 Clause 14.2 in relation to Advance Payment Guarantee;
 Clause 14.9 in relation to Retention Money Guarantee;
Indemnity
 Clause 1.13 in relation to compliance with laws;
Clause 4.14 in relation to avoidance of interference with the
convenience of the public or the access to & use & occupation
of all roads & footpaths.;
 Clause 4.16 in relation to transport of goods;
 Clause 17.1 in relation to bodily injury, sickness, diseases or
death, of any person whatsoever arising out of or in the course
of or by reason of the Contractor’s design(if any), the
execution & completion of the Works & remedying of any
defects therein;
 Clause 17.5 in relation to intellectual & industrial property
rights against & from any other claim which arises out of or in
relation to the manufacture, use, sale or import of any Goods,
or any design for which the Contractor is responsible;
Obligation to provide Securities,
Indemnities
Insurance & Insurance
 Clause 18.1 in relation to general requirements
(choice of the insurer, terms of insurance,
making the insurance in the joint name,
providing the policy, providing evidence for the
payment of premium, use of the insurance
money for the purpose of the Contract,.)in
providing specific insurance arrangement;
 Clause 18.2 in relation to insurance of Works &
Contractor’s Equipment;
Clause 18.3 in relation to insurance against
injury to persons & damage to property;
Clause 18.4 in relation to insurance for
Contractor’s Personnel;
 5. Obligation to supply Information & Notice

Information
 Clause 4.1 (a) & (b) design information, in case where the
Contractor is required under the Contract to design part of the
permanent Works;
Clause 4.24 geological or archeological finds(Fossils);
 Clause 5.4 submitting evidence in relation to payments made to
the nominated sub-contractors, as the Engineer requests;
Clause 6.10 details of Labour & Equipment;
 Clause 8.3 programme & revised programme;
 Clause 12.1 particulars as requested by the Engineer information
pertaining to measurement of Works;
 Clause 13.5 in relation to provisional sums submission of
quotations, receipts , vouchers & accounts or receipts for
substantiation of the use of the said sums;
Clause 13.6 on use of Day Work items, on daily basis;
Clause 14.3 submitting monthly statements to the Engineer for
payment purposes;
 Clause 20.1 contemporary records as per the request of the
Engineer;
 Obligation to supply Information & Notice
Notices
 Clause 1.9 giving notices in relation to delayed drawings or instructions by
the Engineer;
 Clause 1.13 giving of all notices in relation to the execution & completion of
the Works & remedying any defects therein;
Clause 2.1 giving notice to the Employer in case of failure of the Employer in
providing possession of Site;
 Clause 4.2 in case of submission of the Performance Security copy to the
Employer;
Clause 4.12 in case of encountering unforeseeable physical conditions: to the
Employer;
 Clause 4.16 notice to be given to the Engineer in relation to transport of
Goods & Plant to be delivered to the Site;
 Clause 7.3 giving notice to the Engineer in case of any work is ready & before
it is covered up, put out of sight, or packaged for storage or transport or
inspection;
 Clause 8.4 giving notice to the Engineer in case of request for extension of
time (EOT) for completion;
 Clause 8.9 giving notice to the Engineer in case of suspension of work
instructed by the Engineer;
Clause 8.11 giving notice to the Engineer in case of prolonged suspension of
the Works;
Clause 10.1 giving notice to the Engineer in case of requesting the Taking
Over of the Works & Sections, if any;
 6. Administrative Obligation
 Clause 1.6 entering into a Contract Agreement;
Clause 1.7 (a) securing prior consent for assignment
from the Employer;
 Clause 3.5 duty to consult with the Engineer;
 Clause 4.4 (b) securing prior consent from the Engineer
for Subcontracting;
 Clause 4.6 providing appropriate opportunities for the
Employer’s Personnel and any other contractors
employed by the Employer & for personnel of public
authorities;
Clause 6.1-making arrangement for the engagement of
staff & labour;
 Clause 6.1 Affording opportunity of access to the Site to
the Engineer, other personnel & for the public
authorities;
 Clause 7.8 payment of royalties;
 Clause 20.5 attempting amicable settlement;
 7. Obligation upon or after
Completion
Clause 11.1 remedying defects & completion of
outstanding works, if any;
 Clause 11.11 clearance of Site upon completion;
 Clause 14.10 submission of Statement at
Completion to the Engineer;
 Clause 14.11 submission of draft Final
Statement to the Engineer;
 Clause 14.11 submission of further information
relative to the finalization of the draft Final
Statement;
Clause 14.12 submitting written discharge to
the Employer confirming that the total of the
Final Statement represents full & final
settlement of all monies due to the Contractor;
Any point of discussion