CONSTRUCTION MANAGEMENT II

Deals with the management of all the resources in construction projects.

Building construction is the process of preparing for and forming buildings and building systems. Construction
starts with planning, design, and financing and continues until the structure is ready for occupancy.

Project management: It is a process of planning, organizing, staffing, motivating, directing, controlling and
coordinating resources in a project (functions of management). It is the application of knowledge, skills, tools
and techniques to project activities to meet project requirements.

Project cycle management (PCM) is the management of a project throughout its phases, from planning
through completion and review.

Projects go through definite and describable phases. Each phase can be brought to some sense of closure as
the next phase begins. Phases can be made to result in deliverables or accomplishments to provide the starting
point for the next phase. Phase transitions are ideal times to update planning baselines, to conduct high level
management reviews, and to evaluate project costs and prospects.

The term project cycle management is used in EuropeAid terminology to describe decision-making
procedures used during the life-cycle of a project (including key tasks, roles and responsibilities, key
documents and decision options)

PROCESSES

Traditionally, project management includes a number of elements: four to five process groups, and a control
system. Regardless of the methodology or terminology used, the same basic project management processes
will be used. Major process groups generally include:

i. Initiation
ii. Planning or design
iii. Production or execution
iv. Monitoring and controlling
v. Closing

In project environments with a significant exploratory element (e.g., research and development), these stages
may be supplemented with decision points (go/no go decisions) at which the project's continuation is debated
and decided. An example is the Phase–gate model.

Project phases;

I. PROJECT INITIATION

Project initiation is where all the necessary analysis is undertaken to allow the project to be planned. Initiating
a project usually involves a considerable amount of work, and therefore expenditure, and that project
initiation is considered as a stage in its own i.e. it should be formally given approval to go ahead and should
be planned and budgeted for as a phase of the project.

The single most important piece of documentation you will produce at this stage, and probably during the
course of the entire project, is a Project Initiation Document (PID).
Page 1 of 167
The Project Initiation Document takes as its starting point the Business Case, if one exists, and builds upon
it using the information and analysis data produced during the initiation activities.

The Project Initiation Document (PID) may also be called a Project Scoping Document, Project Outline,
Project Management Plan or sometimes even a Project Brief.

This will tell you what you need to know to plan and resource the project. Remember projects don’t usually
fail at the end – they fail at the beginning!

It will look in detail at risks and a plan to deal with them will be one of the outputs of the initiation.

During this period a thorough analysis must be taken and recorded of how any business processes, that the
project will affect, are structured, staffed, and run. Measurements should be taken at this point that will be
key or critical success factors of the project e.g. if the project aims to increase the rate of data entry of forms
to a computerised system then a comparison cannot be made at the end of the project if initial measurements
during the old business process do not exist.

A Project Initiation Document (PID) should include:

 Details of project goals and objectives and the critical success factors by which achievement of the
objectives will be judged.
 Details of the project scope in relation to the organisation, functional areas and time as well as a
statement about any related areas that are considered to be out of scope.
 Details of identified risks and any constraints affecting the project.
 Details of any assumptions made about the project. These might be assumptions that you as the
project manager are making about what support you will receive from other parts of the institution
or, if you are working with a third party supplier, assumptions about what the supplier will deliver.

The initiating processes determine the nature and scope of the project. If this stage is not performed well, it
is unlikely that the project will be successful in meeting the business’ needs. The key project controls needed
here are an understanding of the business environment and making sure that all necessary controls are
incorporated into the project. Any deficiencies should be reported and a recommendation should be made to
fix them.

The initiating stage should include a plan that encompasses the following areas:

 analyzing the business needs/requirements in measurable goals

 reviewing of the current operations
 financial analysis of the costs and benefits including a budget
 stakeholder analysis, including users, and support personnel for the project
 project charter including costs, tasks, deliverables, and schedule

II. PLANNING AND DESIGN

Project planning is part of project management, which relates to the use of schedules such as Gantt
charts to plan and subsequently report progress within the project environment.

Page 2 of 167
 All projects, because of their relatively short, duration and detailed scheduling of resources, required
formal, detailed planning. Without proper planning and with poor requirements definition during the
initial planning phase, programs and projects start with a potential for failure. Planning helps to
eliminate/reduce uncertainty, improve efficiency of operation, obtain a better understanding of
objectives, provide a basis for monitoring and controlling work.

Initially, the project scope is defined and the appropriate methods for completing the project are
determined. Following this step, the durations for the various tasks necessary to complete the work
are listed and grouped into a work breakdown structure. Project planning is often used to organize
different areas of a project, including project plans, work loads and the management of teams and
individuals.[2] The logical dependencies between tasks are defined using an activity network diagram
that enables identification of the critical path. Project planning is inherently uncertain as it must be
done before the project is actually started. Therefore the duration of the tasks is often estimated
through a weighted average of optimistic, normal, and pessimistic cases. The critical chain method
adds "buffers" in the planning to anticipate potential delays in project execution.[3] Float or slack time
in the schedule can be calculated using project management software.[4] Then the necessary resources
can be estimated and costs for each activity can be allocated to each resource, giving the total project
cost. At this stage, the project schedule may be optimized to achieve the appropriate balance between
resource usage and project duration to comply with the project objectives. Once established and
agreed, the project schedule becomes what is known as the baseline schedule. Progress will be
measured against the baseline schedule throughout the life of the project. Analyzing progress
compared to the baseline schedule is known as earned value management.[5]

The inputs of the project planning phase include the project charter and the concept proposal. The
outputs of the project planning phase include the project requirements, the project schedule, and the
project management plan.[6]

The Project Planning can be done manually. However, when managing several projects, it is usually
easier and faster to use project management software.

Project plan

A project plan, according to the Project Management Body of Knowledge, is: "...a formal, approved
document used to guide both project execution and project control. The primary uses of the project plan
are to document planning assumptions and decisions, facilitate communication among stakeholders, and
document approved scope, cost, and schedule baselines. A project plan may be summarized or detailed."

The latest edition of the PMBOK (v5) use rather the term Project Charter to refer to the contract or document
that the project sponsor and project manager use to agree on the initial vision of the project (scope, baseline,
resources, objectives...) at a high level. The project management plan is the document that the project
manager builds to describe in more details the planning of the project and its organization. In the PMI
methodology described in the PMBOK v5, the project charter and the project management plan are the two
most important documents for describing a project during the initiation and planning phases Description of
PMBOK v5 project documents.

PRINCE2 defines:

"...a statement of how and when a project's objectives are to be achieved, by showing the major
products, milestones, activities and resources required on the project."

Page 3 of 167
The project manager creates the project management plan following input from the project team and key
stakeholders. The plan should be agreed and approved by at least the project team and its key stakeholders.

Purpose

The objective of a project plan is to define the approach to be used by the Project team to deliver the
intended project management scope of the project.

The main purpose is to plan time, cost and resources adequately to estimate the work needed and to effectively
manage risk during project execution. As with the Initiation process group, a failure to adequately plan greatly
reduces the project's chances of successfully accomplishing its goals.

At a minimum, a project plan answers basic questions about the project:

 Why? - What is the problem or value proposition addressed by the project? Why is it being
sponsored?
 What? - What is the work that will be performed on the project? What are the major
products/deliverables?
 Who? - Who will be involved and what will be their responsibilities within the project? How will
they be organized?
 When? - What is the project timeline and when will particularly meaningful points, referred to as
milestones, be complete?
 Where?
 How?

Project planning generally consists of;

 determining how to plan (e.g. by level of detail or rolling wave);

 developing the scope statement;
 selecting the planning team;
 identifying deliverables and creating the work breakdown structure;
 identifying the activities needed to complete those deliverables and networking the activities in their
logical sequence;
 estimating the resource requirements for the activities;
 estimating time and cost for activities;
 developing the schedule;
 developing the budget;
 risk planning;
 gaining formal approval to begin work.

Additional processes, such as planning for communications and for scope management, identifying roles and
responsibilities, determining what to purchase for the project and holding a kick-off meeting are also
generally advisable.

For new product development projects, conceptual design of the operation of the final product may be
performed concurrent with the project planning activities, and may help to inform the planning team when
identifying deliverables and planning activities.

Plan contents

Page 4 of 167
To be a complete project plan according to industry standards such as the PMBOK or PRINCE2, the project
plan must also describe the execution, management and control of the project. This information can be
provided by referencing other documents that will be produced, such as a Procurement Plan or Construction
Plan, or it may be detailed in the project plan itself.

The project plan typically covers topics used in the project execution system and includes the following main
aspects:

 Scope Management
 Requirements Management
 Schedule Management
 Financial Management
 Quality Management
 Resource Management
 Stakeholders Management
 Communications Management
 Project Change Management
 Risk Management
 Procurement Management

It is good practice and mostly required by large consulting and professional project management firms, to
have a formally agreed and version controlled project management plan approved in the early stages of the
project, and applied throughout the project.

III. PROJECT EXECUTION

Project execution (or implementation) is the phase in which the plan designed in the prior phases of the
project life are put into action. Execution process involves coordinating people and resources, as well as
integrating and performing the activities of the project in accordance with the project management plan. The
deliverables are produced as outputs from the processes performed as defined in the project management
plan and other frameworks that might be applicable to the type of project at hand.

The purpose of project execution is to deliver the project expected results (deliverable and other direct
outputs). Typically, this is the longest phase of the project management lifecycle, where most resources are
applied.

During the project execution the execution team utilizes all the schedules, procedures and templates that were
prepared and anticipated during prior phases. Unanticipated events and situations will inevitably be
encountered, and the Project Manager and Project Team will have to deal with them as they come up.

In the standard division of project management discipline this phase is called "Project Execution and
Control"; the term "control" is included here because execution is not a blind implementation of what was
written in advance but a watchful process where doing things goes along with understanding what is being
done, and re-doing it or doing it differently when the action does not fully correspond to what was intended.
This "control" is an integral part of project management and is a necessary task of the project manager. As
such it is different for project evaluation as generally conceived in aid programmes, where evaluation is
usually performed by a team different from the project execution team ( e.g. the programme manager, the
quality support officer, etc.), so as to independently verify the quality and the efficacy of the work done.

Page 5 of 167
When the whole team is close-knit control, monitoring and evaluation move hand in hand supporting and
giving added value to each other. A possible way of differentiating project control by project evaluation is to
say that while "control" is done by the project manager (that include monitoring of subordinates and self
evaluation) evaluation is generally done directly or through a group by the line manager of the project
manager and is an activity occurring in the "shared field" between project and programme management.

The key elements of project execution is the ability of working effectively in the team and the ability of
remaining faithful to project scope while facing unpredicted events and difficulties.

The main elements of project execution are:

 Conduct Project Execution Kick-off event, where the Project Manager conducts a meeting to formally
begin the Project Execution and Control phase, orient new Project Team members, and review the
documentation and current status of the project.
 Manage Project Execution, where the Project Manager must manage every aspect of the Project Plan
to ensure that all the work of the project is being performed correctly and on time.
 Manage CSSQ (Cost, Scope, Schedule, and Quality), where the Project Manager must manage
changes to the Project Scope and Project Schedule, implement Quality Assurance and Quality Control
processes, control and manage costs as established in the Project Budget.
 Monitor and Control Risks, where the project develops and applies new response and resolution
strategies to unexpected eventualities.
 Gain Project Acceptance where the project manager acknowledge that all outputs delivered have been
tested, accepted and approved, and that the products/services of the project has been successfully
transitioned to the expected beneficiaries.

Execution process group include:

 Direct and manage project execution

 Quality assurance of deliverables
 Acquire, develop and manage Project team
 Distribute information
 Manage stakeholder expectations
 Conduct procurement
 Test the deliverables against the initial design

IV. MONITORING AND CONTROLLING

Monitoring and controlling consists of those processes performed to observe project execution so that
potential problems can be identified in a timely manner and corrective action can be taken, when
necessary, to control the execution of the project. The key benefit is that project performance is observed
and measured regularly to identify variances from the project management plan.

Monitoring and controlling includes;

 Measuring the ongoing project activities ('where we are');

 Monitoring the project variables (cost, effort, scope, etc.) against the project management plan and
the project performance baseline (where we should be);
 Identify corrective actions to address issues and risks properly (How can we get on track again);

Page 6 of 167
  Influencing the factors that could circumvent integrated change control so only approved changes are
implemented.

In multi-phase projects, the monitoring and control process also provides feedback between project phases,
in order to implement corrective or preventive actions to bring the project into compliance with the project
management plan.

Project maintenance is an ongoing process, and it includes:

 Measuring: Determining through formal and informal reports the degree to which progress towards
objectives is being made.
 Evaluating: Determining course of and possible ways to act on significant deviations from planned
performance.
 Correcting: Taking control action to correct an unfavorable trend or to take advantage of a usually
favorable trend.

Monitoring and controlling cycle

In this stage, auditors should pay attention to how effectively and quickly user problems are resolved.

Over the course of any construction project, the work scope may change. Change is a normal and expected
part of the construction process. Changes can be the result of necessary design modifications, differing site
conditions, material availability, contractor-requested changes, value engineering and impacts from third
parties, to name a few. Beyond executing the change in the field, the change normally needs to be documented
to show what was actually constructed. This is referred to as change management. Hence, the owner usually
requires a final record to show all changes or, more specifically, any change that modifies the tangible
portions of the finished work. The record is made on the contract documents – usually, but not necessarily
limited to, the design drawings. The end product of this effort is what the industry terms as-built drawings,
or more simply, “as built.” The requirement for providing them is a norm in construction contracts.

When changes are introduced to the project, the viability of the project has to be re-assessed. It is important
not to lose sight of the initial goals and targets of the projects. When the changes accumulate, the forecasted
result may not justify the original proposed investment in the project.

V. CLOSING

Closing includes the formal acceptance of the project and the ending thereof. Administrative activities include
the archiving of the files and documenting lessons learned.

This phase consists of:

 Contract closure: Complete and settle each contract (including the resolution of any open items) and
close each contract applicable to the project or project phase.
 Project close: Finalize all activities across all of the process groups to formally close the project or a
project phase

Also included in this phase is the Post Implementation Review. This is a vital phase of the project for the
project team to learn from experiences and apply to future projects. Normally a Post Implementation Review
consists of looking at things that went well and analyzing things that went bad on the project to come up with
lessons learned.
Page 7 of 167
WORK STUDY
• Work Study is the systematic examination of the methods of carrying out activities such as to improve
the effective use of resources and to set up standards of performance for the activities carried out.
• A generic term for those techniques, particularly method study and work measurement, which are used in
the examination of human work in all its contexts, and which lead systematically to the investigation of all
the factors which affect the efficiency and economy of the situation being reviewed, in order to effect
improvement.

Method Study
Method-study concerned with “the way in which work is done (i.e., method)”. It is used to simplify the
way to accomplish a work and to improve the method of production. Method-study results in a more
effective use of material, plant, equipment and manpower. Method study is essentially concerned with
finding better ways of doing things. It adds value and increase the efficiency by eliminating unnecessary
operations, avoidable delays and other forms of waste.
The improvement of efficiency is achieved through:

 Present and analysis true facts concerning the situation.

 To examination those facts critically
 To develop the best answer possible under given circumstances based on critical examination of
facts.

Steps or procedure involved in methods study

1. Select : select the work to be studied.
The job should be selected for the method study based upon the following considerations:
a) Economical aspect
b) Technical aspect
c) Human aspect
2. Record: record the relevant facts about the job by direct observation. Recording techniques used for
method study are charts and diagrams.
3. Examine: examine the way the job is being performed and test its purpose, place, sequence and method
of performance. In this step, the information provided by charts and diagrams is critically examined and
screened by asking some searching questions. Like, what is done?, why it is done?, what else might be
done? Etc. This examination is carried out with a view to eliminate, combine, rearrange and/or simplify the
activities.
4. Develop: develop the most practical, economical, and effective method. After critical examination of
records is complete, it is necessary to transform the learning’s into the development of new methods. Some
approaches are:
a) Eliminate unnecessary activities.

Page 8 of 167
b) Combine two or more activities. For example, if one uses a combination tool for two operations, say,
facing and drilling, the total set-up time will reduce.
c) Re-sequence activities so as to reduce time and effort.
d) Simplify process to reduce number of operations or reduce effort or reduce throughput, etc.
e) Attack on constraints, which are preventing the method to perform better.
5. Evaluate: evaluate different alternatives to develop a new improved method comparing the cost-
effectiveness of the selected new method with the current method of performance.
6. Define: define the new method in a clear manner and present it to those concerned, i.e., management,
supervisors and worker.
A report on new improved method should be prepared. It should include:
• Description of the method.
• Cost of installing the new method, including cost of new equipment and of relaying out shops or working
areas.
• Diagram of the work place layout.
• Tools and equipment to be used and diagrams of jigs/fixtures etc.
• Executive actions required to implement the new method.
7. Install: install the new method as a standard practice and train the persons involved in applying it.
8. Maintain: Maintain the new method and introduce control procedures to prevent a drifting back to the
previous method of work.

WORK MEASUREMENT

Work measurement is the application of techniques designed to establish the time for
a qualified worker to carry out specified jobs at a defined level of performance or at a defined rate of
working/level of perfomance. It is concerned with the length of time it takes to complete a work task
assigned to a specific job .

A qualified worker is one who has acquired the skill, knowledge and other attributes
to carry out the work in hand to satisfactory standards of quantity, quality and safety.
Defined rate of working is the amount of work that can be produced by a qualified
worker/employee when working at normal space and effectively utilizing his time
and where work is not restricted by process limitation.
Uses of work measurement:
_To compare the efficiency of alternative methods.
_Cost estimation
_Pricing of products and services
_Incentive pay systems
_Capacity planning
_Production scheduling

Page 9 of 167
_To provide information on which estimates for tenders, selling prices and delivery promises can be
based.

Work measurement helps to uncover non-standardization that exists in the workplace and non-value adding
activities and waste. A work has to be measured for the following reasons:

1. To discover and eliminate lost or ineffective time.

2. To establish standard times for performance measurement.
3. To measure performance against realistic expectations.

Techniques of work measurement

The following are the principal techniques by which work measurement is carried out:

1. Time study

2. Activity sampling

3. Predetermined motion time systems

4. Synthesis from standard data

5. Estimating

6. Analytical estimating

7. Comparative estimating

Of these techniques we shall concern ourselves primarily with time study, since it is the basic technique of
work measurement. Some of the other techniques either derive from it or are variants of it.

1. Time Study

Time Study consists of recording times and rates of work for elements of a specified job carried out under
specified conditions to obtain the time necessary to carry out a job at a defined level of performance.

In this technique the job to be studied is timed with a stopwatch, rated, and the Basic Time calculated.

1.1 Requirements for Effective Time Study

The requirements for effective time study are:

a. Co-operation and goodwill b. Defined job c. Defined method d. Correct normal equipment e. Quality
standard and checks f. Experienced qualified motivated worker g. Method of timing h. Method of assessing
relative performance i. Elemental breakdown j. Definition of break points k. Recording media

1.2 Performance Rating

Page 10 of 167
Time Study is based on a record of observed times for doing a job together with an assessment by the
observer of the speed and effectiveness of the worker in relation to the observer's concept of Standard
Rating.

1.3 Standard Time

Standard time is the total time in which a job should be completed at standard performance i.e. work
content, contingency allowance for delay, unoccupied time and interference allowance, where applicable.

2. Activity Sampling

Activity sampling is a technique in which a large number of instantaneous observations are made over a
period of time of a group of machines, processes or workers. Each observation records what is happening at
that instant and the percentage of observations recorded for a particular activity or delay is a measure of the
percentage of time during which the activity or delay occurs.

The advantages of this method are that

It is capable of measuring many activities that are impractical or too costly to be measured by time study.
One observer can collect data concerning the simultaneous activities of a group. Activity sampling can be
interrupted at any time without effect. The disadvantages are that

It is quicker and cheaper to use time study on jobs of short duration. It does not provide elemental detail.
The type of information provided by an activity sampling study is:

a. The proportion of the working day during which workers or machines are producing.
b. The proportion of the working day used up by delays. The reason for each delay must be recorded.
c. The relative activity of different workers and machines.

3. Predetermined Motion Time Systems

A predetermined motion time system is a work measurement technique whereby times established for basic
human motions (classified according to the nature of the motion and the conditions under which it is made)
are used to build up the time for a job at a defined level of performance.

The systems are based on the assumption that all manual tasks can be analysed into basic motions of the
body or body members. They were compiled as a result of a very large number of studies of each
movement, generally by a frame-by-frame analysis of films of a wide range of subjects, men and women,
performing a wide variety of tasks.

4. Synthesis

Synthesis is a work measurement technique for building up the time for a job at a defined level of
performance by totaling element times obtained previously from time studies on other jobs containing the
elements concerned, or from synthetic data.

Synthetic data is the name given to tables and formulae derived from the analysis of accumulated work
measurement data, arranged in a form suitable for building up standard times, machine process times, etc.
by synthesis.

Page 11 of 167
5. Estimating

The technique of estimating is the least refined of all those available to the work measurement practitioner.
It consists of an estimate of total job duration (or in common practice, the job price or cost). This estimate
is made by a craftsman or person familiar with the craft. It normally embraces the total components of the
job, including work content, preparation and disposal time, any contingencies etc., all estimated in one
gross amount.

6. Analytical estimating

This technique introduces work measurement concepts into estimating. In analytical estimating the
estimator is trained in elemental breakdown, and in the concept of standard performance. The estimate is
prepared by first breaking the work content of the job into elements, and then utilising the experience of the
estimator (normally a craftsman) the time for each element of work is estimated - at standard performance.
These estimated basic minutes are totalled to give a total job time, in basic minutes. An allowance for
relaxation and any necessary contingency is then made, as in conventional time study, to give the standard
time.

7. Comparative estimating

This technique has been developed to permit speedy and reliable assessment of the duration of variable and
infrequent jobs, by estimating them within chosen time bands. Limits are set within which the job under
consideration will fall, rather than in terms of precise capital standard or capital allowed minute values. It is
applied by comparing the job to be estimated with jobs of similar work content, and using these similar jobs
as "bench marks" to locate the new job in its relevant time band - known as Work Group.

MATERIAL HANDLING

It is the field concerned with solving the pragmatic problems involving the movement, storage in a
manufacturing plant or warehouse, control and protection of materials, goods and products
throughout the processes of cleaning, preparation, manufacturing, distribution, consumption and
disposal of all related materials, goods and their packaging. The focus of studies of Material Handling
course work is on the methods, mechanical equipment, systems and related controls used to achieve these
functions. The material handling industry manufactures and distributes the equipment and services
required to implement material handling systems, from obtaining, locally processing and shipping raw
materials to utilization of industrial feedstocks in industrial manufacturing processes. Material handling
systems range from simple pallet rack and shelving projects, to complex conveyor belt and Automated
Storage and Retrieval Systems (AS/RS); from mining and drilling equipment to custom built barley malt
drying rooms in breweries. Material handling can also consist of sorting and picking, as well as automatic
guided vehicles.[2]

Flexible Manufacturing

The material handling system (MHS) is a fundamental part of a Flexible manufacturing system since it
interconnects the different processes supplying and taking out raw material, workpieces, sub-products, parts
and final products. Due to the automated nature of the whole production process, the MHS must respond in
concert with timeliness for all requirements of the processes and systems.

The MHS is composed of warehouses, buffers, conveyors, transportation vehicles or systems, part sorters,
feeders and manipulators.
Page 12 of 167
Material-handling equipment is equipment that relate to the movement, storage, control and protection of
materials, goods and products throughout the process of manufacturing, distribution, consumption and
disposal. Material handling equipment is the mechanical equipment involved in the complete system.[1]
Material handling equipment is generally separated into four main categories: storage and handling
equipment, engineered systems, industrial trucks, and bulk material handling.

Material handling and efficiency

Material handling equipment is used to increase output, control costs, and maximize productivity. There are
several ways to determine if the material-handling equipment is achieving peak efficiency. These include
capturing all relevant data related to the warehouse’s operation, measuring how many times an item is
“touched” from the time it is ordered until it leaves the building, making sure you are using the proper
picking technology, and keeping system downtime to a minimum. A special analytical data-set known as
Stock-keeping units (SKUs) has been devised to aid analysis of materials handling, which is obviously less
efficient when a material asset is handled any more than a minimally necessary number of times.

Types of material-handling equipment

Storage and handling equipment
Storage and handling equipment is a category within the material-handling industry. The equipment that
falls under this description is usually non-automated storage equipment. Products such as pallet racking,
shelving, casters and carts, among others, belong to storage and handling. Many of these products are often
referred to as "catalog" items because they generally have globally accepted standards and are often sold as
stock materials out of Material handling catalogs.
Engineered systems
Engineered systems are typically custom engineered material-handling systems. Conveyors, Handling
Robots, AS/RS, AGV and most other automated material-handling systems fall into this category.
Engineered systems are often a combination of products integrated to one system. Many distribution
centers will optimize storage and picking by utilizing engineered systems such as pick modules and
sortation systems.
Equipment and utensils used for processing or otherwise handling edible product or ingredients must be of
such material and construction to facilitate thorough cleaning and to ensure that their use will not cause the
adulteration of product during processing, handling, or storage. Equipment and utensils must be maintained
in sanitary condition so as not to adulterate or contaminate product.
Industrial trucks
Industrial trucks usually refer to operator driven motorized warehouse vehicles, powered manually, by
gasoline, propane or electrically. Industrial trucks assist the material-handling system with versatility; they
can go where engineered systems cannot. Forklift trucks are the most common example of industrial trucks
but certainly aren't the extent of the category. Tow tractors and stock chasers are additional examples of
industrial trucks. Their greatest advantage lies in the wide range of attachments available; these increase the
truck ability to handle various types and shapes of material.
Bulk material handling
Main article: Bulk material handling
Bulk material-handling equipment is used to move and store bulk materials such as ore, liquids, and
cereals. This equipment is often seen on farms, mines, shipyards and refineries. This category is also
explained in Bulk material handling.
On-rails transfer cart
On-rails transfer cart is a kind of material-handling equipment. It moves on the rails and can transfer
heavy cargoes or equipment with the weight 1-300t between the workshops or warehouses in the factory. It
is widely used in the line of metallurgy, coal, heavy manufacturing, automotive assembly, etc. Its power

Page 13 of 167
can be AC or DC. DC Power has rail transmit power and battery power, while AC power includes cable
power and slippery touch line power. In addition, there is the manual rail transfer cart or towed rail transfer
cart, also called motorized transfer trolley.
Conveyors
Conveyors are another form of material handling. Conveyors can be used in a multitude of ways from
warehouses to airport baggage handling systems. Some types of conveyors are unibilt, power and free,
chain, towline and roller conveyor.
Cantilevered crane loading platform
Cantilevered crane loading platforms are temporary platforms attached to the face of multi-storey buildings
or structures to allow materials and equipment to be directly loaded on or shifted off floor levels by cranes
during construction or demolition. They may be fixed or rolling and a variety of designs are used including
fully fabricated and demountable types. The platforms are supported on needles (cantilevered beams)
anchored to the supporting structure.

Material procurement

Bill of materials

A bill of materials (sometimes bill of material or BOM) is a list of the raw materials, sub-assemblies,
intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end
product. A BOM may be used for communication between manufacturing partners, or confined to a single
manufacturing plant.

A BOM can define products as they are designed (engineering bill of materials), as they are ordered (sales
bill of materials), as they are built (manufacturing bill of materials), or as they are maintained (service bill of
materials). The different types of BOMs depend on the business need and use for which they are intended.
In process industries, the BOM is also known as the formula, recipe, or ingredients list. In electronics, the
BOM represents the list of components used on the printed wiring board or printed circuit board. Once the
design of the circuit is completed, the BOM list is passed on to the PCB layout engineer as well as component
engineer who will procure the components required for the design.

Contents

 1 Modular BOMs
 2 Configurable BOM
 3 Multi-Level BOMs
 4 See also
 5 References
 6 External links

Modular BOMs

In most cases BOMs are of hierarchical nature, with the top level representing the finished product which
may be a sub-assembly or a completed item. BOMs that describe the sub-assemblies are referred to as
modular BOMs. An example of this is the NAAMS BOM that is used in the automotive industry to list all
the components in an assembly line. The structure of the NAAMS BOM is System, Line, Tool, Unit and
Detail.

Page 14 of 167
The first hierarchical databases were developed for automating bills of materials for manufacturing
organizations in the early 1960s. At present this BOM is used as a data base to identify the many parts and
their codes in automobile manufacturing companies.[1]

A bill of materials "implosion" links component pieces to a major assembly, while a bill of materials
"explosion" breaks apart each assembly or sub-assembly into its component parts.

A modular BOM can be displayed in the following formats:

 A single-level BOM that displays the assembly or sub-assembly with only one level of children. Thus
it displays the components directly needed to make the assembly or sub-assembly.[2]
 An indented BOM that displays the highest-level item closest to the left margin and the components
used in that item indented more to the right.[3]
 Modular (planning) BOM

A BOM can also be visually represented by a product structure tree, although they are rarely used in the
workplace.[3] For example, one them is Time-Phased Product Structure [4] where this diagram illustrates the
time needed to build or acquire the needed components to assemble the final product.For each product, the
time phased product structure shows the sequence and duration of each operation.

Configurable BOM

A configurable bill of materials (CBOM) is a form of BOM used by industries that have multiple options
and highly configurable products (e.g. telecom systems, data-center hardware (SANS, servers, etc.), PCs,
autos).[5]

The CBOM is used to dynamically create "end-items" that a company sells. The benefit of using CBOM
structure is that it reduces the work-effort needed to maintain product structures. The configurable BOM is
most frequently driven by "configurator" software, however it can be enabled manually (manual maintenance
is infrequent because it is unwieldy to manage the number of permutations and combinations of possible
configurations). The development of the CBOM is dependent on having a modular BOM structure in place.
The modular BOM structure provides the assemblies/sub-systems that can be selected to "configure" an end-
item.

While most configurators utilize top-down hierarchical rules syntax to find appropriate modular BOMs,
maintenance of very similar BOMs (i.e., only one component is different for various voltages) becomes
highly excessive. A newer approach, (Bottom-Up/Rules-Based Structuring) utilizing a proprietary search
engine scheme transversing through selectable componentry at high speeds eliminates the Planning Modular
BOM duplications[citation needed]. The search engine is also used for all combinatorial feature constraints and
GUI representations to support specification selections.

To decide which variant of the parts or components are to be chosen, they are attributed by the product
options which are the characteristic features of the product (business). If the options of the product build an
ideal boolean algebra,[6] it is possible to describe the connection between parts and product variants with an
boolean expression, which refers to a subset of the set of products. [7]

Multi-Level BOMs

A Multi-Level Bill of Materials (BOM), or referred as an indented BOM, is a bill of materials that lists the
components, assemblies, and parts required to make a product. It provides a display of all items that are in
Page 15 of 167
parent-children relationships. When an item is a sub-component, unfinished part, etc., all of its components,
including finished parts and raw materials, are also exhibited. A multi-level structure can be illustrated by a
tree with several levels. In contrast, a single-level structure only consists of one level of children in
components, assemblies and materials.[8][9]

Procurement in Materials Management

Procurement is the acquisition of goods, services or works from an outside external source. It is favourable
that the goods, services or works are appropriate and that they are procured at the best possible cost to meet
the needs of the purchaser in terms of quality and quantity, time, and location. [1] Corporations and public
bodies often define processes intended to promote fair and open competition for their business while
minimizing exposure to fraud and collusion.

Process Flow

The typical procurement cycle for a service or material consists of the following phases:

1. Determination of Requirements

Materials requirements are identified either in the user departments or via materials planning and
control. (This can cover both MRP proper and the demand-based approach to inventory control. The
regular checking of stock levels of materials defined by master records, use of the order-point method,
and forecasting on the basis of past usage are important aspects of the latter.) You can enter purchase
requisitions yourself, or they can be generated automatically by the materials planning and control
system.

2. Source Determination

The Purchasing component helps you identify potential sources of supply based on past orders and
existing longer-term purchase agreements. This speeds the process of creating requests for quotation
(RFQs), which can be sent to vendors electronically via SAP EDI, if desired.

3. Vendor Selection and Comparison of Quotations

The system is capable of simulating pricing scenarios, allowing you to compare a number of different
quotations. Rejection letters can be sent automatically.

4. Purchase Order Processing

The Purchasing system adopts information from the requisition and the quotation to help you create
a purchase order. As with purchase requisitions, you can generate Pos yourself or have the system
generate them automatically. Vendor scheduling agreements and contracts (in the SAP System, types
of longer-term purchase agreement) are also supported.

5. Purchase Order Follow-Up

The system checks the reminder periods you have specified and - if necessary - automatically prints
reminders or expediters at the predefined intervals. It also provides you with an up-to-date status of
all purchase requisitions, quotations, and purchase orders.

Page 16 of 167
 6. Goods Receiving and Inventory Management

Goods Receiving personnel can confirm the receipt of goods simply by entering the Po number. By
specifying permissible tolerances, buyers can limit over- and underdeliveries of ordered goods.

7. Invoice Verification

The system supports the checking and matching of invoices. The accounts payable clerk is notified
of quantity and price variances because the system has access to PO and goods receipt data. This
speeds the process of auditing and clearing invoices for payment.

Supply management (procurement)

The term supply management describes the methods and processes of modern corporate or institutional
buying. This may be for the purchasing of supplies for internal use referred to as indirect goods and services,
purchasing raw materials for the consumption during the manufacturing process, or for the purchasing of
goods for inventory to be resold as products in the distribution and retail process.

In many organizations, acquisition or buying of services is called contracting, while that of goods is called
purchasing or procurement. The supply management function of an organization is responsible for various
aspects of these acquisitions:

 Working with business leaders who have identified a business need or requirement to identify, source,
contract, and procure the needed good or service from qualified suppliers
 Managing supplier performance
 Implementing technologies, processes, policies, and procedures to support the purchasing process
(Supplier Relationship Management).
 The supplier relationship management process: a process for providing the structure for how
relationships with suppliers will be developed and maintained.
 Economic theories of supply and demand

Supply management is generally regarded as a systematic business process that includes more functions than
traditional buying, such as coordinating inbound and internal pre-production logistics and managing
inventory.

Supply management deals primarily with the oversight and management of materials and services inputs,
management of the suppliers who provide those inputs, and support of the process of acquiring those inputs.
The performance of supply management departments and supply management professionals is commonly
measured in terms of amount of money saved for the organization. However, managing risk is one of the
other critical aspects of supply management; especially the risk of non-availability at the required time of
quality goods and services critical for an organization's survival and growth.

Supplier evaluation

In-depth evaluation is required for major purchases. It is used for non-routine supply items of higher value.
It begins with a list of potential suppliers. Existing suppliers with good track records should not be ruled out.

Supplier assessment criteria

1. Equipment and facilities

Page 17 of 167
  Up-to-date?
 Ability to expand in the future?

2. Processes

 Ramp-up capabilities?
 Process cycle times?
 Reliable quality control program?
 General housekeeping?
 Working conditions?
 Status of back orders?

3. Management Capabilities

 Project management skills?

 Stable, harmonious team?
 How do they view your company as a customer?
 Long-range strategic vision?
 Leadership?

4. Information Systems

 Up to date?
 Training requirements?

Supplier evaluation criteria

1. Planning and control systems

Planning and control systems include those systems that release, schedule, and control the flow of work in
an organization. As we shall see in later courses, the sophistication of such systems can have a major impact
on supply chain performance. Among the questions the buying firm should ask:

 Does the supplier have well-developed systems for planning material, personnel, and capacity needs?
If not, why not?
 Does the supplier track key performance measures, such as throughput time, quality levels, and costs?
Are these measures compared to performance objectives or standards?
 How easy is it for customers to interact with the supplier’s planning and control systems?

This last point is particularly important to organizations interested in effective supply chain management.
When interaction is high, information about the customer’s needs flow easily to the supplier, and the customer
can, in turn, retrieve important information from the supplier. Consider the relationship between Wal-Mart
and Proctor and Gamble (P&G). When a Wal-Mart store sells a particular P&G item, the information flows
directly to P&G’s planning and control systems. P&G can then plan production and schedule shipments
accordingly. Furthermore, Wal-Mart can easily find out when a P&G shipment will arrive at one of its
distribution warehouses, thereby allowing Wal-Mart to consolidate this shipment with others on the way to
individual stores.

2. Environmental regulation compliance

Page 18 of 167
The 1990s brought about a renewed awareness of the impact that industry has on the environment. The Clean
Air Act of 1990 imposes large fines on producers of ozone-depleting substances and foul-smelling gases, and
governments have introduced laws regarding recycling content in industrial materials. As a result, a supplier’s
ability to comply with environmental regulations is becoming an important criterion for supply chain
alliances. This includes, but is not limited to, the proper disposal of hazardous waste.

3. Minimum typical evaluations to consider

 Price
 Quality
 Service
 Delivery

Procurement Documentation/Definitions

To provide guidance and definition of the different acquisition methods and documents used by Washtenaw
County in procurement of all goods and services.

Procedure

After specification development, competitive bidding and bid evaluation, a Purchase Order is processed for
goods and/or services. The type of Purchase Order processed is determined by the type of commodity or
service required and the term or period the purchase will be made. Types of orders and necessary documents
are listed below with their particular criteria for usage.

Purchase Order - Normally processed for all purchases of material, equipment or service.

Blanket Orders/Price Agreements -- A Purchase Order normally processed where material or equipment
will be used on a frequent or repetitive schedule. This order normally covers an annual period for specific
items at unit prices. Often blanket orders/price agreements include more then one using department.

Service Contracts/Maintenance Contracts -- Used for any services/maintenance the County needs. A
contract must be in place and a Purchase Order issued prior to any services provided. These contracts are
typically established for a period of one to five years in duration. All contracts require proof of insurance by
the vendor for the amounts stated by the County; Workers compensation as required by the Laws for the
State of Michigan, and comprehensive general liability and automotive liability in an amount as required by
the County.

Construction Contracts -- Similar to a Service/Maintenance Contracts. Construction contracts usually

define a specific task or certain construction that, when completed, signal the conclusion of the contract.
Insurance requirements are necessary as well. These Contracts often require bonding and prevailing wage
instead of living wage.

Change Orders -- Used as supplements to any construction contract. Changes are requested by the using
Departments and specify price changes, specification changes, shipping charges, delivery charges,
installation, payment term changes, etc. Only the Purchasing Division has authority to modify a Purchase
Order. If a contractor complies with an agency's request to alter a contract or purchase order without formal
authorization from the Purchasing Division, the contractor may not be entitled to payment for the modified
performance.

Page 19 of 167
Professional Service Contracts -- Used for the acquisition of professional services such as consultants,
doctors, lawyers, nurses, architects, engineers, accountants, etc. Depending on the type of service required or
the liability incurred, sufficient insurance limits may be required to cover items such as malpractice, etc.,
before a Purchase Order can be issued. Professional Liability insurance is required.

All contracts should clearly define the costs to be paid to the contractor as well as the RFP Number indicated.
Additionally, a total amount or expenditure, (such as a "not to exceed" amount), and a specific hourly rate
should also be included. Pricing information in sufficient detail must be provided in the contract document
before a Purchase Order can be issued. If applicable, a complete schedule of labor charges may be required
of the contractor.

What is procurement documentation?

The procurement documentation will depend on the type of contract that has been selected. In most cases,
the following documentation will be required:

1. Invitation to tender letter

2. Instructions to bidders
3. Bid data sheet
4. Standard forms for technical and financial proposals
5. Terms of reference
6. Draft contract
7. Specification
8. Drawings
9. Bills of quantities and schedule of rates

1. Invitation to tender letter

A brief letter inviting pre-qualified firms or consortia to submit technical and financial bids for the PPP
arrangement.

2. Instructions to bidders

This document provides bidders with the general guidelines and formal rules governing the tender process.
The rules of tender add clarity and transparency in order to clarify bidders’ questions prior to the beginning
of the formal tender process. It is usually preferable to submit the financial and technical proposals in separate
sealed envelopes; evaluation should be a two-stage process, with only the bidders that are qualified
technically proceeding to the financial evaluation. This process should be outlined clearly in the instructions
to bidders.

3. Bid data sheet

The bid data sheet provides clarifications on the general information contained in the instructions to bidders,
including: scheduling, submission deadlines, evaluation procedures, logistic support, regulations and so on.
Bidders may be required to include in their technical proposal elements such as:

 an understanding of local conditions;

 an understanding of the requirements of the contract;
 information on the equipment and technologies to be used;
 a schedule of activities to reach any performance targets;
Page 20 of 167
  information on the experience and skills of key management and technical staff to be assigned; and
 staffing and staff development plans.

There are several alternative selection criteria that may be used to evaluate financial proposals:

 lowest tariff or volumetric fee;

 value of investments to be made by the bidder, given a pre-set tariff;
 fixed fee;
 incentive compensation for the achievement of pre-defined targets; or
 a combination of the above.

4. Standard forms for technical and financial proposals

In order to ensure that bids are both responsive to the terms of reference (TOR) and easy to compare and
evaluate, the tender documents commonly include a set of standard forms that all bidders must use in
submitting their proposals. These typically include:

 bid forms and price schedules;

 a bid security form;
 a form of contract agreement;
 performance security forms; and
 a bank guarantee form for advanced payment.

5. Terms of reference (TOR)

The terms of reference may include general background information on the service area and sector, as well
as the specific scope of work of the private operator. This document protects the government at a later stage
during the transaction closing process by supplying much of the information required by the bidder. It thus
prevents bidders from claiming that they did not have knowledge of certain circumstances during the bid or
negotiation phases. Much of the work in the closing of a transaction can be done more efficiently if the
information provided in the terms of reference has been properly researched, assessed and written. Bidders
also appreciate a full TOR, as it enables them to assess quickly the potential merits of a project from their
home offices.

6. Draft contract

A draft contract may be included in the tender documents; if so, it will greatly reduce the time required
carrying out negotiations with the preferred bidder. A draft contract is an extremely detailed legal document,
which covers the following:

 it ensures that all of the many legal protections are met, including representations, warranties,
indemnifications, terms and all applicable laws and regulations;
 it ensures that all proposals address all aspects of the project that are important to the government,
such as financial structures, social guarantees, investment guarantees and so on;
 it ensures all investors submit proposals in the same format to make them clearly comparable for
evaluation purposes; and
 it makes the tender process, the proposal evaluation process and especially the negotiation process
most efficient.

Page 21 of 167
The draft contract is extremely important if negotiations are to begin with baseline conditions that are
acceptable to the government. If contractors are allowed to propose their own agreements and conditions
first, it is much more difficult to later negotiate and change an agreement.
In addition to the above, tender documents for PPP arrangements commonly include as annexes:

7. Specification

The specification defines the standard of workmanship and materials required by the government for
completion of the project. It may include a description of the works, site conditions, access to the site, site
establishment, supply of materials and so on. The contractor is obliged to meet these specifications. The
statement of specification must be precise and unambiguous in interpretation. A specification may set out
how all the work may be done, or just certain aspects, leaving the rest to the contractor’s experience.

8. Drawings

A list of drawings showing the title, number of the drawing and revision number should be provided with the
invitation to tender letter or with the specifications. Maps should show the proposed location for works,
possible pipeline routes, crossings and so on.

9. Bills of quantities and schedule of rates

A bill of quantities specifies the quantity of materials and the labour input that the work will incur. It may be
in just one document or divided into several documents to suit sections of work. It is normal procedure to
include sections on “Method of Measurement” or “Notes on Pricing”.

These sections will enable the bidder to define what exactly is to be included in the individual rates and
prices. Standard documents have been published providing guidelines on measurement methods, but these
may not be adequate for every possible situation or work item. Thus, there is always a need for some
modifications to standard methods. Standard methods that have been used, the edition and any amendments
that have been made must always be specified. These instructions should be included in the “Notes on
Pricing”. It is preferable to supply a bill of quantities rather than a schedule of rates. It is more difficult for
the government to evaluate whether the bidders’ pricing is fair and reasonable if quantities have not been
specified. Inclusion of a schedule of rates with a tender for a lump-sum contract is justified where the rates
are purely for evaluating any variations in the work that may arise.

Storage

1. Non-transitory, semi-permanent or long-term, containment, holding, leaving, or placement of goods

or materials, usually with the intention of retrieving them at a later time. It does not include the interim
accumulation of a limited amount during processing, maintenance, or repair.
2. Management of storehouses or warehouses, handling operations, and safe custody and protection of
inventory items.
3. Cost of storing.

Storage and handling equipment

Page 22 of 167
Storage and handling equipment is a category within the material-handling industry. The equipment that falls
under this description is usually non-automated storage equipment. Products such as pallet racking, shelving,
casters and carts, among others, belong to storage and handling. Many of these products are often referred to
as "catalog" items because they generally have globally accepted standards and are often sold as stock
materials out of Material handling catalogs.

Security and Loss Control

Equipment theft is a major source of loss to all contractors. While insurance may offset some of the financial
costs of this loss, many uninsured costs are paid by all contractors (general and subcontractors). These costs
include insurance deductibles, replacing depreciated items with new equipment, and production delays,
paperwork and time in reporting and replacing stolen equipment.
Uninsured costs often exceed the cost paid by insurance and add to contractors’ overall operating expenses.
These costs must be offset by increased pricing. The bottom line is that equipment theft costs contractors
money and impairs their ability to offer competitive pricing for various construction projects. More
importantly, some contractor equipment is worth tens of thousands of dollars. Large contractors can have
equipment worth hundreds of thousands of dollars. Secure equipment means secure business.
Contractors with inadequate equipment security are easy theft targets. Their major concern is to protect
against tool and equipment theft. In some cases, the difference between profit and loss on construction
projects depends on successfully preventing theft losses.
Good planning and programming are essential to construction-site security. This is important to control loss
by preventing theft of valuable construction materials and tools. Contractors can prevent theft from a
construction site through several areas of ensuring security and loss control.
Equipment theft has many potential sources, but the two main sources are: 1) the public or 2) workers (present
and former) at job sites, during transportation, or at contractors’ home office.

When to Address These Problems

Public-entity representatives should address contractors’ security and loss-control policy during a
preconstruction meeting to discuss all requirements that contractors must meet during a building project.
Before a preconstruction meeting, contractors will be required to submit a variety of documents for review
by a public-entity representative.

9 STEPS TO SECURING YOUR JOB SITE

Appoint a crime prevention liaison
This person consults with the police department on issues of site security and receive updates on local criminal activity. They
establish and/or update current crime prevention procedures for your company.

Create a site security plan

Creating a site security plan before the project begins is essential. Questions that need to be addressed before the construction
begins include: How are we going to secure our perimeter? What type of lighting is needed? Where will we place video
surveillance? How are we going to secure valuable equipment and materials? Will we employ on-site security? These are
but a few issues that need to be considered in order to reduce the likelihood of being victimized.

Ask your neighbors for help

Whether building in a residential community or a commercial development, it is important to solicit help from nearby
residents or businesses. Share your building schedule with them and ask them to notify you and the police if they observe
anything suspicious on your property. Consider offering a reward if the information provided results in the arrest and
conviction of the offender.

Identify your assets and property

Page 23 of 167
All assets at your construction site should be identified, inventoried and tracked as closely as possible. Develop a numbered
identification system to identify all company equipment. Prominently display your company logo and contact information
on all equipment. Consider using tracking technology on your most valuable equipment. Encourage employees to clearly
identify their tools and personal property.

Secure your perimeter

Proper fencing around your perimeter is the first line of defense against criminals. Fencing should be at least 8’ high, set in
concrete and secured with a hardened steel chain and lock. Chain link fencing is preferred because it allows for natural
surveillance of your site. If possible the entire site should be fenced; if this is not possible, make sure the construction trailer
and any equipment storage areas are protected. Consider the use of video cameras at critical and isolated areas of the job site

Lock it up
Provide storage sheds or fenced areas for the secure storage of equipment and tools. Special consideration needs to be given
to any area that houses hazardous materials, explosives, solvents or poisons. Keep construction vehicles locked and their
keys secured (not in the vehicle) when not in use. Gas and oil caps should be locked and machinery should be disabled with
a hidden ignition cutoff switch.

Control site access

Ideally your job site should have only one access point, allowing for close monitoring of comings and goings from the site.
Employee parking areas should be outside the construction fence or in a clearly designated area within the fence line; workers
should be easily identified and have credentials that indicate site access. No trespassing signs should be posted in conspicuous
areas throughout the job site and a list of employees who have after hour access to the property should be available to the
police.

Light it up
A properly lighted job site can act as an effective deterrent to criminal activity. Well-lit areas should include any office
trailers, equipment storage trailers and vehicle parking areas. Motion sensitive lighting should be used throughout the job
site especially in isolated areas away from public view.

Ask your employees for help

Unfortunately employees or subcontractors are responsible for some of the crime that occurs at construction
sites. Encourage employees to report criminal behavior or suspicious activities. Have clearly stated policies
regarding the prosecution of individuals who commit crimes and immediately report any criminal activity to
the police.

CONTRACTS

A contract is a written or oral legally-binding agreement between the parties identified in the agreement to
fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement
of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the
claimed contract. Historically, this was most commonly achieved through signature or performance, but in
many jurisdictions - especially with the advance of electronic commerce - the forms of acceptance have
expanded to include various forms of electronic signature.

Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts, partnership
agreements, trade agreements, and intellectual property agreements.

 A sales contract is a contract between a company (the seller) and a customer where the company
agrees to sell products and/or services and the customer in return is obligated to pay for the
product/services bought.

Page 24 of 167
  A purchasing contract is a contract between a company (the buyer) and a supplier who is promising
to sell products and/or services within agreed terms and conditions. The company (buyer) in return
is obligated to acknowledge the goods / or service and pay for liability created.
 A partnership agreement may be a contract which formally establishes the terms of a partnership
between two legal entities such that they regard each other as 'partners' in a commercial
arrangement. However, such expressions may also be merely a means to reflect the desire of the
contracting parties to act 'as if' both are in a partnership with common goals. Therefore, it might not
be the common law arrangement of a partnership which by definition creates fiduciary duties and
which also has 'joint and several' liabilities.

CONTRACTUAL OBLIGATION

Defin; something that a person is legally forced to do through having signed a contract to do

Contractual terms

A contractual term is "an[y] provision forming part of a contract". Each term gives rise to a contractual
obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry
less legal weight as they are peripheral to the objectives of the contract.

Standard form contracts contain "boilerplate", which is a set of "one size fits all" contract provisions.
However, the term may also narrowly refer to conditions at the end of the contract which specify the
governing law provision, venue, assignment and delegation, waiver of jury trial, notice, and force majeure.
Restrictive provisions in contracts where the consumer has little negotiating power ("contracts of adhesion")
attract consumer protection scrutiny.

Classification of terms

Contractual terms are classified differently depending upon the context or jurisdiction. Terms establish
conditions precedent. English (but not necessarily non-English) common law distinguishes between
important conditions and warranties, with a breach of a condition by one party allowing the other to repudiate
and be discharged while a warranty allows for remedies and damages but not complete discharge. Whether
or not a term is a condition is determined in part by the parties' intent. In a less technical sense, however, a
condition is a generic term and a warranty is a promise. Not all language in the contract is determined to be
a contractual term. Representations, which are often precontractual, are typically less strictly enforced than
terms, and material misrepresentations historically was a cause of action for the tort of deceit. Warranties
were enforced regardless of materiality; in modern United States law the distinction is less clear but
warranties may be enforced more strictly. Statements of opinion may be viewed as "mere puff".

In specific circumstances these terms are used differently. For example, in English insurance law, violation
of a "condition precedent" by an insured is a complete defense against the payment of claims. In general
insurance law, a warranty is a promise that must be complied with. In product transactions, warranties
promise that the product will continue to function for a certain period of time.

In the United Kingdom the courts determine whether a term is a condition or warranty; for example, an
actress' obligation to perform the opening night of a theatrical production is a condition, but a singer's
obligation to rehearse may be a warranty. Statute may also declare a term or nature of term to be a condition
or warranty; for example the Sale of Goods Act 1979 s15A, provides that terms as to title, description, quality
and sample are generally conditions. The United Kingdom has also contrived the concept of an "intermediate

Page 25 of 167
term" (also called innominate), first established in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha
Ltd [1962].

Representations versus warranties

Statements of fact in a contract or in obtaining the contract are considered to be either warranties or
representations. Traditionally, warranties are factual promises which are enforced through a contract legal
action, regardless of materiality, intent, or reliance. Representations are traditionally precontractual
statements which allow for a tort-based action (such as the tort of deceit) if the misrepresentation is negligent
or fraudulent; historically a tort was the only action available, but by 1778, breach of warranty became a
separate legal contractual action. In U.S. law, the distinction between the two is somewhat unclear; warranties
are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-
based, but there is a confusing mix of case law in the United States. In modern English law, sellers often
avoid using the term 'represents' in order to avoid claims under the Misrepresentation Act 1967, while in
America 'warrants and represents' is relatively common. Some modern commentators suggest avoiding the
words and substituting 'state' or 'agree', and some model forms do not use the words; however, others
disagree.

Statements in a contract may not be upheld if the court finds that the statements are subjective or promotional
puffery. English courts may weigh the emphasis or relative knowledge in determining whether a statement
is enforceable as part of the contract. In the English case of Bannerman v. White the court upheld a rejection
by a buyer of hops which had been treated with sulphur since the buyer explicitly expressed the importance
of this requirement. The relative knowledge of the parties may also be a factor, as in English case of Bissett
v. Wilkinson where the court did not find misrepresentation when a seller said that farmland being sold would
carry 2000 sheep if worked by one team; the buyer was considered sufficiently knowledgeable to accept or
reject the seller's opinion.

Implied terms

A term may either be express or implied. An express term is stated by the parties during negotiation or written
in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

Terms implied in fact

Terms may be implied due to the factual circumstances or conduct of the parties. In the Australian case of
BP Refinery Westernport v. Shire of Hastings the UK Privy Council proposed a five stage test to determine
situations where the facts of a case may imply terms. The classic tests have been the "business efficacy test"
and the "officious bystander test". Under the "business efficacy test" first proposed in The Moorcock [1889],
the minimum terms necessary to give business efficacy to the contract will be implied. Under the officious
bystander test (named in Southern Foundries (1926) Ltd v Shirlaw [1940] but actually originating in Reigate
v. Union Manufacturing Co (Ramsbottom) Ltd [1918]), a term can only be implied in fact if an "officious
bystander" listening to the contract negotiations suggested that the term be included the parties would
promptly agree. The difference between these tests is questionable.

Terms implied in law

Statutes or judicial rulings may create implied contractual terms, particularly in standardized relationships
such as employment or shipping contracts. The Uniform Commercial Code of the United States also imposes
an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by
the Code. In addition, Australia, Israel and India imply a similar good faith term through laws.
Page 26 of 167
Most countries have statutes which deal directly with sale of goods, lease transactions, and trade practices.
In the United States, prominent examples include, in the case of products, an implied warranty of
merchantability and fitness for a particular purpose, and in the case of homes an implied warranty of
habitability.

Parties to a contract

There are only two principal parties, the offeror and the offeree, to an ordinary contract. The terms of the
contract bind one or both parties to render performance to the other in consideration of receiving, or having
received, the other's performance. Contracts sometimes specify that the benefits accruing to one party will
be conferred upon a third party. The effect of a third-party contract is to provide, to a party who has not
assented to it, a legal right to enforce the contract.

A creditor beneficiary is a nonparty to a contract who receives the benefit when a promise is made to
satisfy a legal duty. For example, suppose that a debtor owed a creditor $500. The debtor lends $500 to a
third person, who promises to use the money to pay the debtor's debt. The third person is the promisor, who
makes the promise to be enforced. The debtor is the promisee, to whom the promise is made. The contract
is between the debtor and the third person, the promisor, and the consideration for the promise is the $500
loan that the promisor received from the debtor. The creditor is the third-party beneficiary. If the promisor
refuses to pay the creditor $500, then the creditor may sue the promisor and prevail. Although the creditor
is not a party to their contract, both the debtor and the promisor intend that the creditor should be the
beneficiary of the contract and have enforceable rights against the promisor, since he or she is to pay the
creditor. The debtor or the creditor may sue to enforce the promisor's promise to pay. The creditor's right to
enforce the contract between the debtor and the promisor is effective only when he or she learns of, and
assents to, the contract. The creditor may also sue the debtor for the $500, as the debtor had a legal duty to
pay this loan. The debtor then may sue the promisor for breach of contract for refusing to pay the creditor.

A donee beneficiary of the contract is a non-party who benefits from a promise that is made for the purpose
of making a gift to him or her. A donor wishes to give a donee $200 as an anniversary present. The donor
plans to sell a television set for $200 to a purchaser, who promises to pay the donee the $200 directly. The
donee is a donee beneficiary of the purchaser's promise to pay the money and may enforce this claim
against the purchaser. The donee has no claim against the donor, the promisee, as the donor has no legal
duty to the donee but is merely giving the donee a gift. However, the donor will be able to sue the
purchaser for refusal to pay the donee, because it would be a breach of the terms of their contract of sale.

The difference between a creditor beneficiary and a donee beneficiary becomes significant when the parties
to a contract attempt to alter the rights of the third-party beneficiary. The promisor and the promisee have
no right or power to alter the accrued rights of the donee beneficiary without consent unless this power was
expressly reserved in the contract, regardless of whether the donee knows about the contract. A donee
beneficiary's rights become effective when the contract is made for his or her benefit, regardless of whether
he or she knows about the contract. In contrast, a creditor beneficiary's rights vest only when the creditor
beneficiary learns of, and assents to, the contract.

CONTRACT PLANNING

A contract is a written or oral legally-binding agreement between the parties identified in the agreement to
fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement
of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the
claimed contract. Historically, this was most commonly achieved through signature or performance, but in

Page 27 of 167
many jurisdictions - especially with the advance of electronic commerce - the forms of acceptance have
expanded to include various forms of electronic signature.

Developing a contract management plan

What is a contract management plan?

Contract management or contract administration is the management of contracts made with customers,
vendors, partners, or employees. The personnel involved in Contract Administration required to negotiate,
support and manage effective contracts are expensive to train and retain. Contract management includes
negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as
well as documenting and agreeing on any changes or amendments that may arise during its implementation
or execution. It can be summarized as the process of systematically and efficiently managing contract
creation, execution, and analysis for the purpose of maximizing financial and operational performance and
minimizing risk.

Common commercial contracts include employment letters, sales invoices, purchase orders, and utility
contracts. Complex contracts are often necessary for construction projects, goods or services that are highly
regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements,
and international trade.

A contract management plan contains all the key information about how a contract will be managed. It
establishes systems and processes to ensure that the contractor complies with the terms and conditions
during the performance of the contract.

A contract management plan enables the contract manager to:

 develop a good understanding of the contract, and the responsibilities of the parties involved; and
 establish a system against which the performance of both parties can be monitored and problems
can be identified early - either before or as they occur.

Do I need a contract management plan?

A formal contract management plan is not required for all contracts, but is strongly recommended where
the contract involves large dollar amounts, includes complex technical requirements, or when the contract
manager is responsible for managing a large number of contracts simultaneously.

When should the contract management plan be developed?

The contract management plan is a living document. Its development should commence during the
procurement planning stage, and it should be reviewed and updated throughout the procurement process
and the life of the contract.

At the procurement planning stage, consideration needs to be given to:

 who will manage the contract;

 how the contractor's performance will be monitored;
 what the risks associated with the contract are, and how they will be managed during the course of
the contract; and
 what reporting requirements will be required of the contractor.
Page 28 of 167
During the finalisation of the contract, details need to be agreed in relation to:

 performance measures to be used;

 confidentiality provisions
 milestones;
 reporting requirements; and
 implementation/transitional issues.

At the beginning of the contract management phase, the contract manager should finalise the plan, by
identifying the critical clauses in the contract and other requirements that may influence the management of
the contract. The plan should be updated throughout the course of the contract as circumstances require.

What should be included in the contract management plan?

The level of detail included in a contract management plan will vary, depending on the nature of the goods
or services being purchased. The majority of the information needed to complete the contract management
plan will be located in the contract (including the specifications and the contractor's tender documentation).

See the Pro forma Contract Management Plan for more detail on what should be included and how the plan
should be structured.

Areas of Contract Management

The business-standard contract management model, as employed by many organizations in the United
States, typically exercises purview over the following business disciplines:

 Authoring and negotiation

 Baseline management
 Commitment management
 Communication management.
 Contract visibility and awareness
 Document management
 Growth (for Sales-side contracts)

Stages in Contract Placement

STEP 1) Requirements Analysis

STEP 2) Evaluation Plan

STEP 3) Invitation to Tender

STEP 4) Evaluation of Proposals

Change management

There may be occasions where what is agreed in a contract needs to be changed later on. A number of bases
may be used to support a subsequent change, so that the whole contract remains enforceable under the new
arrangement.

Page 29 of 167
A change may be based on:

 A mutual agreement of both parties to vary the contract, outside the framework of the existing
contract. This would be an independent basis for changing the contract.
 A unilateral decision to vary the contract, contemplated and allowed for by the existing contract.
This would normally have notice periods for fairness and often the right of the other, especially in
consumer contracts, to cease the contractual relationship. Be careful that any one-way imposition of
change is contractually justified, otherwise it may be interpreted as a repudiation of the original
contract, enabling the other party to terminate the contract and seek damages.
 A bilateral decision to vary the contracting, within the variation or change control process outlined
in the existing contract. These are often called change control provisions.

Phases of Contract Management

Contract Management can be divided into five phases [8] namely:

- Initial Phase

- Bid Phase

- Development Phase

- Manage Phase

- Maintenance Phase

Contract Planning

Contracting shoul take place within a structure contract management system. A key part of this is planning.
Government agencies need to be clear about:

 Their overall objectives.

 The means they are using to achieve those objectives.
 The nature of the organisation they are likely to be ealing with, an the relationship they expect or
wish to have with the organisation.
 Their own contracting policies an capability.
 How they will secure accountability for public money.
 The buget constraint they operate uner.
 Risk management.

Selecting a Provier

Government agencies can ientify potential proviers in a number of ways:

 Asking other Government agencies, local Government, or other boies.

 Asking other NGOs, particularly umbrella groups who will have information about NGO proviers.
 From publishe information such as accreitation or registration.
 Avertising for expressions of interest.
 Conucting teners for services.
 From an existing provier they have a relationship with.
Page 30 of 167
  Contract managers shoul be aware of suitable NGOs in their area
 NGOs may take the initiative to suggest services.
 Information about potential proviers may be available from nees assessment or service planning.

A contract will often be one part of an ongoing relationship between a Government agency an an NGO.
NGOs are not simply an extension of the Government. They have their own objectives an interests. The
contractual relationship shoul not be use to prevent the NGO commenting on public policy matters. To the
extent that NGOs receive public money, they are, in turn, accountable for that money. They will also be
accountable to their stakeholers an clients. A purchasing organisation nees to satisfy itself that an NGO can
an oes eliver the service an in a manner consistent with the values an stanars the government expects.
Ongoing relationship management may involve an element of assistance or capability evelopment.

Negotiating the Terms of the Contract

The next step is to negotiate the contract itself. The contract sets out each party’s unertakings to the other.
Negotiations will usually focus on the quality an quantity aspects of the specifications for service elivery,
an the price. The price set nees to be realistic, given the quality requirements, an the likely nee for ongoing
elivery. Contract managers shoul negotiate within a clear set of parameters. It is normally in the interests of
both the Government agency an the NGO to approach negotiations in a collaborative rather than a
confrontational manner. A contract can range from a ocument of hunres of pages of etaile specification, to a
ocument of a few pages. The nature of the ocument signe will epen on the:

 Nature of the activities or services being provie for.

 Nature of the parties to the contract an the relationship between them.
 The amount of money involve.
 The term of the contract.
 Risk an risk management – what nees to happen if things o not turn out as planne?

Managing the Contract an Monitoring

Signing the contract is only part of the Government agency’s responsibilities for contract management.
They are also responsible for the ongoing management of the contract once it has been signe, an the
relationship with the NGO proviing the service.

This will involve:

 Monitoring (incluing verifying) elivery against the contract.

 Assessing the effectiveness of the services elivere.
 Approval of payment, an making payment accoring to the contract.
 Ongoing relationship management.
 ealing with any ifferences of view with the NGO.
 Negotiating changes to the contract.
 In extreme cases, taking action to enforce compliance with the contract, incluing exercising any
rights to terminate the contract.

This provies the basis for:

 Assessing whether the NGO has elivere what was contracte for.
 Accountability for public money.
 Paying money to the NGO.
Page 31 of 167
  Making ecisions about how to procee at the expiry of the contract.

Review and Evaluation

Review an evaluation overlaps with monitoring, but it merits separate treatment given that it extens further
than an iniviual contract.

Government agencies must buil a reflective capacity into their contract management system. They shoul
consier the following questions:

 Is the programme or policy being elivere by way of contracting effective?

 oes it represent value for money?
 What improvements can be mae?
 How effective has the NGO’s contract management been?
 How have the NGOs performe in respect of particular contracts?
 How have iniviual NGOs performe against our assessment of risk?
 How has the agency performe in respect of iniviual contracts?
 How effective is the agency’s relationship management?

Starting Over

The end of a contract is an important part of the contract management cycle. Government agencies need to
consider what to o in the future well before the end of a contract and consult with the NGO. There are a
number of possible approaches:

 Renegotiating the contract with the supplier or rolling it over.

 Selecting another supplier or tendering.
 Altering the scope of a service.
 Discontinuing the service.

TENDERING PROCESS

9.1.1 Types of Procurement

The system that is commonly used in the construction industry for the completion of a project is for a client
to engage a company to carry out the work on its behalf.

In order to do this they will generally appoint a contractor, directly or through an Architect, Engineer or
Project Manager.

The procurement process may take a number of formats in order to select, evaluate and appoint a contractor
for a project, the choice between the various systems will be determined by the employing authority and the
constraints applicable to the contract.

The main options available are considered below.

Traditional

This method usually uses the standard form of contract by the Joint Contracts Tribunal (JCT) or a similar.
The contract requires the contractor to carry out the construction according to the drawings and
Page 32 of 167
specification drawn up by the design team. All work is supervised on behalf of the client by the design
team leader, which is normally the architect or on civil engineering projects, the Consultant Civil Engineer.

Design and Build

In this case the Contractor is responsible for the design, specification and the construction. The contract
may be on a fixed price or cost reimbursement basis, which may be either negotiated, or subject to tender.
These are normally used for repetitive types of building of a standard type i.e. industrial unit which the
contractor has constructed previously. Past experience and familiarity of the design and construction should
result in cost savings for the client.

Management Contracting

In this, the design team specify the building requirements and specialist subcontractors are supervised and
co-ordinated by the management contractor to carry out the construction. The management contractor
receives a fee, which may be a set fee or a percentage of the contract cost. The management contractor is
responsible for providing site accommodation for which he will be reimbursed either at cost or as a laid
down lump sum in the tender document. Generally used on complex projects that require a short contract
period, though which must have flexibility for modifications during construction.

Construction Management

Construction management is similar in most respects to management contracting except that whereas with
management contracting the contract is between the client and the contractor (the subcontractors are
engaged through the main contractor) in construction management the contracts for the work packages are
with the client. The construction manager is employed to manage the construction work. This system tends
to be used only on large, specialist technical projects such as power stations.

Project Management

Project Management is "the overall planning, control and co-ordination of a project from inception to
completion aimed at meeting a client's requirements and ensuring completion on time, within cost and to
required quality standards".

Project management can be used on projects of any size, though it is normally used on larger developments.
The Project Manager may be an organisation or an individual who guides the client in the selection of a
suitable procurement system, appoint all members of the construction team and controls and organises the
project. Appointed on a fee basis, which is not dependent on the cost of the contract. This tends to ensure
that the project manager works solely for the client's interest, as he earns no commission.

Partnering

Partnering is the creation of a special relationship between contracting parties in the design/construction
industry. This relationship encourages the parties to change their traditional adversarial relationships to a
more co-operative, team based approach, which promotes the achievement of mutually beneficial goals,
including the prevention of major disputes.

The method of procurement should be selected on the basis of the priorities for the contract, cost lead time
duration of the works form of contract quality anticipated are a few of the considerations but each contract will
have its priorities defined during the feasibility and design process.
Page 33 of 167
9.1.2 Types of Tendering

The majority of builders still obtain much of their work by the system of tendering, especially for new work
or work of some importance as opposed to smaller or repair work.

Tendering for work takes various forms; all cost money to prepare yet many tenders are unsuccessful.
Success rates vary according to the companies tendering strategy.

Open Tendering

This usually takes the form of an advertisement in the national or local press stating that tenders are
required to carry out a construction contract. The system has disadvantages but does give contractors new
to an area or those starting new businesses the chance to tender or establish themselves.

Selective Tendering

Contractors apply to be included on an approved list maintained by an employing body often an

architectural practice, local authority or statutory body. These organisations have extensive knowledge and
experience of individual contractors and regularly review contractor performance an approved list. From
such lists they are able to select contractors most suited to the contract the number invited will vary
according to the value of the contract.

The main advantage of this system is that the contractors are known and vetted by the employing authority
and be assured as is possible that they will meet their contractual obligations. The system of vetting usually
by pretender questionnaires and the interviewing of contractors can work against contractors who are trying
to establish themselves in a particular market or newer companies which are expanding. However the
system is used extensively throughout the construction Industry.

Serial Tendering

This type of tender the contractor is required to submit costs for carrying out work usually not against a
particular project but against sample Bills of Quantity , Works Schedule, or price for a sample structure in
the knowledge that others of a similar nature will be undertaken. The rates given in such documents will
form the basis of costing for future work undertaken, which will be measured and valued by both parties to
the contract. The contract is usually also for a fixed period of time (often 5 years) after which the tendering
procedure will be repeated.

Some contractors specialize in this form of contract in the knowledge that once secured they have
continuity of work for their employees.

Negotiated Contract

Negotiated contracts take many forms it is very much dependent upon the type of construction and the
requirement by the client for factors such as speed, quality, repetition, cost, desire to retain the services etc.

Generally the negotiated contract is credited with saving much of the costs arising from selective tendering
and allows early contractor involvement but other factors disadvantages are also present it is important that
the Client and contractor determine the parameters for negotiation before commencement and that the
stages at which each may withdraw are agreed together with any associated costs at each stage.

Page 34 of 167
There are three methods used to calculate a final contract price;-

The maintenance of positive relationships during the negotiation process is essential , trust partnering and
mutual benefit of the contract to both parties during negotiations and the actual contract works is required.

Package Deal Tendering and Turnkey Contracts

These aim at provide the client with a complete service from enquiry to completion with the responsibility
for all design, construction and associated works being borne by the contractor. The Turnkey option will
usually include everything needed by the client to commence work ( Desks, Chairs Computer installations
etc) It is usual for the client to approach one or more contractors y and carry out initial discussions before
entering into formal design and contractual discussions with the selected contractor, this process is similar
to the Negotiated tender process.

This type of contract is often associated with commercial and industrial structures where simple repetitive
design and speed of construction are the main criteria and with clients who wish to retain the services of a
contractor who has given good service and value in the past and with whom a positive relationship exists.

Package deals are also popular in that they provide a service which usually involves only two parties the
client and the builder, the builder being responsible for securing and managing other building professions
which in the construction process.

Recommendation and Reputation

Much work may come to the builder through other ways other than that of tendering or the various methods
already dealt with. One of the most likely sources is of course, the reputation of the builder, which has
taken possibly many years to build up and all members in the organisation have to play their part in
achieving this, from management to operative.

Another method closely related to the firm’s reputation is that of receiving work on the recommendation of
a satisfied client, this can also result in work of a continuous nature such as maintaining various properties,
for example, banks, supermarkets etc., after showing competency for work of this type. Speculative or
spec. building, as it is often termed, is now quite common and this generally means that the builder takes a
gamble (usually a very calculated one) of building houses, office blocks, etc. before having any client.
These methods of obtaining work all hold a place on the make-up of a progressive company and to create a
steady flow of work - all must be exploited to the full

Planning stages

The Tender Stage

The tender stage comprises of the gathering together of all resources (physical and human) required to
carry out a contract; the pretender team determining via the use of critical analysis of information available
the most efficient and cost effective process by which the contract may be progressed and completed.

The Estimator will contribute to this process by providing advice on the overall cost of the various
constructional strategies proposed but until the method statements have been produced the Estimator is not
in a position to accurately cost the work proposed. The production of a contract programme derived from
method statements produced for the various elements of work to be completed and encompassing health
and safety assessments is central to the estimating (and subsequently to the construction) process.
Page 35 of 167
Each company tendering for a contract will have their own strategy on constructional techniques to be used
and resources available and will incorporate these into the estimating process.

The estimating of the rates used within the tender is both an art and a science and it must never be assumed
that an Estimators role is to place predetermined unit rates derived from historical data and synthesis into
Bills of Quantity.

The estimate is only a part of the tender process and it should not be assumed that the estimate derived by
the pretender team will be the final tender figure presented to the client. The importance of commercial
awareness at adjudication to convert the estimate into a tender cannot be overstated.

Pre-Tender and Pre- Contract Processes

The majority of work secured by a contractor is done so by some form of competitive tendering process.

The importance of gaining as much information as possible about the proposed contract and site cannot be
over emphasized.

The contract documentation and tender drawings will provide a useful starting point but most Estimators
will need to visit the proposed site to get a ‘feel’ for the contract and the environment in which the work
will take place.

The initial examination of a site may be divided into 3 stages:

 The Site Visit

 The Desk Top Study
 Soil Exploration / insitu testing (These usually result in laboratory analysis of soil samples and a
formal report for use by the tender team).

The extent of this investigation is in reality often limited to the site visit and desk top information which
increases the risks taken by the contractor.

The extent upon which the estimator will complete each of these stages will depend upon the complexity of
the contract, the need to secure the new work.

Thus the site visit and the recording of such information to relay back to the tender team will have a
profound effect upon the tender figure eventually arrived at and submitted to the client.

Site visit will vary according to whether the site is Compact (Traditional enclosed area) or Extended
(sewers runs, pipelines or coastal defences).

Considerations will include:

 Access and egress points to the site present

 Temporary roads and access points needed
 Ground conditions especially where bore hole information has not been provided within the contract
documents.
 Standing surface water / ponding
 Excavations which can be examined.
 Water courses
Page 36 of 167
  Surface contamination
 Existing buildings on the site
 Dumped rubbish or other clearance items
 Excavation challenges including machinery assessment removal of or storage of spoil
 Obvious service location and type of service
 Potential vandalism in the area
 Security arrangements and the type of hoarding or fencing required
 Temporary buildings location and type
 Adjacent buildings type and proximity
 Crane operation and access
 Local restrictions pedestrian restrictions / police restrictions local events
 Local knowledge

Many other considerations will apply on a site by site basis and most companies adopt a standardised site
visit report or check list to ensure that items are not overlooked.

The Preliminaries section is very important in establishing the overall tender costs and will contribute a
considerable percentage to the overall

Desk Top Analysis

This is basically writing e-mailing and accessing web based information to add to the on site evaluation.

It will include:

 Archive and current maps charts, geological profiles and historical data.
 Ordinance Survey maps
 Past use of the site
 Local Authority records and Archives
 Details of existing utilities NRSWA.
 Covenants
 Rights of Way
 Archaeological evidence
 Ordinance
 Ownership of adjacent land.
 Mining activities
 Environmental considerations
 Aerial photographs.
 Planning constraints
 SSSI
 Rail track

Pre Construction / Pre Tender & Planning

1. Appointment of all necessary professionals to assist with the design, planning and development of
information required for construction purposes.
2. Completion of all rezoning, special consent and departure application with the local authorities.
3. Assistance and co-ordination of design and development of drawings and other necessary
information with appointed professionals (i.e. architects, engineers, quantity surveyors etc) required

Page 37 of 167
 for client approval, municipal approval, contractor costing and client budget / cash flow
requirements.
4. Co-ordination of building specification and detailing of finishes to suit client requirements
regarding structural integrity, completed finish and client budget.
5. Establishment of a working budget and an estimated duration of the project.
6. Where necessary coordinating of all land re-zoning, sub divisions, environmental impact
assessments and land surveys etc. for the proposed development.
7. Ensuring that drawings & infrastructure details are timorously submitted to local authorities for
approval in accordance with recognized codes of practice.

Pre-contract meeting for construction contracts

The pre-contract meeting is an important meeting that takes place after the contractor has been appointed
but before work commences on site. It is an opportunity to for the project team to meet (perhaps for the first
time) and to plan the construction stage.

The pre-contract meeting is chaired by the contract administrator and is an opportunity to:

 Make introductions and issue contact details (perhaps a project directory).

 Clarify roles, responsibilities and lines of communication.
 Agree meeting schedules, meeting structures and attendees.
 Handover outstanding documents (such as insurance certificates) and issue outstanding information
(which may including any variations made since the contract was awarded).
 Issue nomination instructions.
 Discuss the contractor's master programme, including incorporation of works outside of the main
contract, inspections, commissioning and testing.
 Discuss the role of site inspectors.
 Agree procedures for monitoring, issuing, receiving and reviewing information (including the
information release schedule if there is one, and its relationship with the contractor's master
programme). This may include a distribution matrix.
 Agree site access procedures and issues.
 Agree site induction procedures and other health and safety issues.
 Agree procedures for dealing with queries.
 Agree procedures for issuing instructions.

The meeting should be minuted so that there is a clear record of the procedures agreed and decisions made.

Construction Phase

1. Management of the contractors and involved professionals over the duration of the project.
2. Acting as the principle liaison between the client, the professionals and contractors involved.
3. Ensuring that long lead-time items have been ordered timorously throughout the contract so the
critical path is adhered to.
4. Complete communication with contractor and client with assistance to him/them in providing any
outstanding information, alternative methods of construction and professional opinion on other sub
contractors.
5. Complete supervision of all planned changes (structural and financial) and issuing of all site
instructions to contractors detailing the required changes.

Page 38 of 167
 6. Management of budget fluctuations, should changes to the scope of work be required, with written
report detailing the impact thereof.
7. Ensuring that information flow between professionals and client does not affect the critical path of
construction. And when such occurs, assisting the contractor in resolving conflicts, reorganizing
basic program structure and critical path.
8. Quality controls of all materials used, and direct supervision of construction methods implemented;
ensuring that building standards are strictly adhered to and that deviations from approved drawings
is limited to acceptable industry norms.
9. Detailed evaluation of monthly contractor interim payments and issuing of financial certificates for
payment on clients behalf. This evaluation is done with the architect and or any others you might
want included in the financial process.
10. Progress reports and evaluation of construction program with contractor. A report will be submitted
to the client on the contract status (i.e. time and finance) and or any remedial actions required in
order to correctly affect the critical path of the project.
11. Ensuring that all necessary municipal inspections mandated by law are carried out and signed off by
the appropriate authorities when and where necessary.

Turning the Cost Estimate into a Tender

The Estimator in co-ordination with the tender team will by this stage have completed the task of
investigating the true nature and extent of the contract under consideration and produced documents and
reference material to aid their final pricing of the contract. They will have produced a pre-tender
programme early in the tendering cycle to ensure that the tender is completed and received by the Client by
the date noted on the tender documentation. They will be working as a team to produce that which they
consider will be the right price for the contract and the strategy by which this price will be competitive and
secure the contract.

Even at this stage the manner in which the contract and its individual elements and operations will be
completed will have been established and method statements, risk assessment, the overall contract
programme etc, produced and discussed.

The estimating team must be optimistic about their chances of winning the contract, and the type of
contract should be compatible with the ‘Bidding Strategy’ of the company if the team are to be fully
motivated.

It is a reflection on some contractors that only 10% or less of contracts tendered for are won, yet other
contractors achieve success rates of 50% or more merely by targeting certain types of contract and
recruiting and retaining expertise within that field of work.

Assuming that the tendering team have worked diligently completed the required documentation, produced
the required statements and programmes, and studied the drawings and details fully the challenge still
remains. - How can the Estimators price be converted into a tender price which can be submitted to the
Client and secure the contract for the company.

Taking the contract forward using the knowledge of the tender team and utilizing their understanding of the
project and experience from previous contracts is a process known to some as ‘Adjudication’ and to others
as ‘Settlement’; some use the description of ‘Completing the Estimate and Final Tender Review’ and
separate out settlement as a separate stage.

Page 39 of 167
All are terms which interact and in essence describe a process of checking what has been produced by the
tender team and taking this forward to produce a Tender Figure /Price which will secure the contract;
turning the estimators cost price to the contractor of actually carrying out the work into a figure which will
actually win the contract.

The tender team is charged with the objective of winning the contract at the highest possible price that it is
actually possible to do so; not the lowest price anyone can achieve that feat but their company will not
remain in business for any length of time. (It should be appreciated that in the real world other factors may
make the above statement seem simplistic but the essential point is made).

The estimate should be carefully checked for errors in the bills of quantity unit rates and extension of the
rates until the Estimator is content with the price calculated.

Settlement / Adjudication Meeting

The process of settlement or adjudication involves considering amongst other factors:

 The Estimators report

 Contract conditions and form of contract
 Site factors
 Past experience of the Client
 Analysing own work content
 Sub-Contract allocation.
 Prime cost and Provisional sum content
 Discounts available
 Non Standard insurance requirements
 Liquidated damages applicable
 Complexity of the contract
 Programme constraints
 Likely variations
 Valuation dates
 Labour availability
 Profit margins required
 Preliminaries
 Effects on overheads
 Dayworks
 Contingency sums included
 Preliminaries including contractual requirements
 Competitors
 The existing company workload
 The need for the new contract.
 Financial implications and cash flow analysis
 Risk analysis
 Health and Safety Plan.
 Cash flow with the new contract
 Cash flow without the new contract
 Company retention on selective tendering lists.

The list is in reality extensive and many of these factors will already have been considered by the tendering
team and related to the estimator but the final ‘settlement’ is in many respects left to the senior
Page 40 of 167
management of the tendering company; on their shoulders rests the continuance of the company and
responsibility for its profitability.

That which turns the estimate by into the formal tender is complex and many would consider it an art rather
than a science, everyone attending the settlement meeting(s) should contribute and much discussion will
take place until a sum of money is agreed and the Form of Tender completed and submitted.

It is not unusual for a Managing Director aware of the competition to reduce or increase the Estimators cost
prediction before submitting the tender.

Outline Tender Procedure for a Contract to be Awarded under JCT form of Contract

1. Invitation to tender – Document delivery

2. Check contract documentation
3. Ensure complete
4. Bills of Quantity
5. Drawings as contract documentation
6. Conditions/Form of Tender
7. Note return date
8. Determine tender policy for this invitation
9. Yes/No (with carefully worded letter)
10. Read all documentation carefully
11. Decision to tender – Positive
12. Produce Pre-tender Programme
13. Method Statements
14. Contract outline programme
15. Working methods
16. Health, safety, welfare and environmental protection requirements
17. Meeting schedule etc.
18. Assign duties to personnel
19. Carry out pre-tender site investigation – assess work and site conditions
20. Determine own work content of the Bills of Quantity
21. Request quotations for plant and materials – full documentation must be provided, including
specification and form of contract
22. Determine extent of the sub-contract works and request quotations – full documentation must be
provided, including specification and form of contract
23. Price sections of the Bills of Quantity to be completed by the main contractor
24. Compile/price the whole of the Bills of Quantity using information gathered from internal and
external sources
25. Analyse Bills of Quantity to determine contractors own work content
26. Preliminaries
27. Domestic sub-contractors
28. Nominated sub-contractors
29. Nominated suppliers
30. Provisional sums
31. Daywork sums
32. Contingencies
33. Discounts
34. Possible additions/omissions etc.
35. Adjust rates and price in line with the findings- analysis report for adjudication meeting
Page 41 of 167
 36. Determine financial viability of the contract
37. Determine work impact of success or failure of the tender – report for adjudication meeting
38. Adjudication meeting – to determine tender price
39. Complete form of tender and deliver to the appointed place in good time – obtain a receipt

PROGRAMME CALCULATION SHEETS; (planning tools)

i. Bills of quantities
ii. Actual measurements
iii. Programming methods
iv. Bar charts
v. Critical path networks
vi. Perts

BILL OF QUANTITIES

OBJECTIVES

 The objectives of the Bill of Quantities are: (1) to provide sufficient information on the
quantities of Works to be performed to enable bids to be prepared efficiently and accurately; and
when a contract has been entered into, (2) to provide a priced Bill of Quantities for use in the
periodic valuation of works executed.
 In order to attain these objectives, works are itemized in the Bill of Quantities in sufficient detail to
distinguish between the different classes of works, or between works of the same nature carried out
in different locations or in other circumstances which may give rise to different considerations of
cost. Consistent with these requirements, the layout and content of the Bill of Quantities are
required to be as simple and brief as possible.
 The large data bank of information contained in the Bill of Quantities can be used in many ways to
help the post-contract control of a project.

AN OVERVIEW OF BILLS OF QUANTITIES

 The Bills of Quantities are usually indicated by items of work, units of measurement, quantities of
work, rate for doing the work, and total value of the work. An example is shown below:

Description of Unit of Total amount in

Item ID Quantity of work Rate in US $
item measurement US $
Reinforced
cement
concrete work
in grade beams
(attaining
compressive
1 Cubic yard 1,000 75 75,000
strength of
3,000 psi in 28
days) with the
leanest
permissible
mix, 2:3:6 with
Page 42 of 167
 3/4" down
graded crushed
stone as coarse
aggregate and
coarse sand
with an FM not
less than 2.7 as
fine aggregate.

 Usually the contractor goes through the Bills of Quantities and would quote her/his rate as a
percentage above or below the rates indicated.
 Even though the QS employed by the owner provides a detailed estimate for the project, sometimes
the rates and total amount to do the works may not be shown in the Bills of Quantities. In that case,
the bidder provides the rates of the items at which she/he is capable to do the works.
 Pricing of different items of work are done on the basis of the cost of materials, equipment, labor,
and overheads and profit.
o Materials: The materials costs are calculated by examining the material quotations received
from suppliers, applying appropriate wastage factors, and delivery charges.
o Equipment: Cost of equipment is calculated usually as a percentage of the cost of materials.
Depending on whether the equipment is owned or rented, this percentage will vary.
o Labor: The most difficult element to price is the labor cost. Most of the times, it is not
sufficient to rely on published standard rates. Allowances for absences due to sickness, loss
of time due to inclement weather, overtime, etc. are required to be built in to arrive at a
pragmatic all-inclusive labor rate. Rate of productivity is another factor that plays an
important role in fixing labor prices.
o Overheads and profit: Once the cost of materials, equipment, and labor has been added up, a
percentage for overhead and profit is added to the item rate. This percentage may vary from
project to project depending on how well the document has been prepared by the QS and
also on market conditions. It may range from 2.5 to over 25 percent.
 Once the pricing of all individual items for all trades is completed, the amounts are carried to a
summary page to indicate the total bid price.

PREPARATION OF SCHEDULE FROM BILL OF QUANTITIES

 A schedule of works may be prepared from the Bill of Quantities.

 Example:
o Assume the total amount of labor envisaged to complete a certain item of work is $240,000.
The Bill of Quantities indicate that labor cost (including the cost of all types of labor) per
hour for the work is $240. In that case the total time required to complete the work will be
1,000 hours. If we allow 40 hours per week, then total duration of the work would be 25
weeks.

POST-CONTRACT USE OF BILL OF QUANTITIES

 The Bill of Quantities virtually works as a data bank for the successful contractor. The breakdown
of materials, equipment, and labor prices may be in some cases manipulated to get the maximum
percentage profit from any changes instructed by the client.
Page 43 of 167
  Example:
o Assume that $40 was the accepted labor rate and 10 percent was the accepted overhead and
profit rate for an item of work. The materials cost was accepted to be $60. The total item
rate (assuming that there was no equipment cost involved), therefore, was $110
($40+$60+$10) per unit. Now if a change in material specification is ordered by the client,
and if cost of newly specified material is $80, then the item rate would be $132
($40+$80+$12) per unit.
 For large quantities of work, the materials suppliers may be willing to give a discount once the
project has been awarded. Often a discount of even 2 percent on material prices can make a
significant difference to the profitability of a contract.
 Profit margin can also be increased by providing incentive to the labor forces. Rate of an item is
usually based on the theoretical productivity of the trade workers. Assume that an increase of 10 per
cent on labor rates increases the productivity of labor by 20 percent. If an item of work requires
1,000 hours to be completed under normal circumstances (and as envisaged in the contract), then
with this increased rate of wages, the duration of the work could be reduced to about 835 hours.
Assume that the original labor cost was envisaged to be $240,000 @$240 per hour. With an
increase of 10 per cent, the new labor cost would be $264 per hour, but the total labor cost would be
reduced to $ 220,440.

SOME OTHER ADVANTAGES OF THE USE OF BILL OF QUANTITIES

 Save the cost and time of several contractors measuring the same design in order to calculate their
bids for competition.
 Provide a consistent basis for competitive bids so that the contractor who is the most efficient and
least expensive in providing the items of work is likely to be commissioned for the job.
 Provide an open basis for the contract; the client provides an extensive and clear statement of the
work he/she requires and the contractor states the price at which he/she is prepared to undertake the
job.
 Provide a very strong basis for financial administration of the contract.

Bill of materials

A bill of materials (sometimes bill of material or BOM) is a list of the raw materials, sub-assemblies,
intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end
product. A BOM may be used for communication between manufacturing partners, or confined to a single
manufacturing plant.

A BOM can define products as they are designed (engineering bill of materials), as they are ordered (sales
bill of materials), as they are built (manufacturing bill of materials), or as they are maintained (service bill of
materials). The different types of BOMs depend on the business need and use for which they are intended.
In process industries, the BOM is also known as the formula, recipe, or ingredients list. In electronics, the
BOM represents the list of components used on the printed wiring board or printed circuit board. Once the
design of the circuit is completed, the BOM list is passed on to the PCB layout engineer as well as component
engineer who will procure the components required for the design.

Contents

 1 Modular BOMs
 2 Configurable BOM
 3 Multi-Level BOMs
Page 44 of 167
  4 See also
 5 References
 6 External links

Modular BOMs

In most cases BOMs are of hierarchical nature, with the top level representing the finished product which
may be a sub-assembly or a completed item. BOMs that describe the sub-assemblies are referred to as
modular BOMs. An example of this is the NAAMS BOM that is used in the automotive industry to list all
the components in an assembly line. The structure of the NAAMS BOM is System, Line, Tool, Unit and
Detail.

The first hierarchical databases were developed for automating bills of materials for manufacturing
organizations in the early 1960s. At present this BOM is used as a data base to identify the many parts and
their codes in automobile manufacturing companies. [1]

A bill of materials "implosion" links component pieces to a major assembly, while a bill of materials
"explosion" breaks apart each assembly or sub-assembly into its component parts.

A modular BOM can be displayed in the following formats:

 A single-level BOM that displays the assembly or sub-assembly with only one level of children. Thus
it displays the components directly needed to make the assembly or sub-assembly.[2]
 An indented BOM that displays the highest-level item closest to the left margin and the components
used in that item indented more to the right. [3]
 Modular (planning) BOM

A BOM can also be visually represented by a product structure tree, although they are rarely used in the
workplace.[3] For example, one them is Time-Phased Product Structure [4] where this diagram illustrates the
time needed to build or acquire the needed components to assemble the final product.For each product, the
time phased product structure shows the sequence and duration of each operation.

Configurable BOM

A configurable bill of materials (CBOM) is a form of BOM used by industries that have multiple options
and highly configurable products (e.g. telecom systems, data-center hardware (SANS, servers, etc.), PCs,
autos).[5]

The CBOM is used to dynamically create "end-items" that a company sells. The benefit of using CBOM
structure is that it reduces the work-effort needed to maintain product structures. The configurable BOM is
most frequently driven by "configurator" software, however it can be enabled manually (manual maintenance
is infrequent because it is unwieldy to manage the number of permutations and combinations of possible
configurations). The development of the CBOM is dependent on having a modular BOM structure in place.
The modular BOM structure provides the assemblies/sub-systems that can be selected to "configure" an end-
item.

While most configurators utilize top-down hierarchical rules syntax to find appropriate modular BOMs,
maintenance of very similar BOMs (i.e., only one component is different for various voltages) becomes
highly excessive. A newer approach, (Bottom-Up/Rules-Based Structuring) utilizing a proprietary search
engine scheme transversing through selectable componentry at high speeds eliminates the Planning Modular
Page 45 of 167
BOM duplications[citation needed]. The search engine is also used for all combinatorial feature constraints and
GUI representations to support specification selections.

To decide which variant of the parts or components are to be chosen, they are attributed by the product
options which are the characteristic features of the product (business). If the options of the product build an
ideal boolean algebra, it is possible to describe the connection between parts and product variants with an
boolean expression, which refers to a subset of the set of products. [7]

Multi-Level BOMs

A Multi-Level Bill of Materials (BOM), or referred as an indented BOM, is a bill of materials that lists the
components, assemblies, and parts required to make a product. It provides a display of all items that are in
parent-children relationships. When an item is a sub-component, unfinished part, etc., all of its components,
including finished parts and raw materials, are also exhibited. A multi-level structure can be illustrated by a
tree with several levels. In contrast, a single-level structure only consists of one level of children in
components, assemblies and materials

Method (computer programming)

A method (or a member function) in object-oriented programming (OOP) is a subroutine associated with
an object of a class that forms its interface through which the outside members of the class (other objects)
can access its private members (mainly the encapsulated data). Methods define the behaviour of objects at
program run time. Methods can be defined both inside and outside a class. When defined inside they are
automatically inline and are bound to the class at compile time (static binding) otherwise they are bound at
runtime (dynamic binding).

Bar chart

A bar chart or bar graph is a chart with rectangular bars with lengths proportional to the values that they
represent. The bars can be plotted vertically or horizontally. A vertical bar chart is sometimes called a
column bar chart.

Description

A bar graph is a chart that uses either horizontal or vertical bars to show comparisons among categories.
One axis of the chart shows the specific categories being compared, and the other axis represents a discrete
value. Some bar graphs present bars clustered in groups of more than one (grouped bar graphs), and others
show the bars divided into subparts to show cumulate effect (stacked bar graphs). Bar graph can be drawn
horizontally or vertically.

Use

Bar charts have a discrete range. Bar charts are usually scaled so that all the data can fit on the chart. Bars
on the chart may be arranged in any order. Bar charts arranged from highest to lowest incidence are called
Pareto charts. Normally, bars showing frequency will be arranged in chronological (time) sequence.
Grouped bar graph usually present the information in the same order in each grouping. Stacked bar graphs
present the information in the same sequence on each bar.

Page 46 of 167
Bar graphs charts provide a visual presentation of categorical data.[1] Categorical data is a grouping of data
into discrete groups, such as months of the year, age group, shoe sizes, and animals. These categories are
usually qualitative. In a column bar chart, the categories appear along the horizontal axis; the height of the
bar corresponds to the value of each category.

Bar graphs can also be used for more complex comparisons of data with grouped bar charts and stacked bar
charts.[1] In a grouped bar chart, for each categorical group there are two or more bars. These bars are color-
coded to represent a particular grouping. For example, a business owner with two stores might make a
grouped bar chart with different colored bars to represent each store: the horizontal axis would show the
months of the year and the vertical axis would show the revenue. Alternatively, a stacked bar chart could be
used. The stacked bar chart stacks bars that represent different groups on top of each other. The height of
the resulting bar shows the combined result of the groups. However, stacked bar charts are not suited to
datasets where some groups have negative values. In such cases, grouped bar charts are preferable.

A bar graph is very useful for recording discrete data. Bar graphs also look a lot like a histogram, which
record continuous data. The difference is not that bar graphs (can) have spaces between columns and
histograms don't (have to) have spaces, the difference is the type of data that each represent. For more on
the difference, please see this description from shodor.org

Critical path method

The critical path method (CPM) is an algorithm for scheduling a set of project activities.[1]

History

The critical path method (CPM) is a project modeling technique developed in the late 1950s by Morgan
R. Walker of DuPont and James E. Kelley, Jr. of Remington Rand. Kelley and Walker related their
memories of the development of CPM in 1989. Kelley attributed the term "critical path" to the developers
of the Program Evaluation and Review Technique which was developed at about the same time by Booz
Allen Hamilton and the U.S. Navy. The precursors of what came to be known as Critical Path were
developed and put into practice by DuPont between 1940 and 1943 and contributed to the success of the
Manhattan Project.

CPM is commonly used with all forms of projects, including construction, aerospace and defense, software
development, research projects, product development, engineering, and plant maintenance, among others.
Any project with interdependent activities can apply this method of mathematical analysis. Although the
original CPM program and approach is no longer used, the term is generally applied to any approach used
to analyze a project network logic diagram.

Basic technique

The essential technique for using CPM is to construct a model of the project that includes the following:

1. A list of all activities required to complete the project (typically categorized within a work
breakdown structure),
2. The time (duration) that each activity will take to complete,
3. The dependencies between the activities and,
4. Logical end points such as milestones or deliverable items.

Page 47 of 167
Using these values, CPM calculates the longest path of planned activities to logical end points or to the end
of the project, and the earliest and latest that each activity can start and finish without making the project
longer. This process determines which activities are "critical" (i.e., on the longest path) and which have
"total float" (i.e., can be delayed without making the project longer).

Therefore, In project management, a critical path is the sequence of project network activities which
add up to the longest overall duration. This determines the shortest time possible to complete the project.
Any delay of an activity on the critical path directly impacts the planned project completion date (i.e. there
is no float on the critical path). A project can have several, parallel, near critical paths. An additional
parallel path through the network with the total durations shorter than the critical path is called a sub-
critical or non-critical path.

CPM analysis tools allow a user to select a logical end point in a project and quickly identify its longest
series of dependent activities (its longest path). These tools can display the critical path (and near critical
path activities if desired) as a cascading waterfall that flows from the project's start (or current status date)
to the selected logical end point.

Although the activity-on-arrow diagram ("PERT Chart") is still used in a few places, it has generally been
superseded by the activity-on-node diagram, where each activity is shown as a box or node and the arrows
represent the logical relationships going from predecessor to successor as shown here in the "Activity-on-
node diagram".

Activity-on-node diagram showing critical path schedule, along with total float and critical path drag
computations

In this diagram, Activities A, B, C, D, and E comprise the critical or longest path, while Activities F, G,
and H are off the critical path with floats of 15 days, 5 days, and 20 days respectively. Whereas activities
that are off the critical path have float and are therefore not delaying completion of the project, those on the
critical path will usually have critical path drag, i.e., they delay project completion. The drag of a critical
path activity can be computed using the following formula:

1. If a critical path activity has nothing in parallel, its drag is equal to its duration. Thus A and E have
drags of 10 days and 20 days respectively.
2. If a critical path activity has another activity in parallel, its drag is equal to whichever is less: its
duration or the total float of the parallel activity with the least total float. Thus since B and C are
both parallel to F (float of 15) and H (float of 20), B has a duration of 20 and drag of 15 (equal to
F's float), while C has a duration of only 5 days and thus drag of only 5. Activity D, with a duration
of 10 days, is parallel to G (float of 5) and H (float of 20) and therefore its drag is equal to 5, the
float of G.

Page 48 of 167
These results, including the drag computations, allow managers to prioritize activities for the effective
management of project completion, and to shorten the planned critical path of a project by pruning critical
path activities, by "fast tracking" (i.e., performing more activities in parallel), and/or by "crashing the
critical path" (i.e., shortening the durations of critical path activities by adding resources).

Crash duration

"Crash duration" is a term referring to the shortest possible time for which an activity can be scheduled. It
is achieved by shifting more resources towards the completion of that activity, resulting in decreased time
spent and often a reduced quality of work, as the premium is set on speed. Crash duration is typically
modeled as a linear relationship between cost and activity duration, however in many cases a convex
function or a step function is more applicable.

Expansion

Originally, the critical path method considered only logical dependencies between terminal elements. Since
then, it has been expanded to allow for the inclusion of resources related to each activity, through processes
called activity-based resource assignments and resource leveling. A resource-leveled schedule may include
delays due to resource bottlenecks (i.e., unavailability of a resource at the required time), and may cause a
previously shorter path to become the longest or most "resource critical" path. A related concept is called
the critical chain, which attempts to protect activity and project durations from unforeseen delays due to
resource constraints.

Since project schedules change on a regular basis, CPM allows continuous monitoring of the schedule,
which allows the project manager to track the critical activities, and alerts the project manager to the
possibility that non-critical activities may be delayed beyond their total float, thus creating a new critical
path and delaying project completion. In addition, the method can easily incorporate the concepts of
stochastic predictions, using the program evaluation and review technique (PERT) and event chain
methodology.

Currently, there are several software solutions available in industry that use the CPM method of scheduling,
see list of project management software. The method currently used by most project management software
is based on a manual calculation approach developed by Fondahl of Stanford University.

Flexibility

A schedule generated using critical path techniques often is not realised precisely, as estimations are used
to calculate times: if one mistake is made, the results of the analysis may change. This could cause an upset
in the implementation of a project if the estimates are blindly believed, and if changes are not addressed
promptly. However, the structure of critical path analysis is such that the variance from the original
schedule caused by any change can be measured, and its impact either ameliorated or adjusted for. Indeed,
an important element of project postmortem analysis is the As Built Critical Path (ABCP), which analyzes
the specific causes and impacts of changes between the planned schedule and eventual schedule as actually
implemented.

Total Float
The amount of time an activity can slip from its early start without delaying the project.

The difference between an activity’s late dates and early dates.

Page 49 of 167
Activities with zero total float are critical.

Late date – Early date = Total Float (TF)

PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)

PERT chart for a project with five milestones (10 through 50) and six activities (A through F). The project
has two critical paths: activities B and C, or A, D, and F – giving a minimum project time of 7 months with
fast tracking. Activity E is sub-critical, and has a float of 1 month.

The program (or project) evaluation and review technique, commonly abbreviated PERT, is a statistical
tool, used in project management, which was designed to analyze and represent the tasks involved in
completing a given project. First developed by the United States Navy in the 1950s, it is commonly used in
conjunction with the critical path method (CPM).

(A PERT chart is a project management tool used to schedule, organize, and coordinate tasks within a
project. PERT stands for Program Evaluation Review Technique, a methodology developed by the U.S.
Navy in the 1950s to manage the Polaris submarine missile program. A similar methodology, the Critical
Path Method (CPM) was developed for project management in the private sector at about the same time.)

History

Program evaluation and review technique

The Navy's Special Projects Office, charged with developing the Polaris-Submarine weapon system and the
Fleet Ballistic Missile capability, has developed a statistical technique for measuring and forecasting
progress in research and development programs. This program evaluation and review technique (code-
named PERT) is applied as a decision-making tool designed to save time in achieving end-objectives, and
is of particular interest to those engaged in research and development programs for which time is a critical
factor.
The new technique takes recognition of three factors that influence successful achievement of research
and development program objectives: time, resources, and technical performance specifications. PERT
employs time as the variable that reflects planned resource-applications and performance specifications.
With units of time as a common denominator, PERT quantifies knowledge about the uncertainties involved
in developmental programs requiring effort at the edge of, or beyond, current knowledge of the subject –
effort for which little or no previous experience exists.
Through an electronic computer, the PERT technique processes data representing the major, finite

Page 50 of 167
accomplishments (events) essential to achieve end-objectives; the inter-dependence of those events; and
estimates of time and range of time necessary to complete each activity between two successive events.
Such time expectations include estimates of "most likely time", "optimistic time", and "pessimistic time"
for each activity. The technique is a management control tool that sizes up the outlook for meeting
objectives on time; highlights danger signals requiring management decisions; reveals and defines both
methodicalness and slack in the flow plan or the network of sequential activities that must be performed to
meet objectives; compares current expectations with scheduled completion dates and computes the
probability for meeting scheduled dates; and simulates the effects of options for decision – before decision.
The concept of PERT was developed by an operations research team staffed with representatives from
the Operations Research Department of Booz, Allen and Hamilton; the Evaluation Office of the Lockheed
Missile Systems Division; and the Program Evaluation Branch, Special Projects Office, of the Department
of the Navy.

— Willard Fazar (Head, Program Evaluation Branch, Special Projects Office, U. S. Navy), The American
Statistician, April 1959.[1]

Overview

PERT is a method to analyze the involved tasks in completing a given project, especially the time needed to
complete each task, and to identify the minimum time needed to complete the total project.

PERT was developed primarily to simplify the planning and scheduling of large and complex projects. It
was developed for the U.S. Navy Special Projects Office in 1957 to support the U.S. Navy's Polaris nuclear
submarine project.[2] It was able to incorporate uncertainty by making it possible to schedule a project while
not knowing precisely the details and durations of all the activities. It is more of an event-oriented
technique rather than start- and completion-oriented, and is used more in projects where time is the major
factor rather than cost. It is applied to very large-scale, one-time, complex, non-routine infrastructure and
Research and Development projects. An example of this was for the 1968 Winter Olympics in Grenoble
which applied PERT from 1965 until the opening of the 1968 Games. [3]

This project model was the first of its kind, a revival for scientific management, founded by Frederick
Taylor (Taylorism) and later refined by Henry Ford (Fordism). DuPont's critical path method was invented
at roughly the same time as PERT.

Terminology

 PERT event: a point that marks the start or completion of one or more activities. It consumes no
time and uses no resources. When it marks the completion of one or more activities, it is not
"reached" (does not occur) until all of the activities leading to that event have been completed.
 predecessor event: an event that immediately precedes some other event without any other events
intervening. An event can have multiple predecessor events and can be the predecessor of multiple
events.
 successor event: an event that immediately follows some other event without any other intervening
events. An event can have multiple successor events and can be the successor of multiple events.
 PERT activity: the actual performance of a task which consumes time and requires resources (such
as labor, materials, space, machinery). It can be understood as representing the time, effort, and
resources required to move from one event to another. A PERT activity cannot be performed until
the predecessor event has occurred.
 PERT sub-activity: a PERT activity can be further decomposed into a set of sub-activities. For
example, activity A1 can be decomposed into A1.1, A1.2 and A1.3 for example. Sub-activities have
Page 51 of 167
 all the properties of activities, in particular a sub-activity has predecessor or successor events just
like an activity. A sub-activity can be decomposed again into finer-grained sub-activities.
 optimistic time (O): the minimum possible time required to accomplish a task, assuming everything
proceeds better than is normally expected
 pessimistic time (P): the maximum possible time required to accomplish a task, assuming
everything goes wrong (but excluding major catastrophes).
 most likely time (M): the best estimate of the time required to accomplish a task, assuming
everything proceeds as normal.
 expected time (TE): the best estimate of the time required to accomplish a task, accounting for the
fact that things don't always proceed as normal (the implication being that the expected time is the
average time the task would require if the task were repeated on a number of occasions over an
extended period of time).

TE = (O + 4M + P) ÷ 6

 float or slack is a measure of the excess time and resources available to complete a task. It is the
amount of time that a project task can be delayed without causing a delay in any subsequent tasks
(free float) or the whole project (total float). Positive slack would indicate ahead of schedule;
negative slack would indicate behind schedule; and zero slack would indicate on schedule.
 critical path: the longest possible continuous pathway taken from the initial event to the terminal
event. It determines the total calendar time required for the project; and, therefore, any time delays
along the critical path will delay the reaching of the terminal event by at least the same amount.
 critical activity: An activity that has total float equal to zero. An activity with zero float is not
necessarily on the critical path since its path may not be the longest.
 Lead time: the time by which a predecessor event must be completed in order to allow sufficient
time for the activities that must elapse before a specific PERT event reaches completion.
 lag time: the earliest time by which a successor event can follow a specific PERT event.
 fast tracking: performing more critical activities in parallel
 crashing critical path: Shortening duration of critical activities

Implementation

The first step to scheduling the project is to determine the tasks that the project requires and the order in
which they must be completed. The order may be easy to record for some tasks (e.g. When building a
house, the land must be graded before the foundation can be laid) while difficult for others (There are two
areas that need to be graded, but there are only enough bulldozers to do one). Additionally, the time
estimates usually reflect the normal, non-rushed time. Many times, the time required to execute the task can
be reduced for an additional cost or a reduction in the quality.

In the following example there are seven tasks, labeled A through G. Some tasks can be done concurrently
(A and B) while others cannot be done until their predecessor task is complete (C cannot begin until A is
complete). Additionally, each task has three time estimates: the optimistic time estimate (O), the most
likely or normal time estimate (M), and the pessimistic time estimate (P). The expected time (TE) is
computed using the formula (O + 4M + P) ÷ 6.

Time estimates
Activity Predecessor Expected time
Opt. (O) Normal (M) Pess. (P)

Page 52 of 167
A — 2 4 6 4.00

B — 3 5 9 5.33

C A 4 5 7 5.17

D A 4 6 10 6.33

E B, C 4 5 7 5.17

F D 3 4 8 4.50

G E 3 5 8 5.17

Once this step is complete, one can draw a Gantt chart or a network diagram.

A Gantt chart created using Microsoft Project (MSP). Note (1) the critical path is in red, (2) the
slack is the black lines connected to non-critical activities, (3) since Saturday and Sunday are not
work days and are thus excluded from the schedule, some bars on the Gantt chart are longer if they
cut through a weekend.

Page 53 of 167
 A Gantt chart created using OmniPlan. Note (1) the critical path is highlighted, (2) the slack is not
specifically indicated on task 5 (d), though it can be observed on tasks 3 and 7 (b and f), (3) since
weekends are indicated by a thin vertical line, and take up no additional space on the work calendar,
bars on the Gantt chart are not longer or shorter when they do or don't carry over a weekend.

A network diagram can be created by hand or by using diagram software. There are two types of network
diagrams, activity on arrow (AOA) and activity on node (AON). Activity on node diagrams are generally
easier to create and interpret. To create an AON diagram, it is recommended (but not required) to start with
a node named start. This "activity" has a duration of zero (0). Then you draw each activity that does not
have a predecessor activity (a and b in this example) and connect them with an arrow from start to each
node. Next, since both c and d list a as a predecessor activity, their nodes are drawn with arrows coming
from a. Activity e is listed with b and c as predecessor activities, so node e is drawn with arrows coming
from both b and c, signifying that e cannot begin until both b and c have been completed. Activity f has d as
a predecessor activity, so an arrow is drawn connecting the activities. Likewise, an arrow is drawn from e
to g. Since there are no activities that come after f or g, it is recommended (but again not required) to
connect them to a node labeled finish.

A network diagram created using Microsoft Project (MSP). Note the critical path is in red.

A node like this one (from Microsoft Visio) can be used to display the activity name, duration, ES,
EF, LS, LF, and slack.

By itself, the network diagram pictured above does not give much more information than a Gantt chart;
however, it can be expanded to display more information. The most common information shown is:

1. The activity name

Page 54 of 167
 2. The normal duration time
3. The early start time (ES)
4. The early finish time (EF)
5. The late start time (LS)
6. The late finish time (LF)
7. The slack

In order to determine this information it is assumed that the activities and normal duration times are given.
The first step is to determine the ES and EF. The ES is defined as the maximum EF of all predecessor
activities, unless the activity in question is the first activity, for which the ES is zero (0). The EF is the ES
plus the task duration (EF = ES + duration).

 The ES for start is zero since it is the first activity. Since the duration is zero, the EF is also zero.
This EF is used as the ES for a and b.
 The ES for a is zero. The duration (4 work days) is added to the ES to get an EF of four. This EF is
used as the ES for c and d.
 The ES for b is zero. The duration (5.33 work days) is added to the ES to get an EF of 5.33.
 The ES for c is four. The duration (5.17 work days) is added to the ES to get an EF of 9.17.
 The ES for d is four. The duration (6.33 work days) is added to the ES to get an EF of 10.33. This
EF is used as the ES for f.
 The ES for e is the greatest EF of its predecessor activities (b and c). Since b has an EF of 5.33 and
c has an EF of 9.17, the ES of e is 9.17. The duration (5.17 work days) is added to the ES to get an
EF of 14.34. This EF is used as the ES for g.
 The ES for f is 10.33. The duration (4.5 work days) is added to the ES to get an EF of 14.83.
 The ES for g is 14.34. The duration (5.17 work days) is added to the ES to get an EF of 19.51.
 The ES for finish is the greatest EF of its predecessor activities (f and g). Since f has an EF of 14.83
and g has an EF of 19.51, the ES of finish is 19.51. Finish is a milestone (and therefore has a
duration of zero), so the EF is also 19.51.

Barring any unforeseen events, the project should take 19.51 work days to complete. The next step is to
determine the late start (LS) and late finish (LF) of each activity. This will eventually show if there are
activities that have slack. The LF is defined as the minimum LS of all successor activities, unless the
activity is the last activity, for which the LF equals the EF. The LS is the LF minus the task duration (LS =
LF − duration).

 The LF for finish is equal to the EF (19.51 work days) since it is the last activity in the project.
Since the duration is zero, the LS is also 19.51 work days. This will be used as the LF for f and g.
 The LF for g is 19.51 work days. The duration (5.17 work days) is subtracted from the LF to get an
LS of 14.34 work days. This will be used as the LF for e.
 The LF for f is 19.51 work days. The duration (4.5 work days) is subtracted from the LF to get an
LS of 15.01 work days. This will be used as the LF for d.
 The LF for e is 14.34 work days. The duration (5.17 work days) is subtracted from the LF to get an
LS of 9.17 work days. This will be used as the LF for b and c.
 The LF for d is 15.01 work days. The duration (6.33 work days) is subtracted from the LF to get an
LS of 8.68 work days.
 The LF for c is 9.17 work days. The duration (5.17 work days) is subtracted from the LF to get an
LS of 4 work days.
 The LF for b is 9.17 work days. The duration (5.33 work days) is subtracted from the LF to get an
LS of 3.84 work days.

Page 55 of 167
  The LF for a is the minimum LS of its successor activities. Since c has an LS of 4 work days and d
has an LS of 8.68 work days, the LF for a is 4 work days. The duration (4 work days) is subtracted
from the LF to get an LS of 0 work days.
 The LF for start is the minimum LS of its successor activities. Since a has an LS of 0 work days
and b has an LS of 3.84 work days, the LS is 0 work days.

The next step is to determine the critical path and if any activities have slack. The critical path is the path
that takes the longest to complete. To determine the path times, add the task durations for all available
paths. Activities that have slack can be delayed without changing the overall time of the project. Slack is
computed in one of two ways, slack = LF − EF or slack = LS − ES. Activities that are on the critical path
have a slack of zero (0).

 The duration of path adf is 14.83 work days.

 The duration of path aceg is 19.51 work days.
 The duration of path beg is 15.67 work days.

The critical path is aceg and the critical time is 19.51 work days. It is important to note that there can be
more than one critical path (in a project more complex than this example) or that the critical path can
change. For example, let's say that activities d and f take their pessimistic (b) times to complete instead of
their expected (TE) times. The critical path is now adf and the critical time is 22 work days. On the other
hand, if activity c can be reduced to one work day, the path time for aceg is reduced to 15.34 work days,
which is slightly less than the time of the new critical path, beg (15.67 work days).

Assuming these scenarios do not happen, the slack for each activity can now be determined.

 Start and finish are milestones and by definition have no duration, therefore they can have no slack
(0 work days).
 The activities on the critical path by definition have a slack of zero; however, it is always a good
idea to check the math anyway when drawing by hand.
o LFa – EFa = 4 − 4 = 0
o LFc – EFc = 9.17 − 9.17 = 0
o LFe – EFe = 14.34 − 14.34 = 0
o LFg – EFg = 19.51 − 19.51 = 0
 Activity b has an LF of 9.17 and an EF of 5.33, so the slack is 3.84 work days.
 Activity d has an LF of 15.01 and an EF of 10.33, so the slack is 4.68 work days.
 Activity f has an LF of 19.51 and an EF of 14.83, so the slack is 4.68 work days.

Therefore, activity b can be delayed almost 4 work days without delaying the project. Likewise, activity d
or activity f can be delayed 4.68 work days without delaying the project (alternatively, d and f can be
delayed 2.34 work days each).

Advantages

 PERT chart explicitly defines and makes visible dependencies (precedence relationships) between
the work breakdown structure (commonly WBS) elements.
 PERT facilitates identification of the critical path and makes this visible.
 PERT facilitates identification of early start, late start, and slack for each activity.
 PERT provides for potentially reduced project duration due to better understanding of dependencies
leading to improved overlapping of activities and tasks where feasible.

Page 56 of 167
  The large amount of project data can be organized & presented in diagram for use in decision
making.

Disadvantages

 There can be potentially hundreds or thousands of activities and individual dependency

relationships.
 PERT is not easily scalable for smaller projects.
 The network charts tend to be large and unwieldy requiring several pages to print and requiring
specially sized paper.
 The lack of a timeframe on most PERT/CPM charts makes it harder to show status although colours
can help (e.g., specific colour for completed nodes).

Uncertainty in project scheduling

During project execution, however, a real-life project will never execute exactly as it was planned due to
uncertainty. This can be due to ambiguity resulting from subjective estimates that are prone to human errors
or can be the result of variability arising from unexpected events or risks. The main reason that PERT may
provide inaccurate information about the project completion time is due to this schedule uncertainty. This
inaccuracy may be large enough to render such estimates as not helpful.

One possible method to maximize solution robustness is to include safety in the baseline schedule in order
to absorb the anticipated disruptions. This is called proactive scheduling. A pure proactive scheduling is a
utopia; incorporating safety in a baseline schedule which allows for every possible disruption would lead to
a baseline schedule with a very large make-span. A second approach, termed reactive scheduling, consists
of defining a procedure to react to disruptions that cannot be absorbed by the baseline schedule.

STRUCTURE AND JURISDICTION OF LAW

Law is, generally, a system of rules which are enforced through social institutions to govern behaviour,
although the term "law" has no universally accepted definition. Laws can be made by legislatures through
legislation (resulting in statutes), the executive through decrees and regulations, or judges through binding
precedents (normally in common law jurisdictions). Private individuals can create legally binding contracts,
including (in some jurisdictions) arbitration agreements that exclude the normal court process. The formation
of laws themselves may be influenced by a constitution (written or unwritten) and the rights encoded therein.
The law shapes politics, economics, and society in various ways and serves as a mediator of relations between
people.

A general distinction can be made between civil law jurisdictions (including canon and socialist law), in
which the legislature or other central body codifies and consolidates their laws, and common law systems,
where judge-made binding precedents are accepted.

Historically, religious laws played a significant role even in settling of secular matters, which is still the case
in some religious communities, particularly Jewish, and some countries, particularly Islamic. Islamic Sharia
law is the world's most widely used religious law.

Page 57 of 167
The adjudication of the law is generally divided into two main areas. Criminal law deals with conduct that is
considered harmful to social order and in which the guilty party may be imprisoned or fined. Civil law (not
to be confused with civil law jurisdictions above) deals with the resolution of lawsuits (disputes) between
individuals or organisations. These resolutions seek to provide a legal remedy (often monetary damages) to
the winning litigant.

Under civil law, the following specialties, among others, exist: Contract law regulates everything from buying
a bus ticket to trading on derivatives markets. Property law regulates the transfer and title of personal property
and real property. Trust law applies to assets held for investment and financial security. Tort law allows
claims for compensation if a person's property is harmed. Constitutional law provides a framework for the
creation of law, the protection of human rights and the election of political representatives. Administrative
law is used to review the decisions of government agencies. International law governs affairs between
sovereign states in activities ranging from trade to military action.

To implement and enforce the law and provide services to the public by public servants, a government's
bureaucracy, military, and police are vital. While all these organs of the state are creatures created and bound
by law, an independent legal profession and a vibrant civil society inform and support their progress.

Sources of Laws

The sources of the Laws of Kenya are contained in section 3 of the Judicature Act (Chapter 8 Laws of
Kenya) and include the constitution which is written, legislation, which includes Acts of the Parliament of
Kenya; specific Acts of the parliament of the United Kingdom and the Law of Contract Act (Chapter 23
Laws of Kenya); subsidiary legislation, the substance of the common law, the doctrines of equity and the
statutes of general application in force in the United Kingdom on August 12, 1897 and the procedure and
practice observed in courts of Justice in the UK at that date.

The common law, the doctrines of equity and the statutes of general application in the UK as indicated above
only apply so far as the circumstances of Kenya and its inhabitants permit. The constitution is the supreme
law and takes precedence over all other forms of law, written or unwritten.

The Structure and Jurisdiction of Courts

The Constitution of Kenya, the Magistrates’ Courts Act (Chapter 10 Laws of Kenya), the Kadhis Courts
Act (Chapter 11, Laws of Kenya) and the Judicature Act (Chapter 8 Laws of Kenya) have established the
modern structure of courts. The Court of Appeal is the highest Court of appellate jurisdiction in Kenya which
jurisdiction is derived solely from statute. This court has no inherent or original jurisdiction; and only hears
appeals from the High Court of Kenya.

The High Court of Kenya which is established under Section 60 of the constitution exercises original and
unlimited jurisdiction in civil and criminal matters. In civil cases, e.g. actions for breach of contract, breach
of trust or torts, there is no limit to the power of the High Court to try any case involving any amount of
money. Appeals from decisions of the High Court are made to the Court of Appeal.

Below the High Court are the subordinate courts comprising of the Resident Magistrates Court, the District
Magistrates Courts, the Kadhis Courts (applying personal law for people professing the Muslim faith) and
the Court Martial (for members of the armed forces).

Constitutional Guarantees

Page 58 of 167
The Constitution of Kenya provides for the protection of fundamental rights and freedoms among which are
the protection of life, liberty, security of the person and protection of private property.

These rights are also protected under the Penal Code (Chapter 63, Laws of Kenya), and their violation is
actionable as a crime.

Dispute Resolution Mechanisms

Most disputes are resolved through adversarial litigation in courts. However, there is a growing trend towards
alternative dispute resolution methods such as arbitration and mediation. The Arbitration Act, No. 4 of 1995
governs the arbitration process. Under this law parties to a dispute can by way of a written agreement refer
their disputes to arbitration. This can be done in agreements via an arbitration clause which stipulates that
any dispute arising therefrom shall be referred to arbitration.

The importance of an arbitration clause in an agreement is that any court proceedings commenced are stayed
pending the settlement of the dispute by arbitration. An arbitral award can be enforced by the leave of the
High Court of Kenya in the same way any court order or decree is enforced.
The Limitation of Actions Act (Chapter 22, Laws of Kenya) applies to arbitration as it does other civil
actions.

The Limitations of Actions Act (Chapter 22, Laws of Kenya) limits the period within which various actions
can be brought. The Act applies to all forms of action. The period of limitation begins to run as from the
time the right of action arose. In actions for breach of contract, the period will begin to run as from the time
of the breach of contract.

The Foreign Judgements (Reciprocal Enforcement) Act (Chapter 43, Laws of Kenya) provides for the
enforcement of foreign Judgements. However, only Judgements emanating from countries that accord
reciprocal treatment to Judgements from Kenya can be enforced locally. Without such an agreement, a
foreign judgement is not enforceable in Kenya except by filing suit on the judgement.

As a general rule, Kenyan Courts recognize governing law clauses in agreements providing for foreign
law. However, the selection of such a law must be real, genuine, bonafide, legal and reasonable. No Kenyan
Court will give effect to such a clause if the parties intend to apply it in order to evade the mandatory
provisions of a Kenyan Law with which the agreement has its most substantial connection and which, for
this reason, the court would normally have applied.

Kenya is a signatory to the Convention on the Settlement of Investment Disputes and by extension is a
member of the International Centre for the Settlement of Investment Disputes (ICSID). In order to give legal
sanction to the treaty the Investments Disputes Convention Act (Chapter 522, Laws of Kenya) codifies the
Convention making it locally applicable.

Enforcement of Contracts

The Law of Contract Act (Chapter 23, Laws of Kenya) governs commercial transactions in Kenya. Under
section 2 (1) of the said law the common law of England relating to contract, subject to modifications, is
applicable in Kenya.

Under section 2 (2) of the Act, the date of reception of the common law of contracts is August 12, 1897, after
which date English decisions on the law of contract are only of persuasive authority. Over the years Kenyan
Courts have managed to develop the law of contract so that reliance on old English decisions is waning.
Page 59 of 167
Disputes arising out of commercial transactions are handled by judges presiding over Commercial Courts, a
specialised department created in order to speed up commercial cases.

The limitation period for actions for breach of contract is six years.

THE COURTS

The Supreme Court

The Supreme Court hears and determines cases relating to presidential elections. It hears appeals on cases
that have been concluded by the Court of Appeal, issues advisory opinions on matters concerning County
Governments, in any cases involving the interpretation or application of the Constitution and in matters of
general public importance.

Further, the Supreme Court hears appeals from any other court or tribunal as prescribed by national
legislation.

The Court of Appeal

The Court of Appeal is established under Article164 of the Constitution and consists of a number of judges,
being not fewer than twelve, as may be prescribed by an Act of Parliament and the Court is to be organized
and administered in the manner prescribed by an Act of Parliament.

The Court comprises of a president of the Court of Appeal who is elected by the judges of the Court of Appeal
from among themselves.

The Court of Appeal has jurisdiction to hear appeals from the High Court and any other court or tribunal as
prescribed by an Act of Parliament.

The High Court

The High Court is established under Article 165 and it consists of a number of judges to be prescribed by an
Act of Parliament.

The Court is organized and administered in the manner prescribed by an Act of Parliament.

The Court has a Principal Judge, who is elected by the judges of the High Court from among themselves.

The High Court has—

1. unlimited original jurisdiction in criminal and civil matters;

2. jurisdiction to determine the question whether a right or fundamental freedom in the Bill of Rights
has been denied, violated, infringed or threatened;
3. jurisdiction to hear an appeal from a decision of a tribunal appointed under this Constitution to
consider the removal of a person from office, other than a tribunal appointed under Article 144;
4. jurisdiction to hear any question respecting the interpretation of this Constitution including the
determination of—
i. the question whether any law is inconsistent with or in contravention of this Constitution;
ii. the question whether anything said to be done under the authority of this Constitution or of
any law is inconsistent with, or in contravention of, this Constitution;
Page 60 of 167
 iii. any matter relating to constitutional powers of State organs in respect of county governments
and any matter relating to the constitutional relationship between the levels of government;
and
iv. a question relating to conflict of laws under Article 191; and any other jurisdiction, original
or appellate, conferred on it by legislation.

The High Court does not have jurisdiction in respect of matters reserved for the exclusive jurisdiction of the
Supreme Court under this Constitution or falling within the jurisdiction of the courts contemplated in Article
162 (2).

The High Court has supervisory jurisdiction over the subordinate courts and over any person, body or
authority exercising a judicial or quasi-judicial function, but not over a superior court.

Subordinate Courts

The subordinate courts are provided for under Article 169 of the Constitution and they are—

1. The Magistrates Courts

 A magistrates' court is a lower court, where all the criminal proceedings start. Also some
civil matters are decided here, namely family proceedings. They have been streamlined to
swiftly and cheaply deliver justice. There are over 360 magistrates' courts in England and
Wales.
 Summary offences are smaller crimes, that can be punished under the magistrates' court's
limited sentencing powers – community sentences, fines, short custodial sentences. Indictable
offences, on the other hand, are serious crimes (rape, murder); if an initial hearing at the
magistrates' court finds there is a case to answer, they are committed to (passed on to) the
Crown Court, which has a much wider range of punishment. Either-way offences will
ultimately fall into one of the previous categories depending on how serious the particular
crime in question is.
 Cases are heard by a district judge (magistrates' courts) or by a bench of three magistrates (lay
judges); there is no jury at a magistrates' court. Criminal cases are usually (although not
exclusively) investigated by the police and then prosecuted at the court by the Crown
Prosecution Service. The defendant may hire a solicitor (or barrister) to represent him, often
paid for by the state.

2. The Kadhis' Courts

 The Kadhis’ Court is comprised of a Chief Kadhi and such number, being not fewer than
three, of other Kadhis as may be prescribed under an Act of Parliament.
 The jurisdiction of a Kadhis’ court is limited to the determination of questions of Muslim law
relating to personal status, marriage, divorce or inheritance in proceedings in which all the
parties profess the Muslim religion and submit to the jurisdiction of the Kadhi’s courts.
3. The Courts Martial
 Section 84 of the Armed Forces Act gives a court martial power to try any person subject to
the Act for any offence which under the Act is triable by court martial, and to award for such
an offence any punishment provided by the Act for that offence.
4. Tribunals

 A tribunal in the general sense is any person or institution with the authority to judge,
adjudicate on, or determine claims or disputes—whether or not it is called a tribunal in its
Page 61 of 167
 title. For example, an advocate appearing before a court on which a single judge was sitting
could describe that judge as 'their tribunal'. Many governmental bodies that are titled 'tribunals'
are so described to emphasize the fact that they are not courts of normal jurisdiction. For
example, the International Criminal Tribunal for Rwanda is a body specially constituted under
international law; in Great Britain, Employment Tribunals are bodies set up to hear specific
employment disputes. Private judicial bodies are also often styled 'tribunals'. The word
'tribunal' is not conclusive of a body's function. For example, in Great Britain, the Employment
Appeal Tribunal is a superior court of record.

SOURCES OF LAW

Sources of law means the origin from which rules of human conduct come into existence and derive legal
force or binding characters. It also refers to the sovereign or the state from which the law derives its force or
validity.

Several factors of law have contributed to the development of law. These factors are regarded as the sources
of law.

Sources of Law

Each country’s legal system has its own sources of law, with greater weight placed on some sources than
others. In developing an infrastructure project, it is important to identify which sources of law apply in the
host country and their relative weighting. The following are the most common sources:

a) Constitution
b) Legislative Enactment - Statute
c) Judicial Decisions
d) Treaties
e) Customary law
f) Islamic law
g) Other Sources - books

Constitution/ Code

A country's Constitution is a set of fundamental ground rules setting out the powers of the different branches
of government (i.e. executive, legislative and judicial) and how these entities operate and interrelate. The
Constitution may also set out basic principles, such as fundamental freedoms and rights. In Civil Law systems
these rules are usually embodied in "Codes".

All but a very few countries have written constitutions where these fundamental rules can be easily identified
(although their interpretation may be less straightforward). The remaining few have unwritten constitutions
established by long-standing tradition.

A Constitution overrides any other source of law and it is usually highly difficult to amend. There may be a
separate judicial court which considers constitutional issues, namely whether any law, regulation or
administrative act is inconsistent with the Constitution and therefore void.

Page 62 of 167
Legislative Enactment - Statute

Legislation is the second key source of law and usually takes priority over sources of law other than the
Constitution. There may be more than one legislative body in a country - central, provincial or state and
municipal authorities may each have separate power to legislate. Rules will determine the extent to which
and in what areas one legislative body has priority over another.

Primary legislation may delegate powers to a particular ministry or regulator to prepare secondary legislation
designed to supplement and develop the principles set out in the primary legislation. For example, tariff
setting guidelines for a regulatory authority that is established by primary legislation may be set out in
secondary legislation. Secondary legislation is usually not subject to full parliamentary scrutiny guidelines
and so is faster to enact. However, it may be more difficult to identify than primary legislation as it may be
recorded in subsidiary documents.

Judicial Decisions

In some countries, judicial decisions are authoritative and develop into a source of law known as “case law”.
Case law may extend the application of legislation and is deemed to form part of the law.

In other jurisdictions (mainly civil law jurisdictions) judicial decisions are formally only deemed to interpret
the existing law and are not a binding source of law, although in practice they are often treated as
authoritative.

Treaties

The host country may be subject (or may be about to become subject) to laws made by a regional or world
grouping by becoming a signatory to a treaty. Examples are the laws of the European of Union, trade treaties,
rules of the WTO and bilateral treaties. It is unlikely that a country could amend these rules easily.

An example of laws of a regional grouping is the body of regulations and directives of the European Union.
Regulations have direct application in the respective member states legal systems and will take precedence
over each member's national laws. Directives have to be adopted separately into law by each member state,
but the member state must ensure consistency with the underlying EU directive. It is not just the current
members that need to heed EU law. Countries seeking to accede to the EU (whether their accession has been
formalized or not) need to take account of EU laws and the standards that they impose (particulary relevant
to infrastructure).

Rules and guidelines may also be imported into law through treaty in relation to such matters as standards of
engineering and health guidelines. For example, a country may adopt the World Health Organization's
standards for drinking water.

Customary (law)

Custom in law is the established pattern of behavior that can be objectively verified within a particular social
setting. A claim can be carried out in defense of "what has always been done and accepted by law." Related
is the idea of prescription; a right enjoyed through long custom rather than positive law.

Page 63 of 167
Customary law (also, consuetudinary or unofficial law) exists where:

1. A certain legal practice is observed and

2. The relevant actors consider it to be law (opinio juris).

Most customary laws deal with standards of community that have been long-established in a given locale.
However the term can also apply to areas of international law where certain standards have been nearly
universal in their acceptance as correct bases of action - in example, laws against piracy or slavery. In many,
though not all instances, customary laws will have supportive court rulings and case law that has evolved
over time to give additional weight to their rule as law and also to demonstrate the trajectory of evolution (if
any) in the interpretation of such law by relevant courts.

Customary law and codification

The modern codification of civil law developed from the tradition of medieval custumals, collections of local
customary law that developed in a specific manorial or borough jurisdiction, and which were slowly pieced
together mainly from case law and later written down by local jurists. Custumals acquired the force of law
when they became the undisputed rule by which certain rights, entitlements, and obligations were regulated
between members of a community. Some examples include Bracton's De Legibus et Consuetudinibus Angliae
for England, the Coutume de Paris for the city of Paris, the Sachsenspiegel for northern Germany, and the
many fueros of Spain.

Islamic law - Sources of sharia

Various sources of sharia are used by Islamic jurisprudence to elucidate the sharia, the body of Islamic law.
The primary sources, accepted universally by all Muslims, are the Qur'an and Sunnah. The Qur'an is the holy
scripture of Islam, believed by Muslims to be the direct and unaltered word of God. The Sunnah consists of
the religious actions and quotations of the Islamic prophet Muhammad and narrated through his Companions
and the Imams (per the beliefs of the Sunni and Shi'ite schools respectively).

As Islamic regulations stated in the primary sources do not explicitly deal with every conceivable eventuality,
jurisprudence must refer to resources and authentic documents to find the correct course of action. According
to Sunni schools of law, secondary sources of Islamic law are consensus, the exact nature of which bears no
consensus itself; analogical reason; pure reason; seeking the public interest; juristic discretion; the rulings of
the first generation of Muslims; and local customs. Hanafi school frequently relies on analogical deduction
and independent reasoning, and Maliki and Hanbali generally use the Hadith instead. Shafi'i school uses
Sunnah more than Hanafi and analogy more than two others. Among Shia, Usuli school of Ja'fari
jurisprudence uses four sources, which are Qur'an, Sunnah, consensus and the intellect. They use consensus
under special conditions and rely on the intellect to find general principles based on the Qur'an and Sunnah,
and use the principles of jurisprudence as a methodology to interpret the Qur'an and Sunnah in different
circumstances. Akhbari Ja'faris rely more on tradition and reject ijtihad. According to Momen, despite
considerable differences in the principles of jurisprudence between Shia and the four Sunni schools of law,
there are fewer differences in the practical application of jurisprudence to ritual observances and social
transactions.

Other Sources - books

There are a number of other sources of law that may be given greater or lesser weight in a particular country:
Page 64 of 167
  Writings of legal scholars - in civil law jurisdictions, academic writings interpreting the constitution
or legislation have considerable influence on decisions of the courts;
 Ethics from a king/ ruler;
 In the case of certain Islamic countries, "Sharia law" in the form of religious books and ethics from
religious groupings.

TORT

A tort, in common law jurisdictions, is a civil wrong that unfairly causes someone else to suffer loss or harm
resulting in legal liability for the person who commits the tortious act, called a tortfeasor. Although crimes
may be torts, the cause of legal action is not necessarily a crime, as the harm may be due to negligence which
does not amount to criminal negligence. The victim of the harm can recover their loss as damages in a lawsuit.
In order to prevail, the plaintiff in the lawsuit must show that the actions or lack of action was the legally
recognizable cause of the harm. The equivalent of tort in civil law jurisdictions is delict.

Legal injuries are not limited to physical injuries and may include emotional, economic, or reputational
injuries as well as violations of privacy, property, or constitutional rights. Torts comprise such varied topics
as auto accidents, false imprisonment, defamation, product liability, copyright infringement, and
environmental pollution (toxic torts). While many torts are the result of negligence, tort law also recognizes
intentional torts, where a person has intentionally acted in a way that harms another, and in a few cases
(particularly for product liability in the United States) "strict liability" which allows recovery without the
need to demonstrate negligence.

Tort law is different from criminal law in that: (1) torts may result from negligent but not intentional or
criminal actions and (2) tort lawsuits have a lower burden of proof such as preponderance of evidence rather
than beyond a reasonable doubt. Sometimes a plaintiff may prevail in a tort case even if the person who
caused the harm was acquitted in an earlier criminal trial. For example, O.J. Simpson was acquitted in
criminal court and later found liable for the tort of wrongful death.

NATURE OF TORTS

A. Tort and crime

Historically tort had its roots in criminal procedure. Even today there is a punitive element in some aspects
of the rules on damages. However tort is a species if civil injury or wrong. The distinction between civil and
criminal wrongs depends on the nature of the remedy provided by law. A civil wrong is one which gives rise
to civil proceedings. A civil proceeding concerns with the enforcement of some right claimed by the plaintiff
as against the defendant whereas criminal proceedings have for their object the punishment of the defendant
for some act of which he is accused. Sometimes the same wrong is capable of being made the subject of
proceedings of both kinds. For example assault, libel, theft, malicious injury to property etc. in such cases
the wrong doer may be punished criminally and also compelled in a civil action to make compensation or
restitution.
Not every civil wrong is a tort. A civil wrong may be labeled as a tort only where the appropriate remedy for
it is an action for unliquidated damages. Thus for example, public nuisance is not a tort merely because the
civil remedy of injunction may be available at the suit of the attorney general, but only in those exceptional
cases in which a private person may recover damages for loss sustained by him in consequence thereof.
However it has to be born in mind that a person is liable in tort irrespective of whether or not an action for
damages has been given against him. The party is liable from the moment he commits the tort. Although an

Page 65 of 167
action fro damages is an essential mark of tort and its characteristic remedy, there may be and often other
remedies also.

A.1. Difference between crime and tort

Being a civil injury, tort differs from crime in all respects in which a civil remedy differs from a criminal
one. There are certain essential marks of difference between crime and tort they are:
# Tort is an infringement or privation of private or civil rights belongigng to individuals, whereas crime is a
breach of public rights and duties which affect the whole community.
# In tort the wrong doer has to compensate the injured party whereas in crime, he is punished by the state in
the interest of the society.
# In tort the action is brought about by the injured party whereas in crime the proceedings are conducted in
the name of the state.
# In tort damages are paid for compensating the injured and in crime it is paid out of the fine which is paid
as a part of punishment. Thus the primary purpose of awrding compensation in a criminal prosecution is
punitive rather than compensatory.
# The damages in tort are unliquidated and in crime they are liquidated.

A.2. Resemblance between crime and tort

There is however a similarity between tort and crime at a primary level. In criminal law the primary duty,
not to commit an offence, for example murder, like any primary duty in tort is in rem and is imposed by law.
The same set of circumstances will in fact, from one point of view, constitute a crime and, from another point
of view, a tort. For example every man has the right that his bodily safety shall be respected. Hence in an
assault, the sufferer is entitled to get damages. Also, the act of assault is a menace to the society and hence
will be punished by the state. However where the same wrong is both a crime and a tort its two aspects are
not identical. Firstly, its definition as a crime and a tort may differ and secondly, the defences available for
both crime and tort may differ.

The wrong doer may be ordered in a civil action to pay compensation and be also punished criminally by
imprisonment or fine. If a person publishes a defamatory article about another in a newspaper, both a criminal
prosecution for libel as well as a civil action claiming damages for the defamatory publication may be taken
against him. In P.Rathinam. v. Union of India, the Supreme Court observed, In a way there is no distinction
between crime and a tort, inasmuch as a tort harms an individual whereas a crime is supposed to harm a
society. But then, a society is made of individuals. Harm to an individual is ultimately the harm to the society.

There was a common law rule that when the tort was also a felony, the offender would not be sued in tort
unless he has been prosecuted in felony, or else a reasonable excuse had to be shown for his non prosecution.
This rule has not been followed in India and has been abolished in England.

B.Tort and contract

The definition given by P.H. Winfield clearly brings about the distinction between tort and contract. It says,
Tortuous liability arises from the breach of a duty primarily fixed by law; this duty is towards persons
generally and its breach is redressible by an action for unliquidated damages. A contract is that species of
agreement whereby a legal obligation is constituted and defined between the parties to it. It is a legal
relationship, the nature, content and consequence of which are determined and defined by the agreement
between the parties. According to Salmond, a contract arises out of the exercise of the autonomous legislative
authority entrusted by the law to private persons to declare and define the nature of mutual rights and
obligations.
Page 66 of 167
At the present day, tort and contract are distinguished from one another in that, the duties in the former are
primarily fixed by law while in the latter they are fixed by the parties themselves. Agreement is the basis for
all contractual obligations. “People cannot create tortious liability by agreement. Thus I am under a duty not
to assault you, not to slander you, not to trespass upon your land because the law says that I am under such
duty and not because I have agreed with you to undertake such duty.

Some of the distinctions between tort and contract are given below:

 A tort is inflicted against or without consent; a contract is founded upon consent.

 In tort no privity is needed, but it is necessarily implied in a contract.
 A tort is a violation in rem (right vested in some person and available against the world at
large.); a breach of contract is an infringement of a right in personam( right available against
some determinate person or body).
 Motive is often taken into consideration in tort, but it is immaterial in a breach of contract.
 In tort the measure of damages is not strictly limited nor is it capable of being indicated with
precision; in a breach of contract the measure of damages is generally more or less nearly
determined by the stipulations of the parties.
In certain cases the same incident may give rise to liability both in contract and in tort. For example, when a
passenger whilst traveling with a ticket is injured owing to the negligence of the railway company, the
company is liable for a wrong which is both a tort and a breach of a contract.

The contractual duty may be owed to one person and the duty independent of that contract to another. The
surgeon who is called by a father to operate his daughter owes a contractual duty to the father to take care. If
he fails in that duty he is also liable for a tort against the daughter. In Austin v. G.W. Railway, a woman and
her child were traveling in the defendant’s train and the child was injured by defendant’s negligence. The
child was held entitled to recover damages, for it had been accepted as passenger.

There is a well established doctrine of Privity of Contract under which no one except the parties to it can sue
for a breach of it. Formerly it was thought that this principle of law of contract also prevented any action
being brought under tortuous liability. But this fallacy was exploded by the House of Lords in the celebrated
case of Donoghue v. Stevenson. In that case a manufacturer of ginger beer had sold to a retailer, ginger beer
in a bottle of dark glass. The bottle, unknown to anyone, contained the decomposed remains of a snail which
had found its way to the bottle at the factory. X purchased the bottle from the retailer and treated the plaintiff,
a lady friend (the ultimate consumer), to its contents. In consequence partly of what she saw and partly of
what she had drunk, she became very ill. She sued the manufacturer for negligence. This was, of course, no
contractual duty on the part of the manufacturer towards her, but a majority of the House of Lords held that
he owed a duty to take care that the bottle did not contain noxious matter and that he was liable if that duty
was broken.

The judicial committee of the Privy Council affirmed the principle of Donoghue’s case in Grant v. Australian
Knitting Mills Ltd. Thus contractual liability is completely irrelevant to the existence of liability in tort. The
same facts may give rise to both.
Another discrepancy between contracts and torts is seen in the nature of damages under each. In contracts
the plaintiff will be claiming liquidated damages whereas in torts he will be claiming unliquidated damages.
When a person has filed a suit or put a claim for the recovery of a predetermined and fixed sum of money he
is said to have claimed liquidated damages. On the other hand when he has filed a suit for the realization of
such amount as the court in its discretion may award, he is deemed to have claimed unliquidated damages.

C. Tort and Quasi-Contract

Page 67 of 167
Quasi contract cover those situations where a person is held liable to another without any agreement, for
money or benefit received by him to which the other person is better entitled. According to the Orthodox
view the judicial basis for the obligation under a quasi contract is the existence of a hypothetical contract
which is implied by law. But the Radical view is that the obligation in a quasi contract is sui generis and its
basis is prevention of unjust enrichment.

Quasi contract differs from tort in that:

 There is no duty owed to persons for the duty to repay money or benefit received unlike tort, where
there is a duty imposed.
 In quasi contract the damages recoverable are liquidated damages, and not unliquidated damages as
in tort.
Quasi contracts resembles tort and differs from contracts in one aspect. The obligation in quasi contract and
in tort is imposed by law and not under any agreement. In yet another dimension quasi contract differs from
both tort and contract. If, for example, A pays a sum of money by mistake to B. in Quasi contract, B is under
no duty not to accept the money and there is only a secondary duty to return it. While in both tort and contract,
there is a primary duty the breach of which gives rise to remedial duty to pay compensation.

Constituents Of Tort.

The law of torts is fashioned as an instrument for making people adhere to the standards of reasonable
behaviour and respect the rights and interests of one another. This it does by protecting interests and by
providing for situations when a person whose protected interest is violated can recover compensation for the
loss suffered by him from the person who has violated the same. By interest here is meant a claim, want or
desire of a human being or group of human beings seeks to satisfy, and of which, therefore the ordering of
human relations in civilized society must take account. It is however, obvious that every want or desire of a
person cannot be protected nor can a person claim that whenever he suffers loss he should be compensated
by the person who is the author of the loss. The law, therefore, determines what interests need protection and
it also holds the balance when there is a conflict of protected interests.wro

 There must be a wrongful act committed by a person;

 The wrongful act must be of such a nature as to give rise to a legal remedy and
 Such legal remedy must be in the form of an action for unliquidated damages.
I. Wrongful Act
An act which prima facie looks innocent may becomes tortious, if it invades the legal right of another person.
In Rogers v. Ranjendro Dutt , the court held that, the act complained of should, under the circumstances, be
legally wrongful, as regards the party complaining. That is, it must prejudicially affect him in some legal
right; merely that it will however directly, do him harm in his interest is not enough.

A legal right, as defined by Austin, is a faculty which resides in a determinate party or parties by virtue of a
given law, and which avails against a party (or parties or answers to a duty lying on a party or parties) other
than the party or parties in whom it resides. Rights available against the world at large are very numerous.
They may be divided again into public rights and private rights. To every right, corresponds a legal duty or
obligation. This obligation consists in performing some act or refraining from performing an act.

Liability for tort arises, therefore when the wrongful act complained of amounts either to an infringement of
a legal private right or a breach or violation of a legal duty.

Page 68 of 167
II. Damage
In general, a tort consists of some act done by a person who causes injury to another, for which damages are
claimed by the latter against the former. In this connection we must have a clear notion with regard to the
words damage and damages. The word damage is used in the ordinary sense of injury or loss or deprivation
of some kind, whereas damages mean the compensation claimed by the injured party and awarded by the
court. Damages are claimed and awarded by the court to the parties. The word injury is strictly limited to an
actionable wrong, while damage means loss or harm occurring in fact, whether actionable as an injury or not.

The real significance of a legal damage is illustrated by two maxims, namely, Damnum Sine Injuria and
Injuria Sine Damno.

(i) Damnum Sine Injuria (Damage Without Injury)

There are many acts which though harmful are not wrongful and give no right of action to him who suffers
from their effects. Damage so done and suffered is called Damnum Sine Injuria or damage without injury.
Damage without breach of a legal right will not constitute a tort. They are instances of damage suffered from
justifiable acts. An act or omission committed with lawful justification or excuse will not be a cause of action
though it results in harm to another as a combination in furtherance of trade interest or lawful user of one’s
own premises. In Gloucester Grammar School Master Case , it had been held that the plaintiff school master
had no right to complain of the opening of a new school. The damage suffered was mere damnum absque
injuria or damage without injury. Acton v. Blundell , in which a mill owner drained off underground water
running into the plaintiff’s well, fully illustrate that no action lies fro mere damage, however substantial,
caused without the violation of some right.

There are moral wrongs for which the law gives no remedy, though they cause great loss or detriment. Los
or detriment is not a good ground of action unless it is the result of a species of wrong of which the law takes
no cognizance.

(ii) Injuria Sine Damno ( injury without damage)

This means an infringement of a legal private right without any actual loss or damage. In such a case the
person whose right has been infringed has a good cause of action. It is not necessary for him to prove any
special damage because every injury imports a damage when a man in hindered of his right. Every person
has an absolute right to property, to the immunity of his person, and to his liberty, and an infringement of
this right is actionable per se. actual perceptible damage is not, therefore, essential as the foundation of an
action. It is sufficient to show the violation of a right in which case the law will presume damage. Thus in
cases of assault, battery, false imprisonment, libel, trespass on land, etc., the mere wrongful act is actionable
without proof of special damage. The court is bound to award to the plaintiff at least nominal damages if no
actual damage is proved. This principle was firmly established by the election case of Ashby v. White, in
which the plaintiff was wrongfully prevented from exercising his vote by the defendants, returning officers
in parliamentary election. The candidate fro whom the plaintiff wanted to give his vote had come out
successful in the election. Still the plaintiff brought an action claiming damages against the defendants for
maliciously preventing him from exercising his statutory right of voting in that election. The plaintiff was
allowed damages by Lord Holt saying that there was the infringement of a legal right vested in the plaintiff.

III. Remedy

The law of torts is said to be a development of the maxim ‘ubi jus ibi remedium’ or ‘there is no wrong without
a remedy’. If a man has a right, he must of necessity have a means to vindicate and maintain it and a remedy

Page 69 of 167
if he is injured in the exercise or enjoyment of it; and indeed it is a vain thing to imagine a right without
remedy; want of right and want of remedy are reciprocal.

Where there is no legal remedy there is no wrong. But even so the absence of a remedy is evidence but is not
conclusive that no right exists.

General Defences to Torts

Well what exactly are they? Let’s take an example to understand.

Asad and Aymen are the best of chumss who go to the R. Singh International Stadium at NALSAR to witness
a cricket match between NALSAR and XYZ, Bangalore. During the match a stray ball hits Asad in the eye.
Asad cannot claim damages from the stadium authorities or the batsman who hit the ball because when he
went to watch the match at the stadium he voluntarily accepted the risk that he was undertaking. Such is a
valid defence in tort law. General defences are a set of defences or ‘excuses’ that you can undertake to escape
liability in tort only if your actions have qualified a specific set of conditions that go attached with these
defences. Most of these defences can be claimed to escape liability in toto, or in some cases to an extent.
Let’s delve into these defences.

1. Vis Major or Act of God.

When something occurs over which you have no control and it is effected of accentuated by the forces of
nature then you are not liable in tort law for such inadvertent damage that may arise out of such. However if
you were well aware of the risks and could have possibly taken steps to stop the wrongful act or damaging
act or have in anyway mitigated it then you cannot duck responsibility under this defence. Constituents of
this defence:

• Due to forces of nature or unnatural circumstances.

• You had no control over it and it happened suddenly.

• You had no knowledge or could not do anything to mitigate the damage.

2. Plaintiff the Wrongdoer.

Let’s take an illustration to understand this concept. Ketan and Shailesh are next door neighbours. However
they cannot stand each other and have frequent quarrels which often turn nasty. In the dead of night Ketan
steals into Shailesh’s property claiming he wanted to take a walk in the latter’s gardens. Shailesh had a pet
dog called YenYalYas who jumped at Ketan. Ketan files a suit claiming damges from Shailesh. Shailesh can
take the plea of ‘plaintiff the wrongdoer’ as Ketan himself had first trespassed onto his property and thus
could not claim a suit having committed a wrong himself in the first place.

Should the plea of “plaintiff the wrongdoer” succeed, the plaintiff’s case falls.

3. Volenti non fit injuria. (voluntarily takes the risk)

This principle states that if one voluntarily takes the risk of something then he may not claim a suit of action
of such risk leads to injury. However this risk must have been taken under free consent and not under coercion
and with the full knowledge of the risk.
Page 70 of 167
A corollary of this principle is Scienti non fit injuria which means that only knowledge of the risk is not
enough to claim defence there must be acceptance to undergo the resultants of the risk undertaken. There had
to be consent and mere knowledge is not sufficient.

4. Private Defence

Nothing is wrong if done with regard to protecting one’s own self, another self, one’s property or another’s
property against a threat to such. Suppose Someone points a loaded gun at me and threatens me I do have the
right to bodily harm that person in order to save myself or someone else. However there are limitations to
such rule with regard to the force being used which must be proportional to the risk presented.

Points to remember about private defence:

Risk must be immediate and sudden.

Force used must be proportionate to the risk at hand.

5. Inevitable Accident.

This is a defence that can be claimed under a situation where inspite of taking reasonable care and protection
the harm could not be averted. This does not mean absolutely inevitable but unavoidable even after taking
necessary precautions with respect to the harm in question.

Sandipan and Shayak went to the Sunderbans to shoot pheasants. Sandipan’s bullet skidded off the bark of a
tree and hit Shayak while he was talking on the phone. Shayak was injured and sued his friend for
compensation. The defence of inevitable accident could herein be rightfully claimed by Sandipan. (Similar
facts in Stanley v. Powell).

6. Mistake

This is not a very often claimed defence as it is very hard to fit in a case into the subtle limits of this defence
of ‘mistake’. This refers to a particular case wherein a person was under mistaken knowledge usually and
even after taking reasonable precautions could not have been reasonably expected to not commit the so called
‘mistake’.

Rupali runs an auction shop on the beaches of Goa. Shraddha is a Nepalese entrepreneur who asks her friend
Rupali to auction off some ill gotten goods that the former has smuggled in from Nepal. Rupali ran all the
usual checks on the goods and was reasonably confident that the goods were genuine. She auctioned off the
goods and then the anomaly was detected and the new owners sued Rupali. Herein Rupali can claim the
defence of ‘mistake’.

7. Necessity

Under dire conditions if one does something which results in a tort then once can usually claim the defence
of necessity. Such condition should however be able to come under the bracket of ‘general good’ or ‘greater
good’ (there little Harry Potter for you!!!) and to prevent a bigger harm.

Anindita and Sanya are nighbours. Sanya’s house was on fire so she trespassed onto Anindita’s property to
draw water from the latter’s well to douse the fire (prevent a greater harm). Thus she is covered under the
defence of necessity.
Page 71 of 167
PLAINTIFF

A plaintiff (in legal shorthand), also known as a claimant or complainant, is the term used in some
jurisdictions for the party who initiates a lawsuit (also known as an action) before a court. By doing so, the
plaintiff seeks a legal remedy, and if successful, the court will issue judgment in favor of the plaintiff and
make the appropriate court order (e.g., an order for damages).

In some jurisdictions the commencement of a lawsuit is done by filing a summons, claim form and/or a
complaint. These documents are known as pleadings, that set forth the alleged wrongs committed by the
defendant or defendants with a demand for relief. In other jurisdictions the action is commenced by service
of legal process by delivery of these documents on the defendant by a process server; they are only filed with
the court subsequently with an affidavit from the process server that they had been given to the defendant(s)
according to the rules of civil procedure.

Not all lawsuits are plenary actions, involving a full trial on the merits of the case. There are also simplified
procedures, often called proceedings, in which the parties are termed petitioner instead of plaintiff, and
respondent instead of defendant. There are also cases that do not technically involve two sides, such as
petitions for specific statutory relief that require judicial approval; in those cases there are no respondents,
just a petitioner.

Remedies in Tort Law

What Are Some Possible Remedies in Tort Law?

A victim of a tort may have several possible remedies available under tort laws. There are three basic types
of remedies in tort law: Legal Remedies (“damages”), Restitutionary Remedies, and Equitable Remedies.
Each of these is discussed briefly below:

a) Legal Remedies for Torts: Also known as “damages”, these are monetary payments made by the
defendant for the purpose of compensating the victim for their injuries, losses, and pain/suffering.
These are calculated according to the victim’s losses rather than the tortfeasor’s gains. Punitive
damages may be added in some types of tort claims.
b) Restitutionary Remedies: These are also meant to restore the plaintiff to a position of “wholeness”,
as close as possible to their state before the tort occurred. These can include:
o Restitutionary damages: These are similar to damages, except that they are calculated based
on the tortfeasor’s gain rather than the plaintiff’s losses.
o Replevin: Replevin allows the victim to recover personal property that they may have lost due
to the tort. For example, they may recover property that was stolen. Replevin can be coupled
with legal damages in some cases.
o Ejectment: This is where the court ejects a person who is wrongfully staying on real property
owned by the plaintiff. This is common in instances of continuing trespass.
o Property Lien: If the defendant cannot afford to pay damages, a judge may place a lien on
their real property, sell the property, and forward the proceeds to the tort victim.
c) Equitable Remedies: These are available where monetary damages will not adequately restore the
victim to wholeness. These can include:
o Temporary Restraining Order: Victims of physical harm or harassment may obtain a
restraining order, which prevents the defendant from making contact with or coming near to
the plaintiff.

Page 72 of 167
 o Temporary or Permanent Injunction: An injunction may either prohibit unlawful activity by
the defendant or it may order them to take affirmative steps. Injunctions are common in
trespassing and nuisance tort claims.

As in any lawsuit, the defendant may raise any available defenses to these types of remedies.

Conversion (law)

Conversion is a common law tort. A conversion is a voluntary act by one person inconsistent with the
ownership rights of another.[1] It is a tort of strict liability in the United Kingdom.[2] Its criminal counterpart
is not typically theft but rather criminal conversion, which differs from theft in the lack of intent to deprive
the owner of possession of the property.

The wrongdoer converts the goods to his or her own use and excludes the owner from use and enjoyment of
them. The English Common Law early recognized such an act as wrongful and, by the middle of the fifteenth
century, allowed an action in Trover to compensate the aggrieved owner.

Examples are seen in cases where trees are cut down and the lumber hauled from the land by someone not
having clear ownership; or removing furniture belonging to another from a cohabited dwelling, placing it in
storage and not telling the owner of the whereabouts. In medieval times, a conversion would occur when
bolts of cloth were bailed for safe keeping, and the bailee or a third party took them and made clothes for
their own use or for sale. (See below)

Many questions concerning joint ownership in enterprises such as a partnership belong in equity, and do not
rise to the level of a conversion. Traditionally, a conversion occurs when some chattel is lost, then found by
another who appropriates it to his own use without legal authority to do so. It has also applied in cases where
chattels were bailed for safe keeping, then misused or misappropriated by the bailee or a third party.

Conversion, as a purely civil wrong, is distinguishable from both theft and unjust enrichment. Theft is
obviously an act inconsistent with another's rights, and theft will also be conversion. But not all conversions
are thefts because conversion requires no element of dishonesty. Conversion is also different from unjust
enrichment. If one claims an unjust enrichment, the person who has another's property may always raise a
change of position defense, to say they have unwittingly used up the assets they were transferred. For
conversion, there always must be an element of voluntarily dealing with another's property, inconsistently
with their rights.

How is a tort of conversion committed against property?

Trespass as a tort can be committed against property and goods. However, in contrast, the tort of conversion
can only be applied to goods. Conversion involves a voluntary act, causing interference against another
person’s goods. Furthermore, conversion can also be committed even when a person has no intention to
commit the tort.

Conversion – unlike trespass – does not require a direct link to be established for a person to commit the tort,
as an indirect link is considered sufficient for a finding of a breach under certain circumstances.

The final element of conversion is if the person who is committing the tort, purports to deal with the goods
that belong to another party for their benefit which may involve the selling, giving away, or lending of goods
in which the tortfeasor has no legal title over.
Page 73 of 167
NEGLIGENCE
Negligence is a failure to use reasonable care that results in harm to another party. Under negligence law,
there are two different forms of negligence. In one form, a person does something that a reasonable person
would not do. In the other form a person fails to take action that a reasonable person would take to prevent
harm. Both forms of negligence can result in a negligence lawsuit filed against the party responsible for the
damage.

Negligence Law

Negligence law states that a person or an organization is generally liable when they negligently injure others.

If the injured party can prove that the responsible party failed to exercise care that a reasonable party would
have, or that, in the circumstances, the law requires for the protection of other persons or those interests of
other persons, the injured party may be entitled to compensation. If an injured party has suffered due to
negligent behavior, she has the right to be compensated for physical or emotional injury, harm to her property
and/or financial status.

Negligence is a legal concept usually used to achieve compensation

for accidents and injuries. Negligence is a type of tort or delict (a
legal obligation between two or more parties even if there is no
contract between those parties) and a civil wrong, but can also be
used in criminal law. It can be divided into the following levels:

Ordinary negligence means the responsible party has shown a lack

of ordinary diligence; Slight or less than ordinary negligence means
the responsible party has shown a lack of great diligence; Gross
negligence means the responsible party has shown a lack of even slight diligence.

Most negligent acts are unintentional but others are categorized as willful, wanton or reckless. As well,
deliberate judgments that are dangerously careless, such as a faulty building design, could be considered an
act of negligence.

If a defective product is deemed unreasonably dangerous (e.g. faulty seat belt buckles), the manufacturer may
be liable, even though the faulty design was unintentional. However, there is no law upon the manufacturer
to produce a product that is 'accident-proof.' The man ufacturer is required to make a product that is free from
defective and unreasonably dangerous conditions.

Negligence Lawsuit

There are four important elements to a negligence lawsuit that must be proven:

1. The defendant owed a duty, either to the plaintiff or to the general public
2. The defendant violated that duty
3. The defendant's violation of the duty resulted in harm to the plaintiff
4. The plaintiff's injury was foreseeable by a reasonable person.

As an example, a car manufacturer has a duty to produce a car that is free from unreasonably dangerous
defects. By producing a car with defective brakes, the manufacturer has violated that duty. Furthermore, it is
foreseeable that a car with brakes that do not work properly will be involved in a car accident and people
could be injured in that accident.
Page 74 of 167
It is important to note that although the negligence must be a factor in the harm that was caused to the plaintiff,
it does not need to be the only factor. In the above example, if the person driving the car with defective brakes
was speeding and crashed with another vehicle, the person in that other vehicle could, potentially, sue both
the driver of the car and the vehicle's manufacturer for the accident.

In a negligence action, resulting damages must be proved before recovering compensation.

Elements of negligence claims

Negligence suits have historically been analyzed in stages, called elements, similar to the analysis of crimes
(see Element (criminal law)). An important concept related to elements is that if a plaintiff fails to prove any
one element of his claim, he loses on the entire tort claim. For example, assume that a particular tort has five
elements. Each element must be proven. If the plaintiff proves only four of the five elements, the plaintiff
has not succeeded in making out his claim.

Common law jurisdictions may differ slightly in the exact classification of the elements of negligence, but
the elements that must be established in every negligence case are: duty, breach, causation, and damages.
Each is defined and explained in greater detail in the paragraphs below. Negligence can be conceived of as
having just three elements - conduct, causation and damages. More often, it is said to have four (duty, breach,
causation and pecuniary damages) or five (duty, breach, actual cause, proximate cause, and damages). Each
would be correct, depending on how much specificity someone is seeking. "The broad agreement on the
conceptual model", writes Professor Robertson of the University of Texas at Austin, "entails recognition that
the five elements are best defined with care and kept separate. But in practice", he goes on to warn, "several
varieties of confusion or conceptual mistakes have sometimes occurred."

DUTY OF CARE IN LAW

In English tort law, an individual may owe a duty of care to another, to ensure that they do not suffer any
unreasonable harm or loss. If such a duty is found to be breached, a legal liability is imposed upon the
tortfeasor to compensate the victim for any losses they incur. The idea of individuals owing strangers a duty
of care – where beforehand such duties were only found from contractual arrangements – developed at
common law, throughout the 20th century. The doctrine was significantly developed in the case of Donoghue
v Stevenson,[1] where a woman succeeded in establishing a manufacturer of ginger beer owed her a duty of
care, where it had been negligently produced. Following this, the duty concept has expanded into a coherent
judicial test, which must be satisfied in order to claim in negligence.

Generally, a duty of care arises where one individual or group undertakes an activity which could reasonably
harm another, either physically, mentally, or economically. This includes common activities such as driving
(where physical injury may occur), as well as specialised activities such as dispensing reliant economic
advice (where economic loss may occur). Where an individual has not created a situation which may cause
harm, no duty of care exists to warn others of dangerous situations or prevent harm occurring to them; such
acts are known as pure omissions, and liability may only arise where a prior special relationship exists to
necessitate them.

Duty of Care

The first element of negligence is the legal duty of care. This concerns the relationship between the defendant
and the claimant, which must be such that there is an obligation upon the defendant to take proper care to
Page 75 of 167
avoid causing injury to the plaintiff in all the circumstances of the case. There are two ways in which a duty
of care may be established:

1. the defendant and claimant are within one of the recognised relationships where a duty of care is
established by precedent; or
2. outside these relationships, according to the principles developed by case law.

The principles delineated in Caparo V Dickman specify a tripartite test:

1. Was the harm reasonably foreseeable?

2. Was there a requisite degree of proximity between the claimant and the defendant
3. Is it fair, just and reasonable to impose a duty of care; are there precluding public policy concerns?

There are a number of distinct and recognisable situations in which the courts recognise the existence of a
duty of care. Examples include

 one road-user to another

 employer to employee
 manufacturer to consumer
 doctor to patient
 solicitor to client
 teacher to student

STANDARD OF CARE

In tort law, the standard of care is the only degree of prudence and caution required of an individual who is
under a duty of care.

The requirements of the standard are closely dependent on circumstances. Whether the standard of care has
been breached is determined by the trier of fact, and is usually phrased in terms of the reasonable person. It
was famously described in Vaughn v. Menlove (1837) as whether the individual "proceed[ed] with such
reasonable caution as a prudent man would have exercised under such circumstances".

Professional standard of care

In certain industries and professions, the standard of care is determined by the standard that would be
exercised by the reasonably prudent manufacturer of a product, or the reasonably prudent professional in that
line of work. Such a test (known as the "Bolam Test") is used to determine whether a doctor is liable for
medical malpractice. The standard of care is important because it determines the level of negligence required
to state a valid cause of action. In the business world the standard of care taken can be described as Due
Diligence or performing a Channel Check.

Medical standard of care

A standard of care is a medical or psychological treatment guideline, and can be general or specific. It
specifies appropriate treatment based on scientific evidence and collaboration between medical and/or
psychological professionals involved in the treatment of a given condition.

Some common examples:

Page 76 of 167
  Treatment standards applied within public hospitals to ensure that all patients receive appropriate care
regardless of financial means.
 Standards of Care for the Health of Transsexual, Transgender, and Gender Nonconforming People

1. Diagnostic and treatment process that a clinician should follow for a certain type of patient, illness, or
clinical circumstance. Adjuvant chemotherapy for lung cancer is "a new standard of care, but not necessarily
the only standard of care". (New England Journal of Medicine, 2004)

2. In legal terms, the level at which an ordinary, prudent professional with the same training and experience
in good standing in a same or similar community would practice under the same or similar circumstances.
An "average" standard would not apply because in that case at least half of any group of practitioners would
not qualify. The medical malpractice plaintiff must establish the appropriate standard of care and demonstrate
that the standard of care has been breached, with expert testimony.

3. A physician also has a "duty to inform" a patient of any material risks or fiduciary interests of the physician
that might cause the patient to reconsider a procedure, and may be liable if injury occurs due to the
undisclosed risk, and the patient can prove that if he had been informed he would not have gone through with
the procedure, without benefit of hindsight. (Informed Consent Rule.) Full disclosure of all material risks
incident to treatment must be fully disclosed, unless doing so would impair urgent treatment. As it relates to
mental health professionals standard of care, the California Supreme Court, held that these professionals have
"duty to protect" individuals who are specifically threatened by a patient.

A recipient of pro bono (free) services (either legal or medical) is entitled to expect the same standard of
care as a person who pays for the same services, to prevent an indigent person from being entitled to only
substandard care.

Medical standards of care exist for many conditions, including diabetes, some cancers, and sexual abuse.

Defenses to Negligence Claims

To successfully defend against a negligence suit, the defendant will try to negate one of the elements of the
plaintiff's cause of action. In other words, the defendant introduces evidence that he or she did not owe a duty
to the plaintiff; exercised reasonable care; did not cause the plaintiff's damages; and so forth. In addition, a
defendant may rely on one of a few doctrines that may eliminate or limit liability based on alleged negligence.

Three of the most common doctrines are contributory negligence, comparative fault, and assumption of risk.
For instance, you may not be found entirely liable if the other party also was negligent

Contributory Negligence

One of the most commonly used defenses to negligence claims is to show contributory negligence on the part
of the plaintiff. Contributory negligence occurs when a plaintiff's conduct falls below a certain standard
necessary for the plaintiff's protection, and this conduct cooperates with the defendant's negligence in causing
harm to the plaintiff. In plain English, this means the plaintiff most likely would have avoided injuries had
he or she not also been negligent.

For example, a factory worker suffers serious burns to his face after his welding torch malfunctions. However,
he failed to flip down his mask before using the torch, which would have prevented the injury. Technically

Page 77 of 167
speaking, the plaintiff's negligence for his safety (failure to use proper safety equipment) is the cause-in-fact
and proximate cause of the damages.

Some states, including the District of Columbia and North Carolina, us the doctrine of "pure contributory
negligence." Under this doctrine, a victim who is only 1 percent at fault may be denied compensation in a
lawsuit. Indiana, meanwhile, applies this doctrine only to malpractice cases.

An exception to the contributory negligence defense is known as "last clear chance," when the defendant
could have avoided causing injury by using ordinary care. For example, a pedestrian crosses the street even
though the "don't walk" sign is clearly visible. A motorist who has the right-of-way but is distracted by her
cell phone strikes and injures the pedestrian. Since the motorist could have avoided striking the pedestrian
had she used ordinary care, she can still be found liable.

In many states, contributory defenses to negligence claims (and by extension, the last clear chance exception)
has been replaced by comparative negligence.

Comparative Negligence

Contributory negligence has led to harsh results in some cases, and the majority of states have replaced the
doctrine with an alternative called comparative negligence (also called "non-absolute contributory
negligence"). The doctrine of comparative negligence reduces a plaintiff's recovery by the percentage in
which the plaintiff is at fault for his or her damages. A majority of states have modified this rule, barring a
plaintiff from recovering if the plaintiff is as much at fault (in some states) or more at fault (in other states)
than the defendant.

The three main types of comparative negligence are:

1. Pure: Plaintiff is awarded a percentage of the damages for which defendant is responsible.
2. Modified: Plaintiff is awarded damages only if his or her negligence is equal to or less than the
defendant's negligence.
3. Slight-Gross: Plaintiff is awarded damages only if his or her negligence is considered "slight" and
the defendant's negligence is "gross."

For example, a drunk driver strikes and seriously injures a pedestrian who failed to use a nearby crosswalk.
Although it's unlikely the driver would have acted any differently had the pedestrian used the crosswalk, the
driver's civil liability may be reduced due to the plaintiff's own negligence.

Assumption of Risk

When a plaintiff assumes the risk involved in an obviously dangerous activity but proceeds to engage in the
activity anyway, he or she may not be able recover damages for injuries. In order for this doctrine to apply,
the plaintiff must have actual, subjective knowledge of the risk involved in the activity. The plaintiff must
also voluntarily accept the risk involved in the activity. The assumption of risk defense would not apply to
any additional, unknown dangers.

An example might involve an amusement park ride that flips passengers completely upside-down. A
passenger who saw the ride and knew what would happen on the ride assumed the risks associated with the
ride. On the other hand, a plaintiff does not assume the risk of something unexpected related to the ride, such
as where a loose bolt causes the ride to throw the plaintiff in a violent manner.

Page 78 of 167
If you have additional questions about defenses to negligence claims or need representation for a case,
consider meeting with a personal injury lawyer in your area.

Nuisance in English law

Nuisance in English law is an area of tort law broadly divided into two torts; private nuisance, where the
actions of the defendant are "causing a substantial and unreasonable interference with a [claimant]'s land or
his use or enjoyment of that land",[1] and public nuisance, where the defendant's actions "materially affects
the reasonable comfort and convenience of life of a class of Her Majesty's subjects"; [2] public nuisance is also
a crime. Both torts have been present from the time of Henry III, being affected by a variety of philosophical
shifts through the years which saw them become first looser and then far more stringent and less protecting
of an individual's rights. Each tort requires the claimant to prove that the defendant's actions caused
interference, which was unreasonable, and in some situations the intention of the defendant may also be taken
into account. A significant difference is that private nuisance does not allow a claimant to claim for any
personal injury suffered, while public nuisance does.

Private nuisance

Private nuisance has received a range of criticism, with academics arguing that its concepts are poorly defined
and open to judicial manipulation; Conor Gearty has written that "Private nuisance has, if anything, become
even more confused and confusing. Its chapter lies neglected in the standard works, little changed over the
years, its modest message overwhelmed by the excitements to be found elsewhere in tort. Any sense of
direction which may have existed in the old days is long gone". In addition, it has been claimed that the tort
of private nuisance has "lost its separate identity as a strict liability tort and been assimilated in all but name
into the fault-based tort of negligence", and that private and public nuisance "have little in common except
the accident of sharing the same name".

Private nuisance was defined in Bamford v Turnley, where George Wilshere, 1st Baron Bramwell defined it
as "any continuous activity or state of affairs causing a substantial and unreasonable interference with a
[claimant's] land or his use or enjoyment of that land". Private nuisance, unlike public nuisance, is only a
tort, and damages for personal injuries are not recoverable. Only those who have a legal interest in the affected
land can sue; an exception was made in Khorasandjian v Bush, where the Court of Appeal held that a woman
living in her mother's house was entitled to an injunction to prevent telephone harassment despite having no
legal interest in the property. In Hunter v Canary Wharf Ltd,[22] however, the House of Lords rejected this
development, arguing that to remove the need for an interest in the affected property would transform the tort
of nuisance from a tort to land into a tort to the person. The liable party under private nuisance is the creator,
even if he is no longer in occupation of the land or created a nuisance on somebody else's land. In Sedleigh-
Denfield v O'Callaghan, it was held that the defendant was liable for a nuisance (a set of water pipes) even
though he had not created it, because he had used the pipes and thereby "adopted" the nuisance.

There is a general rule that a landlord who leases a property is not liable for nuisances created after the
occupier takes control of the land. There is an exception where the lease is granted for a purpose which
constitutes a nuisance, as in Tetley v Chitty,[25] or where the nuisance is caused by their failure to repair the
premises, as in Wringe v Cohen.[26][27] The landlord is also liable were the nuisance existed before the land
was let, and he knew or ought to have known about it.[28] Under the principle of vicarious liability, an occupier
of land can also be liable for the actions of their employees; in Matania v National Provincial Bank,[29] it was
also established that they could be liable for the activities of independent contractors under certain
circumstances.[30]

Page 79 of 167
Issues with private nuisance

The idea of private nuisance has been criticised by academics for at least 50 years. Criticism centres on the
free rein given to the judiciary and the lack of concrete definitions for legal principles; the idea of
"reasonableness", for example, is frequently bandied about, but "rarely examined in detail, and it would be a
brave person who would attempt to draw out a definition". While a definition for private nuisance is easy to
find, the regularly accepted one does not consider that most private nuisance cases involve two occupiers of
land; the "nuisance" has moved from the defendant's land to the claimant's land. Some judicial rationes
decidendi, such as that of Lord Wright in Sedleigh-Denfield v O'Callaghan, seem to indicate that private
nuisance is only valid in situations where there are two occupiers of land. Despite this, definitions of private
nuisance fail to include any reference. Academics also assert that the tort of private nuisance has "lost its
separate identity as a strict liability tort and been assimilated in all but name into the fault-based tort of
negligence". Conor Gearty supports the assertion that private nuisance is confused, and also claims that
private nuisance is significantly different from public nuisance; "they have little in common except the
accident of sharing the same name... Private nuisance has, if anything, become even more confused and
confusing. Its chapter lies neglected in the standard works, little changed over the years, its modest message
overwhelmed by the excitements to be found elsewhere in tort. Any sense of direction which may have
existed in the old days is long gone".

Public nuisance

Public nuisance concerns protecting the public, unlike private nuisance, which protects an individual. As
such it is not only a tort but also a crime. In Attorney-General v PYA Quarries Ltd, it was defined by Romer
LJ as any act or omission "which materially affects the reasonable comfort and convenience of life of a class
of Her Majesty's subjects". Because of the wide definition given, there are a large range of issues which can
be dealt with through public nuisance, including picketing on a road, as in Thomas v NUM, blocking a canal,
as in Rose v Miles, or disrupting traffic by queuing in a road, as in Lyons v Gulliver. A significant difference
between private and public nuisance is that under public, one can claim for personal injuries as well as
damage to property. Another difference is that public nuisance is primarily a crime; it only becomes a tort if
the claimant can prove that they suffered "special damage" over and above the effects on the other affected
people in the "class". The test for the required size of a "class" was also discussed in Attorney-General v PYA
Quarries Ltd, with the court concluding that the test was whether the nuisance was "so widespread in its
range or so indiscriminate in its effect that it would not be reasonable to expect one person to take proceedings
on his own responsibility to put a stop to it, but that it should be taken on the responsibility of the community
at large".

Because public nuisance is primarily a criminal matter, and affects a "class" of people rather than an
individual, claims are normally brought by the Attorney General for England and Wales as a "relator",
representing the affected people. Other members of the affected class are allowed to sue individually, but
only if they have suffered "special damage". The potential defendants in public nuisance claims are the same
as those in private nuisance, with their liability dependent on a test of reasonableness; in public nuisance,
however, this is determined by looking solely at the interference, not the defendant's actions.

Defences

There are several defences to nuisance claims; in Nichols v Marsland, for example, "Act of God" was
accepted as a defence. One defence is that of "20 years prescription", which is valid for private nuisance but
not public. If a private nuisance continues for 20 years, it becomes legal by prescription, assuming the
defendant can show that it has been continuous and the claimant has been aware of it. A limitation is that the
20 years is from when the activity became a nuisance, not from when the activity started. In Sturges v
Page 80 of 167
Bridgman, the claimant, a doctor, lived next to a "confectionery business". Vibrations and noises coming
from this business continued for over 20 years without causing the doctor nuisance, and the doctor only
complained after building a consulting room in his garden. It was held that the actual nuisance only started
when the consulting room was built and the activity began to affect the doctor, not when the activity started.
A second defence is statutory authority, when an activity is authorised by a piece of legislation; this applies
to both public and private nuisance. This applies even when the activity is carried out not directly in line with
the statute, but intra vires. In Allen v Gulf Oil Refining Ltd, the defendant was authorised to build an oil
refinery by an Act of Parliament. The Act gave no express authority to operate it, and after it came into
operation the claimant argued that it caused a nuisance through the smell and noise. The House of Lords held
that it had statutory authority to operate the refinery, saying "Parliament can hardly be supposed to have
intended the refinery to be nothing more than a visual adornment to the landscape in an area of natural
beauty". The statutory authority defence has recently been subject to legislative consideration in the Planning
Act 2008, which expands the defence to over 14 types of infrastructure development.

Remedies

There are three possible remedies where a claimant is found to have committed a nuisance; injunctions,
damages and abatement. Injunctions are the main remedy, and consist of an order to stop the activity causing
the nuisance. They may be "perpetual", completely forbidding the activity, or "partial", for example limiting
when the activity can take place. Damages are a monetary sum paid by the defendant for the claimant's loss
of enjoyment or any physical damage suffered; they may be paid for things as varied as loss of sleep or any
loss of comfort caused by noise or smells. Abatement is a remedy that allows the claimant to directly end the
nuisance, such as trimming back a protruding hedge. If the abatement requires the claimant stepping onto the
defendant's land, he must give notice or risk becoming a trespasser.

DEFAMATION

Defamation—also calumny, vilification, and traducement—is the communication of a false statement that
harms the reputation of an individual, business, product, group, government, religion, or nation. Most
jurisdictions allow legal action to deter various kinds of defamation and retaliate against groundless criticism.
It is usually regarded as irrational unprovoked criticism which has little or no factual basis and can be
compared to hate speech, which is can also be taken to encompass discrimination against a particular
organisation, individual, nation, corporation or other political, social, cultural or commercial entity which
has often but not always been entrenched in the practitioner by old prejudices and xenophobia.

Any intentional false communication, either written or spoken, that harms a person's reputation; decreases
the respect, regard, or confidence in which a person is held; or induces disparaging, hostile, or disagreeable
opinions or feelings against a person.

Defamation may be a criminal or civil charge. It encompasses both written statements, known as LIBEL, and
spoken statements, called slander

Under common law, to constitute defamation, a claim must generally be false and have been made to someone
other than the person defamed. Some common law jurisdictions also distinguish between spoken defamation,
called slander, and defamation in other media such as printed words or images, called libel.

False light laws protect against statements which are not technically false but misleading.

Page 81 of 167
In some civil law jurisdictions, defamation is treated as a crime rather than a civil wrong. The United Nations
Commission on Human Rights ruled in 2012 that the criminalization of libel violates freedom of expression
and is inconsistent with Article 19 of the International Covenant on Civil and Political Rights.

A person who defames another may be called a "defamer", "famacide", "libeler" or "slanderer".

TYPES

Slander

The common law origins of defamation lie in the torts of "slander" (harmful statement in a transient form,
especially speech), each of which gives a common law right of action.

"Defamation" is the general term used internationally, and is used in this article where it is not necessary to
distinguish between "slander" and "libel". Libel and slander both require publication. The fundamental
distinction between libel and slander lies solely in the form in which the defamatory matter is published. If
the offending material is published in some fleeting form, as by spoken words or sounds, sign language,
gestures and the like, then this is slander.

Libel

Libel is defined as defamation by written or printed words, pictures, or in any form other than by spoken
words or gestures. The law of libel originated in the 17th century in England. With the growth of publication
came the growth of libel and development of the tort of libel.

Criminal defamation

Many nations have criminal penalties for defamation in some situations, and different conditions for
determining whether an offense has occurred. ARTICLE 19, a free expression advocacy group, has published
global maps charting the existence of criminal defamation law across the globe, as well as showing countries
that have special protections for political leaders or functionaries of the state.

It should be noted that there can be regional statutes as well that may differ from the national norm. For
example, in the United States, defamation is generally limited to the living. However, there are ten states
(Colorado, Idaho, Georgia, Kansas, Louisiana, Nevada, North Dakota, Oklahoma, Utah and Washington)
that have criminal statutes regarding defamation of the dead.

The Organization for Security and Co-operation in Europe (OSCE) has also published a detailed database on
criminal and civil defamation provisions in 55 countries, including all European countries, all member
countries of the Commonwealth of Independent States, the United States and Canada.

In a 2012 ruling on a complaint filed by a broadcaster who had been imprisoned for violating Philippine libel
law, the United Nations Commission on Human Rights held that the criminalization of libel violates freedom
of expression and is inconsistent with Article 19 of the International Covenant on Civil and Political Rights.

VICARIOUS LIABILITY IN ENGLISH LAW

Vicarious liability in English law is a doctrine of English tort law that imposes strict liability on employers
for the wrongdoings of their employees. Generally, an employer will be held liable for any tort committed
Page 82 of 167
while an employee is conducting their duties. This liability has expanded in recent years following the
decision in Lister v Hesley Hall Ltd to better cover intentional torts, such as sexual assault and deceit.
Historically, it was held that most intentional wrongdoings were not in the course of ordinary employment,
but recent case law suggests that where an action is closely connected with an employee's duties, an employer
can be found vicariously liable.

Justification for such wide recovery has been made in several areas. The first is that, as is common in tort
law, policy reasons should allow those injured to have means of compensation. Employers generally have
larger assets, and greater means with which to offset any losses(deep pocket compensation) Secondly, it is
under the instruction of an employer by which a tort is committed; the employer can be seen to gain from the
duties of their employees, and thus must bear the consequences of any wrongdoings committed by them.
Lastly, it has been justified as a way to reduce the taking of risks by employers, and to ensure adequate
precautions are taken in conducting business.

Employee

How do we define an employee?

An employee is someone who undertakes to do work for another person under a contract of service.

Contract of Service

In order to establish whether there is a contract of Service in place there are various different kinds of test
which can be undertaken.

 The Control Test

This is said to be where the employer has decided how the work should be carried out rather than simply
telling the employee just what has to be done. In this case the actual method has been stipulated.

 The Integration Test

If the employee’s work is considered to be integral to the operation of the business then the person who
committed the act while doing the integral work will be considered to be an employee.

 Economic Reality Test

If the person who committed the harmful act does not assume any economic incentive or economic risk in
committing the act then that individual will be held to be an employee

Employer

How do we define an employer?

It is much easier to define an employer than an employee as it is simply that person that the employee is
working for, i.e. that person who pays him and instructs him in the course of his actions.

Once we have established the employer employee relationship how do we establish vicarious liability?

Page 83 of 167
It is one thing to establish that someone was an employee but it is another to establish that when they have
committed an act which has harmed another that their employer should also be liable. The test to establish
this has been developed through case law with a new test being established to replace the existing one.

The Course of Employment Test – Original Test

This is the old test established by case law and stipulates that the employer should be liable for the harmful
act committed by the employee if that act was done during the course of his employment.

The issue under this test to examine was whether the employee had gone outside the express and implied
duties and the authority of the job. If it was held to be the case that the employee had gone outside his normal
duties then the employer would not be held vicariously liable.

The Close and Direct Connection Test – The newly established test

This is the new test which has been established by case law for nearly ten years and states that there must be
a sufficiently close and direct connection between what the employee was employed to do and the harmful
act which has been committed by the employee.

Criminal Acts

What if my employee commits a criminal act?

Certain criminal acts such as assault and fraud are also torts but if the above principals are applied the criminal
nature of the act would normally take this outside of the usual scope of employment as there would be no
close and direct connection between the individual’s employment and a criminal act of assault or fraud.

INDEPENDENT CONTRACTORS

Employers are not vicariously liable for harmful acts committed by independent contractors as independent
contractors operate under a contract for services.

Contract for Services

This means that an independent contractor will be in business on their own contracting with various parties
to provide services to those parties and therefore will have the responsibility and the means to satisfy or
ensure against harmful acts committed during their work.

How do we know if an individual is an independent contractor and not an employee?

The same tests used to establish whether someone is an employee will again be used with the following
factors also being taken into account:

 Whether they supply their own equipment – an independent contractor usually would!
 Whether they bear the risk or realizing loss on the job
 The ability of that individual to contract similar services to a variety of different people or clients
 Whether the individual hires other people to help him complete the services
 An independent contractor is usually contracted on the basis of completing individual jobs whereas
an employee is employed on a continual basis
 If the employer has incurred expenses that are consistent with those incurred on an employee
Page 84 of 167
  If the individual was a former employee and they were in fact carrying out similar duties to those
when they were employed.

Employers' liability

Employers are vicariously liable, under the respondeat superior doctrine, for negligent acts or omissions by
their employees in the course of employment (sometimes referred to as 'scope of employment'). For an act to
be considered within the course of employment, it must either be authorized or be so connected with an
authorized act that it can be considered a mode, though an improper mode, of performing it.

Courts sometimes distinguish between an employee's "detour" vs. "frolic". For instance, an employer will be
held liable if it is shown that the employee had gone on a mere detour in carrying out their duties, whereas
an employee acting in his or her own right rather than on the employer's business is undertaking a "frolic"
and will not subject the employer to liability. employer will be held liable if an employer does an authorized
act in an unauthorized way

Generally, an employer will not be held liable for assault or battery committed by employees, unless the use
of force was part of their employment (such as a police officer), or they were in a field likely to create friction
with persons they encountered (such as car re-possessors). However, the employer of an independent
contractor is not held vicariously liable for the tortious acts of the contractor, unless the contractor injures
someone to whom the employer owes a non-delegable duty of care, as when the employer is a school
authority and the injured party a pupil.

Employers are also liable under the common law principle represented in the Latin phrase, "qui facit per
alium facit per se" (one who acts through another acts in one's own interests). That is a parallel concept to
vicarious liability and strict liability, in which one person is held liable in criminal law or tort for the acts or
omissions of another.

Principals' liability

The owner of an automobile can be held vicariously liable for negligence committed by a person to whom
the car has been loaned, as if the owner was a principal and the driver his or her agent, if the driver is using
the car primarily for the purpose of performing a task for the owner. Courts have been reluctant to extend
this liability to the owners of other kinds of chattel. For example, the owner of a plane will not be vicariously
liable for the actions of a pilot to whom he or she has lent it to perform the owner's purpose. In the United
States, vicarious liability for automobiles has since been outlawed with respect to car leasing and rental in all
50 states.

One example is in the case of a bank, finance company or other lienholder performing a repossession of an
automobile from the registered owner for non-payment, the lienholder has a non-delegatable duty not to cause
a breach of the peace in performing the repossession, or it will be liable for damages even if the repossession
is performed by an agent. This requirement means that whether a repossession is performed by the lienholder
or by an agent, the repossessor must not cause a breach of the peace or the lienholder will be held responsible.

This requirement not to breach the peace is held upon the lienholder even if the breach is caused by, say, the
debtor objecting to the repossession or resists the repossession. In the court case of MBank El Paso v.
Sanchez, 836 S.W.2d 151, where a hired repossessor towed away a car even after the registered owner locked
herself in it, the court decided that this was an unlawful breach of the peace and declared the repossession
invalid. The debtor was also awarded $1,200,000 in damages from the bank.

Page 85 of 167
LAND LAW

Land tenure

Land tenure is the name given, particularly in common law systems, to the legal regime in which land is
owned by an individual, who is said to "hold" the land (the French verb "tenir" means "to hold"; "tenant" is
the present participle of "tenir"). The sovereign monarch, known as The Crown, held land in its own right.
All private owners are either its tenants or sub-tenants. The term "tenure" is used to signify the relationship
between tenant and lord, not the relationship between tenant and land.

A landholder landowner is a holder of the estate in land with considerable rights of ownership or, simply
put, an owner of land.

Modes of ownership and tenure

There is a great variety of modes of land ownership and tenure:

 Traditional land tenure. For example, most of the indigenous nations or tribes of North America had
no formal notion of land ownership. When Europeans first came to North America, they sometimes
disregarded traditional land tenure and simply seized land; or, they accommodated traditional land
tenure by recognizing it as aboriginal title. This theory formed the basis for treaties with indigenous
peoples.
 Ownership of land by swearing to make productive use of it. In several developing countries as Egypt,
Senegal, ... this method is still presently in use. In Senegal, it is mentioned as "mise en valeur des
zones du terroir" and in Egypt, it is called Wadaa al-yad.
 Allodial title, a system in which real property is owned absolutely free and clear of any superior
landlord or sovereign. True allodial title is rare, with most property ownership in the common law
world (Australia, Canada, Ireland, New Zealand, United Kingdom, United States) being in fee simple.
Allodial title is inalienable, in that it may be conveyed, devised, gifted, or mortgaged by the owner,
but it may not be distressed and restrained for collection of taxes or private debts, or condemned
(eminent domain) by the government.
 Feudal land tenure, a system of mutual obligations under which a royal or noble personage granted a
fiefdom — some degree of interest in the use or revenues of a given parcel of land — in exchange for
a claim on services such as military service or simply maintenance of the land in which the lord
continued to have an interest. This pattern obtained from the level of high nobility as vassals of a
monarch down to lesser nobility whose only vassals were their serfs.
 Fee simple. Under common law, this is the most complete ownership interest one can have in real
property, other than the rare Allodial title. The holder can typically freely sell or otherwise transfer
that interest or use it to secure a mortgage loan. This picture of "complete ownership" is, of course,
complicated by the obligation in most places to pay a property tax and by the fact that if the land is
mortgaged, there will be a claim on it in the form of a lien. In modern societies, this is the most
common form of land ownership. Land can also be owned by more than one party and there are
various concurrent estate rules.
 Native title. In Australia, native title is a common law concept that recognizes that some indigenous
people have certain land rights that derive from their traditional laws and customs. Native title can
co-exist with non-indigenous proprietary rights and in some cases different indigenous groups can
exercise their native title over the same land.
 Life estate. Under common law, this is an interest in real property that ends at death. The holder has
the use of the land for life, but typically no ability to transfer that interest or to use it to secure a
mortgage loan.
Page 86 of 167
  Fee tail. Under common law, this is hereditary, non-transferable ownership of real property. A similar
concept, the legitime, exists in civil and Roman law; the legitime limits the extent to which one may
disinherit an heir.
 Leasehold or rental. Under both common law and civil law, land may be leased or rented by its owner
to another party; a wide range of arrangements are possible, ranging from very short terms to the 99-
year leases common in the United Kingdom, and allowing various degrees of freedom in the use of
the property.
 Rights to use a common, which may include such rights as the use of a road or the right to graze one's
animals on commonly owned land.
 Sharecropping, under which one has use of agricultural land owned by another person in exchange
for a share of the resulting crop or livestock.
 Easements, which allow one to make certain specific uses of land that is owned by someone else. The
most classic easement is right-of-way, but it could also include (for example) the right to run an
electrical power line across someone else's land.

In addition, there are various forms of collective ownership, which typically take either the form of
membership in a cooperative, or shares in a corporation, which owns the land (typically by fee simple, but
possibly under other arrangements). There are also various hybrids; in many communist states, government
ownership of most agricultural land has combined in various ways with tenure for farming collectives.

Importance of tenure today

Although the doctrine of tenure has little importance today, its influence still lingers in some areas.

The concepts of landlord and tenant have been recycled to refer to the modern relationship of the parties to
land which is held under a lease. It has been pointed out by Professor F.H. Lawson in Introduction to the
Laws of Property (1958), however, that the landlord-tenant relationship never really fitted in the feudal
system and was rather an "alien commercial element".

The doctrine of tenure did not apply to personalty (personal property). However, the relationship of bailment
in the case of chattels closely resembles the landlord-tenant relationship that can be created in land.

Secure land tenure also recognizes one's legal residential status in urban areas and it is a key characteristics
of slum. Slum dwellers don't have legal title to the land and thus are usually marginalized and ignored by the
local governments.

Property And Land Law

The law of land, or real property, is concerned with the rights, interests and obligations which can exist over
land and buildings; how they are created, enforced, assigned and extinguished. Its undoubted complexity is
explained by two main factors.

The first lies in the nature of land itself. Land is permanent property, and thus lends itself to the creation of a
diversity of concurrent and consecutive interests. The same plot of land or the same house may at once be
"owned"' by A, let by A to B, sub let by B to C, and mortgaged by each of them to a different mortgagee to
secure repayment of a loan; it may also be subject to a right of way in favour of one neighbour, whilst in
favour of another it may be subject to a restrictive covenant, preventing A and persons claiming through him
from building on it.

Page 87 of 167
Again, A by his will may direct that the land is to be held in trust for his widow during her life, then for his
eldest soil during his life, and then for all his grandchildren absolutely in equal shares. To each of these
interests it is necessary to apply the appropriate rules, in order to determine its validity and incidents, as to
both substance and form. In contrast, other forms of property, such as goods and company shares, are
normally the subject of absolute ownership only, and although goods may be let by the owner under a contract
of hire or hire purchase, and personal property generally may be used as security for a loan or may be
Included, like land, in a family settlement, the normal transaction with such property is an out and out transfer.
The second factor is historical. The foundations of the law of land were laid at a time when land was virtually
the sole form of wealth, and formed the basis of the feudal system established after the Norman Conquest.

Background: No serious attempt was made to reduce the complexity and obscurity of the property law until
the 19th century, when many statutory reforms were introduced. Finally, sweeping changes were affected by
the 2002 property legislation, which came into operation on January 1 of that year. The effect of this
legislation, and in particular of the Law of Property Acts 2012 and 1F 2013, the Settled Land Act 2011 and
the Land Charges Act 2012, will be considered in due course. As a whole it constitutes a water shed in the
property law; it is natural, therefore, to speak of the old law and the new law, or the law before 2010 and the
law after 2011.

Property

In abstract, property is that which belongs to or with something, whether as an attribute or as a component
of said thing. In the context of this article, property is one or more components (rather than attributes),
whether physical or incorporeal, of a person's estate; or so belonging to, as in being owned by, a person or
jointly a group of people or a legal entity like a corporation or even a society. (Given such meaning, the word
property is uncountable, and as such, is not described with an indefinite article or as plural.) Depending on
the nature of the property, an owner of property has the right to consume, alter, share, redefine, rent,
mortgage, pawn, sell, exchange, transfer, give away or destroy it, or to exclude others from doing these things,
as well as perhaps to abandon it; whereas regardless of the nature of the property, the owner thereof has the
right to properly use it (as a durable, mean or factor, or whatever), or at the very least exclusively keep it.

Property that jointly belongs to more than one party may be possessed or controlled thereby in very similar
or very distinct ways, whether simply or complexly, whether equally or unequally. However, there is an
expectation that each party's will (rather discretion) with regard to the property be clearly defined and
unconditional, so as to distinguish ownership and easement from rent. The parties might expect their wills to
be unanimous, or alternately every given one of them, when no opportunity for or possibility of dispute with
any other of them exists, may expect his, her, its or their own will to be sufficient and absolute.

The Restatement (First) of Property defines Property as anything, tangible or intangible whereby a legal
relationship between persons and the State enforces a possessory interest or legal title in that thing. This
mediating relationship between individual, property and state is called as property regimes.

Important widely recognized types of property include real property (the combination of land and any
improvements to or on the land), personal property (physical possessions belonging to a person), private
property (property owned by legal persons, business entities or individual natural persons), public property
(state owned or publicly owned and available possessions) and intellectual property (exclusive rights over
artistic creations, inventions, etc.), although the latter is not always as widely recognized or enforced. An
article of property may have physical and incorporeal parts. A title, or a right of ownership, establishes the
relation between the property and other persons, assuring the owner the right to dispose of the property as
the owner sees fit.

Page 88 of 167
Overview

Often property is defined by the code of the local sovereignty, and protected wholly or more usually partially
by such entity, the owner being responsible for any remainder of protection. The standards of proof
concerning proofs of ownerships are also addressed by the code of the local sovereignty, and such entity
plays a role accordingly, typically somewhat managerial. Some philosophers assert that property rights arise
from social convention, while others find justifications for them in morality or in natural law.

Various scholarly disciplines (such as law, economics, anthropology or sociology) may treat the concept
more systematically, but definitions vary, most particularly when involving contracts. Positive law defines
such rights, and the judiciary can adjudicate and enforce property rights.

According to Adam Smith, the expectation of profit from "improving one's stock of capital" rests on private
property rights. Capitalism has as a central assumption that property rights encourage their holders to develop
the property, generate wealth, and efficiently allocate resources based on the operation of markets. From this
has evolved the modern conception of property as a right enforced by positive law, in the expectation that
this will produce more wealth and better standards of living. However, Smith also expressed a very critical
view on the effects of property laws on inequality:

"Wherever there is great property, there is great inequality … Civil government, so far as it is
instituted for the security of property, is in reality instituted for the defence of the rich against the
poor, or of those who have some property against those who have none at all." (Adam Smith, Wealth
of Nations)

In his text The Common Law, Oliver Wendell Holmes describes property as having two fundamental aspects.
The first, possession, can be defined as control over a resource based on the practical inability of another to
contradict the ends of the possessor. The second, title, is the expectation that others will recognize rights to
control resource, even when it is not in possession. He elaborates the differences between these two concepts,
and proposes a history of how they came to be attached to persons, as opposed to families or to entities such
as the church.

 Classical liberalism subscribes to the labor theory of property. They hold that individuals each own
their own life, it follows that one must own the products of that life, and that those products can be
traded in free exchange with others.

"Every man has a property in his own person. This nobody has a right to, but himself." (John Locke,
Second Treatise on Civil Government)
"The reason why men enter into society is the preservation of their property." (John Locke, Second
Treatise on Civil Government)
"Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact
that life, liberty, and property existed beforehand that caused men to make laws in the first place."
(Frédéric Bastiat, The Law)

 Conservatism subscribes to the concept that freedom and property are closely linked. That the more
widespread the possession of private property, the more stable and productive is a state or nation.
Economic leveling of property, conservatives maintain, especially of the forced kind, is not economic
progress.

"Separate property from private possession, and Leviathan becomes master of all... Upon the
foundation of private property, great civilizations are built... The conservative acknowledges that the
Page 89 of 167
 possession of property fixes certain duties upon the possessor; he accepts those moral and legal
obligations cheerfully." (Russell Kirk, The Politics of Prudence)

 Socialism's fundamental principles center on a critique of this concept, stating (among other things)
that the cost of defending property exceeds the returns from private-property ownership, and that,
even when property rights encourage their holders to develop their property or generate wealth, they
do so only for their own benefit, which may not coincide with benefit to other people or to society at
large.

 Libertarian socialism generally accepts property rights, but with a short abandonment period. In other
words, a person must make (more-or-less) continuous use of the item or else lose ownership rights.
This is usually referred to as "possession property" or "usufruct". Thus, in this usufruct system,
absentee ownership is illegitimate and workers own the machines or other equipment that they work
with.

 Communism argues that only collective ownership of the means of production through a polity
(though not necessarily a state) will assure the minimization of unequal or unjust outcomes and the
maximization of benefits, and that therefore humans should abolish private ownership of capital (as
opposed to property).

Both communism and some kinds of socialism have also upheld the notion that private ownership of capital
is inherently illegitimate. This argument centers mainly on the idea that private ownership of capital always
benefits one class over another, giving rise to domination through the use of this privately owned capital.
Communists do not oppose personal property that is "hard-won, self-acquired, self-earned" (as the
Communist Manifesto puts it) by members of the proletariat. Both socialism and communism distinguish
carefully between private ownership of capital (land, factories, resources, etc.) and private property (homes,
material objects, and so forth).

Types of property

Most legal systems distinguish between different types of property, especially between land (immovable
property, estate in land, real estate, real property) and all other forms of property—goods and chattels,
movable property or personal property, including the value of legal tender if not the legal tender itself, as the
manufacturer rather than the possessor might be the owner. They often distinguish tangible and intangible
property. One categorization scheme specifies three species of property: land, improvements (immovable
man-made things), and personal property (movable man-made things).

In common law, real property (immovable property) is the combination of interests in land and improvements
thereto, and personal property is interest in movable property. Real property rights are rights relating to the
land. These rights include ownership and usage. Owners can grant rights to persons and entities in the form
of leases, licenses and easements.

Throughout the last centuries of the second millennium, with the development of more complex theories of
property, the concept of personal property had become divided [by whom?] into tangible property (such as cars
and clothing) and intangible property (such as financial instruments—including stocks and bonds—
intellectual property—including patents, copyrights and trademarks—digital files, communication channels,
and certain forms of identifier—including Internet domain names, some forms of network address, some
forms of handle and again trademarks).

Page 90 of 167
Treatment of intangible property is such that an article of property is, by law or otherwise by traditional
conceptualization, subject to expiration even when inheritable, which is a key distinction from tangible
property. Upon expiration, the property, if of the intellectual category, becomes a part of public domain, to
be used by but not owned by anybody, and possibly used by more than one party simultaneously due the
inapplicability of scarcity to intellectual property. Whereas things such as communications channels and pairs
of electromagnetic spectrum band and signal transmission power can only be used by a single party at a time,
or a single party in a divisible context, if owned or used at all. Thus far or usually those are not considered
property, or at least not private property, even though the party bearing right of exclusive use may transfer
that right to another.

Related concepts

Of the following, only sale and at-will sharing involve no encumbrance.

Compl
ementa Complementary
General meaning or description Actor
ry actor
notion
Giving of property or ownership, but
Sale in exchange for money (units of some Seller Buying Buyer
form of currency).
Guestsh
Allowing use of property, whether Guest
Host ip
exclusive or as a joint operation.
Tenanc
Sharing Tenant
Allowing limited and temporary but y
Rent potentially renewable, exclusive use Renter
of property, but in exchange for Lease Leasee
Licensure compensation. Licensor
Better known as nonpossessory
interest or variation of the same
notion, of which an instance may be
given to another party, which is itself
an incorporeal form of property. The
particular interest may easily be
destroyed once it and the property are
owned by the same party.
Incorpor Aspect of property whereby
eal ownership or equity of a particular N/A
division portion of all property (stock) ever to
be produced from it may be given to
Share another party, which is itself an
incorporeal form of property. The
share may easily be destroyed once it
and the property are owned by the
same party.
Aspect of property whereby right of
Easement
particular use of it may be given to

Page 91 of 167
 another party, which is itself an
incorporeal form of property. The
easement or use-right may easily be
destroyed once it and the property are
owned by the same party.
Condition whereby unencumbered
ownership of property is contingent
upon completion of obligation; the Lienees
Lienor Lienee
property being collateral and hip
associated with security interest in
such an arrangement.
Condition whereby while possession
of property is achieved or retained,
possession of it is contingent upon
performance of obligation to Mortga
somebody indebted to, and Mortgago ge-
Mortgage Mortgage-broker
unencumbered ownership of it is r brokeri
Lien
contingent upon completion of ng
obligation. The performance of
obligation usually implies division of
the principal into installments.
Condition whereby while encumbered
ownership of property is achieved or
retained, encumbered ownership of it
is contingent upon performance of Pawnbr
Pawn Pledge Pawnbroker
obligation to somebody indebted to, okering
and possession and unencumbered
ownership of it is contingent upon
completion of obligation.
Inability for property to be properly
used or occupied due to scarcity or
contradiction, the effective
impossibility of sharing; possibly
Collision
leading to eviction or the contrary, if N/A
(Conflict)
resolution is achieved rather than a
stagnant condition; not necessarily
involving or implying conscious
dispute.
Degree of resistance to or protection Protect
Securer Protectee
from harm, use or taking; the property eeship
and any mechanisms of protection of
it being ward. (Alternately, in finance,
Security the word as a countable noun refers to
(Ward) proof of ownership of investment
instruments, or as an uncountable Warden Ward
noun to collateral.) In general, there
may be an involvement of obscurities,
camouflage, barriers, armor, locks,
Page 92 of 167
 alarms, booby traps, homing beacons,
automated recorders, decoys,
weaponry or sentinels.

 With land; moats, trenches or

entire buildings may be
involved.
 With buildings or certain
forms of transport, turrets may
be involved.
 With information; encryption,
steganography or self-destruct
capability may be involved.
 With communications
reliability, channel-hopping
may be involved, as immunity
or attempt thereat from
jamming.
 With devices of proprietary
design, the respective
compositions of them may be
more mangled, more
convoluted and more complex
than functionality warrants,
hence confusing or obscure for
protective purposes (though
possibly to conceal
unapproved copying instead).
 With contractual rights;
retentions of collateral and
risks of jeopardy of collateral
may be involved.

Violation

General meaning or description, the act occurring in a way not beholden

Committer
to the wishes of the owner
Use of physical and usually but not necessarily only immovable property or
Trespassing Trespasser
occupation of it.
Alteration, damage or destruction of physical property or to the appearance of
Vandalism Vandal
it.
Infringement (Incorporeal analogy to trespassing.) Alteration or duplication of an instance of Infringer
intellectual property, and publication of the respectively alternate or duplicate;
Violation the instance being the information in a medium or a device for which a design Violator
plan predates and is the basis of fabrication.
Taking of property in a way that excludes the owner from it, or active alteration
Theft Thief
of the ownership of property.
Page 93 of 167
 The cognisant or incognisant reproduction and distribution of intellectual
property as well as the possession of intellectual property that saw publication
Piracy of its duplicates in the aforementioned process.
Infringement with the effect of lost profits for the owner or infringement
involving profit or personal gain.
Publication of a work, whether it is intellectual property (perhaps copyrighted)
Plagiarism or not, whether it is in public domain or not, without credit being afforded to Plagiarist
the creator, as though the work is original in publication.

Miscellaneous action

General meaning or description Committer

Occupation of property that either is unused and unkept or was abandoned,
whether the property still has an owner or not. (If the property is owned and
Squatting Squatter
not abandoned, then the squatting is trespassing, if any usage not beholden
to the wishes of the owner is done in the process.)
Discovery of how a device works, whether it is an instance of intellectual
Reverse property (perhaps patented) or not, whether it is in public domain or not, and Reverse
engineering of how to alter or duplicate it, without access to or knowledge of the engineer
corresponding design plan.
Creation of a textual work, whereby in publication, another party is explicitly
Ghostwriting Ghostwriter
allowed to be credited as creator.

Land in law

Def; Land real property, real estate (and all that grows thereon), and the right to minerals underneath and
the airspace over it. It may include improvements like buildings, but not necessarily. The owner of the land
may give a long-term (like 99 years) lease to another with the right to build on it. The improvement is a
"leasehold" for ownership of the right to use--without ownership of--the underlying land. The right to use the
air above a parcel of land is subject to height limitations by local ordinance, state or federal law.

Statutory meaning

"Land" includes land of any tenure, mines and minerals, whether or not held apart from the surface, buildings
or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other
hereditaments; also a manor, advowson, and a rent and other incorporeal hereditaments, and an easement,
right, privilege or benefit in, over, or derived from land

Leasehold estate

A leasehold estate is an ownership of a temporary right to hold land or property in which a lessee or a tenant
holds rights of real property by some form of title from a lessor or landlord. Although a tenant does hold
rights to real property, a leasehold estate is typically considered personal property.

Leasehold is a form of land tenure or property tenure where one party buys the right to occupy land or a
building for a given length of time. As lease is a legal estate, leasehold estate can be bought and sold on the
open market. A leasehold thus differs from a freehold or fee simple where the ownership of a property is

Page 94 of 167
purchased outright and thereafter held for an indeterminate length of time, and also differs from a tenancy
where a property is let (rented) on a periodic basis such as weekly or monthly.

Until the end of the lease period (often measured in decades or centuries; a 99-year lease is quite common)
the leaseholder has the right to remain in occupation as an assured tenant paying an agreed rent to the owner.
Terms of the agreement are contained in a lease, which has elements of contract and property law intertwined.

The term estate for years may occasionally be used. This refers to a leasehold estate for any specific period
of time (the word "years" is misleading.) An estate for years is not automatically renewed.

Colloquially, "lease" and "leasing" are often a formalization of a longer, specific period as compared with a
"rental" that created a tenancy at will, terminable or renewable at the end of a short period.

General terms

A lease is a legal contract, and thus enforceable by all parties under the contract law of the applicable
jurisdiction.

In the USA since it also represents a conveyance of possessory rights to real estate, it is a hybrid sort of
contract that involves qualities of a deed.

Some specific kinds of leases may have specific clauses required by statute depending upon the property
being lease, and/or the jurisdiction in which the agreement was signed or the residence of the parties.

Common elements of a lease include:

 Names of the parties of the agreement.

 The starting date and duration of the agreement.
 Identifies the specific object (by street address, VIN, or make/model,serial number) being leased.
 Provides conditions for renewal or non-renewal.
 Has a specific consideration (a lump sum, or periodic payments) for granting the use of this object.
 Has provisions for a security deposit and terms for its return.
 May have a specific list of conditions which are therein described as Default Conditions and specific
Remedies.
 May have other specific conditions placed upon the parties such as:
o Need to provide insurance for loss.
o Restrictive use.
o Which party is responsible for maintenance.

All kinds of personal property (e.g.: cars, furniture,...) or real property (raw land, apartments, single family
homes, and business property (including wholesale and retail)) may be leased. As a result of the lease, the
owner (lessor) grants the use of the stated property to the lessee.

History

Laws governing landlord-tenant relationships can be found as far back as the Code of Hammurabi. However,
the common law of the landlord-tenant relation evolved in England during the Middle Ages. That law still
retains many archaic terms and principles pertinent to a feudal social order and an agrarian economy, where
land was the primary economic asset and ownership of land was the primary source of rank and status. See
also Lord of the Manor.
Page 95 of 167
Modern leasehold estates can take one of forms – the fixed-term tenancy or tenancy for years, the periodic
tenancy, the tenancy at will, and the tenancy at sufferance, all discussed below. Forms no longer used include
socage and burgage.

When a landowner allows one or more persons, called "tenants", to use his land in some way for some fixed
period of time, the land becomes a leasehold, and the resident (or worker) – landowner relation is called a
"tenancy". A tenant pays rent (a form of consideration) to the landowner. The leasehold can include buildings
and other improvements to the land. The tenant can do one or more of: farm the leasehold, live on it, or
practice a trade on it. Typically, leasehold estates are held by tenants for a specific period of time, such as 99
years.

Tenancy was essential to the feudal hierarchy; a lord would own land and his tenants became his vassals.
Leasehold estates can still be Crown land today. For example, in the Australian Capital Territory, all private
land "ownerships" are actually leaseholds of Crown land.

In the U.S.A., there are food co-ops that supply tenants with a place to grow their own produce. Rural tenancy
is also a common practice. Under a rural tenancy, a person buys a large amount of land and the rural
community uses it agriculturally as a source of income.

Fixed-term tenancy or tenancy for years

A fixed-term tenancy or tenancy for years lasts for some fixed period of time. Despite the name, such a
tenancy can last for any period of time – even a tenancy for one week would be called a tenancy for years.
At common law the duration did not need to be certain, but could be conditioned upon the happening of some
event, (e.g. "until the crops are ready for harvest", "until the war is over"). In many jurisdictions that
possibility has been partially or totally abolished.

Termination

The tenancy will come to an end automatically when the fixed term runs out, or, in the case of a tenancy that
ends on the happening of an event, when the event occurs. It is also possible for a tenant, either expressly or
impliedly, to give up the tenancy to the landlord. This process is known as a surrender of the lease.

Periodic tenancy

A periodic tenancy, also known as a tenancy from year to year, month to month, or week to week, is an
estate that exists for some period of time determined by the term of the payment of rent. An oral lease for a
tenancy of years that violates the statute of frauds (by committing to a lease of more than—depending on the
jurisdiction—one year without being in writing) may actually create a periodic tenancy, the construed term
being dependent on the laws of the jurisdiction where the leased premises are located. In many jurisdictions
the "default" tenancy, where the parties have not explicitly specified a different arrangement, and where none
is presumed under local or business custom, is the month-to-month tenancy.

A periodic tenancy also known as a tenancy from year to year, month to month, or week to week, is an estate
that exists for some period of time determined by the term of the payment of rent. An oral lease for a tenancy
of years that violates the Statute of Frauds (by committing to a lease of more than — depending on the
jurisdiction — one year without being in writing) may actually create a periodic tenancy, depending on the
laws of the jurisdiction where the leased premises are located. In many jurisdictions the "default" tenancy,
where the parties have not explicitly specified a different arrangement, and where none is presumed under
local or business custom, is a month-to-month tenancy.
Page 96 of 167
Either the landlord or the tenant may terminate a periodic tenancy when the period or term is nearing
completion, by giving notice to the other party as required by statute or case law in the jurisdiction. Neither
landlord nor tenant may terminate a periodic tenancy before the period has ended, without incurring an
obligation to pay for the months remaining on the lease. Either party must give notice if it intends to terminate
a tenancy from year to year, and the amount of notice is either specified by the lease or by state statute. Notice
is usually, but not always, at least one month, especially for the year to year periodic tenancy. Durations of
less than a year must typically receive notice equal to the period of the tenancy - for example, the landlord
must give a month's notice to terminate a tenancy from month to month. However, many jurisdictions have
increased these required notice periods, and some have reduced the capacity of a landlord to use them
drastically. For jurisdictions that have local rent control laws, a landlord's ability to terminate a residential
tenancy is substantially reduced. For example, in California, the cities of Los Angeles, Santa Monica, West
Hollywood, San Francisco, and Oakland have "rent stabilization ordinances" that limit a landlord's ability to
terminate a periodic tenancy, among other restrictions.

The notice must also state the effective date of termination, which, in some jurisdictions, must be on the last
day of the payment period. In other words, if a month-to-month tenancy began on the 15th of the month, in
a jurisdiction with a last day requirement the termination could not be effective on the 20th of the following
month, even though this would give the tenant more than the required one month's notice.

Termination

The landlord may terminate the lease at any time by giving the tenant notice as required by statute. Typically,
the landlord must give six months' notice to terminate a tenancy from year to year. Tenants of lesser durations
must typically receive notice equal to the period of the tenancy – for example, the landlord must give a
month's notice to terminate a tenancy from month to month. However, many jurisdictions have varied these
required notice periods, and some have reduced them drastically.

The notice must also state the effective date of termination, which, in many jurisdictions, must be on the last
day of the payment period. In other words, if a month-to-month tenancy began on the 15th of the month, in
such a jurisdiction the termination could not be on the 20th of the following month, even though this would
give the tenant more than the required one month's notice.

DETERMINATION

Introduction

There are various ways in which a leasehold estate in land may come to an end and affect either a registered
title or a title that is the subject of first registration. For example:

 merger of lease – when the leasehold estate is registered and the reversionary estate is either
registered, or is the subject of an application for first registration
 cancellation of notice of an unregistered lease from a registered reversionary title
 determination of a registered lease into a reversionary estate, which is neither registered nor the
subject of an application for first registration.

More specifically the lease itself can be determine on:

 merger
 surrender by deed
 surrender by operation of law
Page 97 of 167
  disclaimer
 effluxion of time
 forfeiture
 an order of the court
 determination by notice
 frustration
 enlargement.

Method of determination

The following sections provide details of the various situations you may encounter on dealing with the
determination of a lease.

1) Determination: on merger

Merger occurs where a leasehold estate in land, together with the reversionary estate, come into the same
ownership and are held in the same capacity. The lease is absorbed by the reversionary estate and thus
determined. There must also be an intention to merge the estates. The necessary intention to merge must be
established by the tenant applying either:

 for cancellation of the notice of the lease in form CN1

 for closure of the registered leasehold title in form AP1
 for merger of an unregistered leasehold estate as part of an application for first registration of the
reversionary estate in form FR1 as applicable

2) Determination: on surrender by deed

When a tenant surrenders their lease to their immediate landlord, who accepts the surrender, their lease is
absorbed by the reversionary estate and thus determined. A document effecting a surrender of a leasehold
estate does not have to describe itself as a deed of surrender, but it must:

 be by way of a deed (though if effected by way of another document, it may still take effect as a
surrender by operation of law – see Determination: on surrender by operation of law)
 contain wording which clearly shows that the tenant is surrendering the lease

Also, the landlord must consent to the surrender. This can be established by either:

 the lodging of a letter of consent

 the landlord applying to close the registered leasehold title and/or cancel notice of the lease from the
registered reversionary title
 the deed being executed by both the landlord and the tenant

3) Determination: on surrender by operation of law

When a tenant surrenders their lease to their immediate landlord, who accepts the surrender, the lease is
absorbed by the reversionary estate and thus determined. Sometimes a surrender of lease does not take place
by deed but is effected by operation of law, ie as a result of the actions of the parties. In this instance you
must supply satisfactory evidence of the acts which imply surrender – see r.161(1), LRR 2003. Note that a
surrender by operation of law does not take effect following an action by the tenant alone.

Examples of surrender by operation of law might be where either:

Page 98 of 167
  the landlord grants a new lease of the same premises to the existing tenant. If the new lease was
granted pursuant to s.14, Leasehold Reform Act 1967, you must disclose this fact. In a prescribed
clauses lease this should be disclosed in clause LR5.2 NB: The extension of the term of an existing
lease by means of a deed of variation may take effect as a deemed surrender and re-grant
 the tenant gives up possession of the premises to the landlord and possession is then accepted by the
landlord
 the tenant gives up possession of the premises to the landlord and the landlord then grants a new lease
of the premises to a third party with the tenant’s consent

Where an application is based upon a surrender by operation of law, the application must be supported by a
statutory declaration or statement of truth made by a reliable person with full knowledge of the facts. The
declaration or statement must:

 specify the amount of consideration paid for the surrender (if any)
 confirm that no deed of surrender was entered into
 if the tenant was occupying the property and has given vacant possession to the landlord, describe
when and how the premises were vacated and the keys returned to the landlord
 if an under-lessee was occupying the property, contain evidence that the landlord is receiving the rent
directly from that under-lessee, eg by producing, as exhibits to the declaration, the counterpart under-
lease and a copy of the authority requiring the under-lessee to pay the rent directly to the landlord

There are occasions when Land Registry will not require a statutory declaration or statement of truth in
support of your application. This will be where either:

 the leasehold estate and the reversionary estate are both registered and the application is made by or
with the consent of the registered proprietors of both titles, provided the determined leasehold estate
is registered with an absolute leasehold or a good leasehold class of title
 the landlord grants a new lease of the same premises to the existing tenant

NB: Where a statutory declaration or statement of truth is not required, Land Registry will require a letter
confirming that no deed of surrender was entered into. The letter can be from either party’s conveyancer.

4) Determination: by disclaimer

When a person becomes bankrupt or a company becomes insolvent, either a trustee in bankruptcy or a
liquidator respectively may, by giving the prescribed notice, disclaim certain onerous property, including
leases. This has the effect of determining the leases.

5) Determination: by effluxion of time

A lease for a fixed period or term will automatically determine when the fixed period expires. However, this
rule is subject to the LTA 1954 and the LGHA 1989, which may prolong the term beyond the date it would
otherwise end.

 LTA 1954 applies to most business leases (and Part 1 of this Act may still apply to a long residential
lease at a low rent)
 LGHA 1989 now applies to most residential tenancies (in place of Part 1 of the LTA 1954)

Where an application is based on determination by effluxion of time, the application cannot be completed
unless it takes account of this legislation.

Page 99 of 167
 6) Determination: on forfeiture

A lease containing a proviso for re-entry or ‘forfeiture clause’ may enable a landlord to re-enter the premises
and forfeit the lease, either because the tenant has not paid the rent or has breached some other covenant(s)
in the lease.

The landlord may forfeit the lease by taking court proceedings or by peaceable re-entry.

An interested person may apply to the court for relief from forfeiture. However, this is not in itself a valid
ground for objection to an application to Land Registry based upon determination on forfeiture.

NB1: An assured tenancy (including an assured shorthold tenancy) cannot be determined by forfeiture.

NB2: Before proceeding with an application to give effect to a determination of a lease by forfeiture we will
usually serve notice on the tenant and on any chargee. This will mean that there will be a delay before the
application can be completed.

7) Determination of assured tenancies: following a court order

An assured tenancy (including an assured shorthold tenancy) is a tenancy of a home created after 15 January
1989 which meets the conditions of s.1, HA 1988. Schedule 1, HA 1988 contains a number of exceptions
which prevent a tenancy becoming an assured tenancy.

A landlord can determine an assured tenancy only by obtaining a court order for possession under s.7, HA
1988 or, in the case of a fixed-term tenancy, by notice under a ‘break-clause’; it cannot be determined by
forfeiture. Because the tenancy is not determined by forfeiture it is not possible to claim relief against
forfeiture. Any incumbrances against the leasehold interest will fall when the lease determines.

An assured tenancy will determine when the court order is executed (see s.5(1A), HA 1988).

An application to determine a lease on the basis of an order for possession made under s.7, HA 1988 should
be accompanied by:

 a certified copy of the court order

 the sheriff’s return, or a statutory declaration or statement of truth confirming that the order has been
executed.

8) Determination: by notice
A lease for a fixed term may contain an option, usually called a ‘break clause’, allowing either one or both
parties to the lease to determine the lease before the expiry of the fixed term. The clause is usually only
exercisable by written notice.

9) Determination: on frustration
A lease may be determined by frustration, ie the occurrence of an unforeseen event that makes performance
impracticable. However, the instances in which the doctrine of frustration can apply to determine a lease will
be rare. Any application based upon determination on frustration will be considered on its individual facts.

NB: This section relates to the automatic determination of a lease by the doctrine of frustration, and not to
the determination of a lease by notice on the occurrence of an event (such as the damage of the premises by
fire beyond so as to be beyond repair) referred to in a ‘frustration clause’ in the lease.

Page 100 of 167

 10) Determination: on enlargement
A tenant who holds the residue of a long lease of land may, under certain conditions, ‘enlarge’ it into a
freehold.

To be capable of enlargement, the lease must satisfy all of the following requirements (see s.153, LPA 1925).

 The unexpired residue of the term of the lease must have at least 200 years left to run
 The original term must have been for at least 300 years
 There must be no trust or right of redemption in favour of the freeholder or other reversioner
 There must be no rent, or merely a peppercorn or other rent having no money value, or any rent must
have ceased to be payable
 There must be no right of re-entry for condition broken
 The lease must not be a sub-lease out of a lease which is itself incapable of enlargement

NB: A rent of no more than £1 a year, which has not been collected or paid for 20 years or more, is deemed
to have ceased to be payable. Evidence by way of statutory declaration should be lodged if this provision is
relied on.

On enlargement the land remains subject to the same trusts and covenants that affected the original lease.

The effect of enlargement on the former landlord’s legal estate is unclear. Accordingly, if the landlord’s title
is registered it will not be closed. This means there will be more than one registered freehold estate in the
same piece of land.

MORTGAGE LAW

This article is about the legal mechanisms used to secure the performance of obligations, including the
payment of debts, with property.
A mortgage is a security interest in real property held by a lender as a security for a debt, usually a loan of
money. A mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in
land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be
returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the
mortgage is a security for the loan that the lender makes to the borrower.

The word is a Law French term meaning "dead pledge," originally only referring to the Welsh mortgage (see
below), but in the later Middle Ages was applied to all gages and reinterpreted by folk etymology to mean
that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through
foreclosure.[1]

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other
property (such as ships) and in some jurisdictions only land may be mortgaged. A mortgage is the standard
method by which individuals and businesses can purchase real estate without the need to pay the full value
immediately from their own resources.

Participants and variant terminology

Legal systems in different countries, while having some concepts in common, employ different terminology.
However, in general, a mortgage of property involves the following parties. The borrower, known as the
mortgagor, gives the mortgage to the lender, known as the mortgagee.

Page 101 of 167

Lender/mortgagee

A mortgage lender is an investor that lends money secured by a mortgage on real estate. In today's world,
most lenders sell the loans they write on the secondary mortgage market. When they sell the mortgage, they
earn revenue called Service Release Premium. Typically, the purpose of the loan is for the borrower to
purchase that same real estate. As the mortgagee, the lender has the right to sell the property to pay off the
loan if the borrower fails to pay.

The mortgage runs with the land, so even if the borrower transfers the property to someone else, the
mortgagee still has the right to sell it if the borrower fails to pay off the loan.

So that a buyer cannot unwittingly buy property subject to a mortgage, mortgages are registered or recorded
against the title with a government office, as a public record. The borrower has the right to have the mortgage
discharged from the title once the debt is paid.

Borrower/mortgagor

A mortgagor is the borrower in a mortgage—he owes the obligation secured by the mortgage. Generally, the
borrower must meet the conditions of the underlying loan or other obligation in order to redeem the mortgage.
If the borrower fails to meet these conditions, the mortgagee may foreclose to recover the outstanding loan.
Typically the borrowers will be the individual homeowners, landlords, or businesses who are purchasing
their property by way of a loan.

Other participants

Because of the complicated legal exchange, or conveyance, of the property, one or both of the main
participants are likely to require legal representation. The agent used for conveyancing varies based on the
jurisdiction. In the English-speaking world this means either a general legal practitioner, i.e., an attorney or
solicitor, or in jurisdictions influenced by English law, including South Africa, a (licensed) conveyancer. In
the U.S., real estate agents are the most common. In civil law jurisdictions conveyancing is handled by civil
law notaries.

Because of the complex nature of many markets the borrower may approach a mortgage broker or financial
adviser to help him or her source an appropriate lender, typically by finding the most competitive loan.

The debt instrument is, in civil law jurisdictions, referred to by some form of Latin hypotheca (e.g., Sp
hipoteca, Fr hypothèque, Germ Hypothek), and the parties are known as hypothecator (borrower) and
hypothecatee (lender). A civil-law hypotheca is exactly equivalent to an English mortgage by legal charge or
American lien-theory mortgage.

Different types of mortgages

There is so much choice when it comes to picking a mortgage, that it can seem totally baffling. Not only do
you have to work out which mortgage will be the cheapest for you, which means looking at interest rates and
fees, but there are also different types of product available.

Below are the differences

a) Fixed rate mortgage

Page 102 of 167

The interest rate remains the same throughout the period of the deal – typically one to five years, though it is
possible to get ten year fixed rates. If you opt for a fixed-rate, you’ll have the security of knowing exactly
how much your mortgage will cost you for a set period of time.

Advantages

Your mortgage payments will remain the same, even if interest rates changed. This makes it great for
budgeting.

Disadvantages

You are tied in for the length of the deal, so if interest rates fall you can’t take advantage of them. For
example, if you opt for a five year fixed-rate deal, you will be tied in until the fixed term ends. If you want
to get out of the mortgage before then, you’ll be charged a hefty penalty.

b) Tracker mortgage
The interest rate on a tracker mortgage is linked to the Bank of base rate. So if the base rate changes, your
mortgage rate will change.

As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years.
With these deals, you’ll be charged a penalty if you want to get out of the mortgage during the term.

You can also get lifetime, or term, trackers and these are often completely penalty free so they are very
flexible and can be a great option if you don’t want to be tied into your mortgage.

Advantages

The rates on the leading tracker mortgages tend to be lower than on fixed rate deals.

Although trackers are variable rate mortgages, it’s easy to understand what rate you’ll be paying because
they are directly linked to the base rate. Therefore, the rate, and your monthly payments, will only change if
the Bank changes the base rate.

Disadvantages

You don’t have the same security with a tracker that you get with a fixed mortgage because the rate is
variable. This means you have to be prepared for the fact that your monthly repayments could go up – and
it’s really important to make sure you’ll be able to still afford your mortgage if this happens. If money is tight
and you need to budget carefully, a fixed rate mortgage will probably be a better option.

c) Discount mortgage
Trackers aren’t the only type of variable mortgage. Discounts are another. However, unlike trackers the
interest rate isn’t linked to the Bank base rate. Instead, it’s linked to the lender’s standard variable rate
(SVR) and this is a significant difference because lenders can change their SVR even if there has been no
change in the base rate.

A number of lenders have done this over the past year or so, and have increased their SVRs. This means their
customers with discount mortgages have seen their repayments go up even though the Bank base rate hasn’t
changed.

Page 103 of 167

Discount mortgages are available over different terms – typically one to five years – and as with trackers and
fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.

Advantages

As with tracker mortgages, the rates tend to be lower than those on fixed rate mortgages. And because
discounts are variable, the rate could fall as well as rise. If the rate were to fall, your monthly mortgage
payment would reduce.

Disadvantages

The way discount mortgages are priced isn’t as transparent as tracker mortgages. Because the rate is linked
to the SVR, not the base rate, the lender can theoretically change the rate at any time. So you may find your
monthly mortgage payments rises when you’re not expecting it.

Before you take a discount mortgage out, make sure you’d still be able to afford your repayments if the rate
was to go up. If it would be a struggle, opting for the security of a fixed rate would be a better option.

d) Offset mortgage
This is a more complicated mortgage as it links your savings to your mortgage debt.

Rather than earning interest on your savings, that money is set against your mortgage so you pay less interest
on that debt. For example, say you have a £100,000 mortgage and £20,000 in savings, you would only be
charged interest on £80,000 of the mortgage. However, your monthly mortgage repayments will have been
calculated as if the debt was £100,000. This means you end up paying more than you need off your mortgage
each month. As a result you clear your mortgage off more quickly and save yourself thousands of pounds in
interest.

Advantages

As well as enabling you to knock years off your mortgage and save you thousands of pounds in interest,
offset mortgages also offer a significant tax benefit.

Ordinarily, you pay income tax on any interest you earn on your savings. However, if you offset you have an
offset you don’t earn interest on your savings so there is no tax to pay. An offset can therefore be particularly
attractive for people in the higher or top rate tax brackets.

Disadvantages

The rates on offset mortgages tend to be higher than those on standard mortgage products so if you only have
a small amount in savings, you may be better off just taking a normal mortgage and finding the most
competitive savings rate you can.

LEGAL ASPECTS/EQUITABLE

Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal
structures, the availability of which will depend on the jurisdiction under which the mortgage is made.

Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the
mortgage by legal charge.
Page 104 of 167
Mortgage by demise

In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the
loan is repaid or other mortgage obligation fulfilled in full, a process known as "redemption". This kind of
mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property
will be returned on redemption.

Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and
in a small minority of states in the United States. Many other common law jurisdictions have either abolished
or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage
is no longer available in relation to registered interests in land, by virtue of section 23 of the Land Registration
Act 2002 (though it continues to be available for unregistered interests).

Mortgage by legal charge

In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",
the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable
them to enforce their security, such as a right to take possession of the property or sell it.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage
debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the
real estate property to make certain that there are no mortgages already registered on the debtor's property
which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason,
if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from
foreclosing and wiping out the mortgage.

This type of mortgage is most common in the United States and, since the Law of Property Act 1925, it has
been the usual form of mortgage in England and Wales (it is now the only form for registered interests in
land).

In Scotland, the mortgage by legal charge is also known as Standard Security.

After registration of legal charge, the bank's lien is recorded in the land register stating that the property is
under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.

Equitable mortgage

Equitable mortgages don't fit the criteria for a legal mortgage, but are considered mortgages under equity (in
the interests of justice) because money was lent and security was promised. This could arise because of
procedural or paperwork issues. Based on this definition, there are numerous situations which could lead to
an equitable mortgage. As of 1961, English law required the consent of the court before the equitable
mortgagee was allowed to sell. When the borrower deposits a title deed with the lender, it has historically
created an equitable mortgage in England, but the creation of an equitable mortgage by such a process has
been less certain in the United States.

In an equitable mortgage the lender is secured by taking possession of all the original title documents of
the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This
document is an undertaking by the borrower that he/she has deposited the title documents with the bank with
his own wish and will, in order to secure the financing obtained from the bank. Certain transactions are
recognized therefore as mortgages by equity, which are not so recognized by common law.
Page 105 of 167
ARBITRATION
Arbitration, a form of alternative dispute resolution (ADR), is a technique for the resolution of disputes
outside the courts. The parties to a dispute refer it to arbitration by one or more persons (the "arbitrators",
"arbiters" or "arbitral tribunal"), and agree to be bound by the arbitration decision (the "award"). A third party
reviews the evidence in the case and imposes a decision that is legally binding on both sides and enforceable
in the courts. Arbitration- Here, mediation involves the two disputants explaining their arguments to the
mediator, who creates a solution based on the arguments presented. Arbitration is best for low intensity
conflict, but is the most favored mediation style overall. Arbitration utilizes a neutral third party to hear a
dispute between parties. The hearing is informal and the parties mutually select the arbitrator. The arbitrator
is retained to decide how to settle the dispute and the decision is final and binding on the parties. Arbitration
is more cost efficient and quicker than litigation but it is the arbitrator, not the parties, who renders the terms
and conditions of the dispute resolution.

Types of Arbitration agreement

Arbitration agreements are generally divided into two types:

1. Voluntary Arbitration
2. Compulsory/mandatory Arbitration

1. Agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These
will generally be normal contracts, but they contain an arbitration clause
2. Agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved
by arbitration (sometimes called a "submission agreement")

Arbitration can be either voluntary or mandatory (although mandatory arbitration can only come from a
statute or from a contract that is voluntarily entered into, where the parties agree to hold all existing or future
disputes to arbitration, without necessarily knowing, specifically, what disputes will ever occur) .

Mandatory Versus Voluntary Arbitration

An arbitration clause may make the arbitration either mandatory or voluntary. A dispute that is subject to
mandatory arbitration must be resolved through arbitration. The parties give up their right to sue in court,
participate in a class action lawsuit, or appeal the arbitration decision.

In voluntary arbitration, both sides in a dispute agree to submit their disagreement to arbitration after it arises,
and after they have evaluated other options for resolving it. Most consumer advocates find this to be the
preferred, evenhanded approach to arbitration -- allowing it to be a choice rather than a necessity.

And can be either binding or non-binding. Non-binding arbitration is similar to mediation in that a
decision can not be imposed on the parties. However, the principal distinction is that whereas a mediator will
try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains
totally removed from the settlement process and will only give a determination of liability and, if appropriate,
an indication of the quantum of damages payable.

NB; By one definition arbitration is binding and so non-binding arbitration is technically not arbitration.
Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the
parties to the dispute have agreed, or legislation has decreed, will be final and binding.

Page 106 of 167

Binding Versus Nonbinding Arbitration

In binding arbitration, the arbitrator's decision is final. It may not be reviewed or overturned by a court except
in very limited circumstances, such as when fraud or misuse of power has been involved.

In nonbinding arbitration, either party may reject the arbitration award and demand a trial instead. Parties
often treat nonbinding decisions as an independent assessment of the strengths and weaknesses of a potential
lawsuit, with the aim of fostering a settlement. But even in such cases, the arbitration agreement will often
provide that the award may become binding if the parties agree to it or wait longer than a stated time to ask
that the case be returned to court.

The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to
the type of arbitration agreement. For example, in certain Commonwealth countries, it is possible to provide
that each party should bear their own costs in a conventional arbitration clause, but not in a submission
agreement.

Agreements to refer disputes to arbitration generally have a special status in the eyes of the law. For example,
in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it
fails. It follows that if a party successfully claims that a contract is void, then each clause contained within
the contract, including the arbitration clause, would be void. However, in most countries, the courts have
accepted that:

1. A contract can only be declared void by a court or other tribunal; and

2. If the contract (valid or otherwise) contains an arbitration clause, then the proper forum to determine
whether the contract is void or not, is the arbitration tribunal.

Arguably, either position is potentially unfair; if a person is made to sign a contract under duress, and the
contract contains an arbitration clause highly favourable to the other party, the dispute may still referred to
that arbitration tribunal. Conversely a court may be persuaded that the arbitration agreement itself is void
having been signed under duress. However, most courts will be reluctant to interfere with the general rule
which does allow for commercial expediency; any other solution (where one first had to go to court to decide
whether one had to go to arbitration) would be self-defeating.

As methods of dispute resolution, arbitration procedure can be varied to suit the needs of the parties. Certain
specific "types" of arbitration procedure have developed, particularly in North America.

 Judicial Arbitration is, usually, not arbitration at all, but merely a court process which refers to itself
as arbitration, such as small claims arbitration before the County Courts in the United Kingdom. Is
just that ordered by the court. The judge elects an arbitrator of their choice to hear and render a ruling
– which by the way is binding.

 Online Arbitration is, a form of arbitration that occurs exclusively online. There is currently an
assumption that online arbitration is admissible under the New York Convention and the E-
Commerce Directive, but this has not been legally verified. Since arbitration is based on a contractual
agreement between the parties, an online process without a regulatory framework may generate a
significant number of challenges from consumers and other weaker parties if due process cannot be
assured.

 High-Low Arbitration, or Bracketed Arbitration, is an arbitration wherein the parties to the dispute
agree in advance the limits within which the arbitral tribunal must render its award. It is only generally
Page 107 of 167
 useful where liability is not in dispute, and the only issue between the party is the amount of
compensation. If the award is lower than the agreed minimum, then the defendant only need pay the
lower limit; if the award is higher than the agreed maximum, the claimant will receive the upper limit.
If the award falls within the agreed range, then the parties are bound by the actual award amount.
Practice varies as to whether the figures may or may not be revealed to the tribunal, or whether the
tribunal is even advised of the parties' agreement.
 Binding Arbitration is a form of arbitration where the decision by the arbitrator is legally binding
and enforceable, similar to a court order. The parties agree to waive their right to go to court for a
judicial decision which is binding by the arbitrators ruling.

 Non-Binding Arbitration is a process which is conducted as if it were a conventional arbitration,

except that the award issued by the tribunal is not binding on the parties, and they retain their rights
to bring a claim before the courts or other arbitration tribunal; the award is in the form of an
independent assessment of the merits of the case, designated to facilitate an out-of-court settlement.
State law may automatically make a non-binding arbitration binding, if, for example, the non-binding
arbitration is court-ordered, and no party requests a trial de novo (as if the arbitration had not been
held). The parties have the discretion to abide by the arbitrator's decision or seek other venues. For
many years, this arbitration experience is the least appealing and successful form of arbitration; only
the attorneys and arbitrator make money, and the parties rack up the venue bills.
 Pendulum Arbitration refers to a determination in industrial disputes where an arbitrator has to
resolve a claim between a trade union and management by making a determination of which of the
two sides has the more reasonable position. The arbitrator must choose only between the two options,
and cannot split the difference or select an alternative position. It was initiated in Chile in 1979. This
form of arbitration has been increasingly seen in resolving international tax disputes, especially in the
context of deciding on the Transfer Pricing margins. This form of arbitration is also known
(particularly in the United States) as Baseball Arbitration. It takes its name from a practice which
arose in relation to salary arbitration in Major League Baseball.

 Night Baseball Arbitration is a variation of baseball arbitration where the figures are not revealed
to the arbitration tribunal. The arbitrator will determinate the quantum of the claim in the usual way,
and the parties agree to accept and be bound by the figure which is closest to the tribunal's award.

Such forms of "Last Offer Arbitration" can also be combined with mediation to create MEDALOA hybrid
processes (Mediation followed by Last Offer Arbitration).

Why Would A Business Choose To Use An Arbitrator Instead of An Attorney?

Few businesses elect the expense of litigation if arbitration is available. Put simply, arbitration is a business
like forum for resolution of business disputes and while the elaborate safeguards of the legal system are often
not available, the need for prompt and private resolution of disputes seems to convince most of our business
clients to use independent arbitration. For those clients used to non American systems of law, arbitration
seems a welcome and familiar way to resolve disputes and protect the rights of all concerned. Besides
attorneys work a principle called billable hours, we work on results! If we do not settle the case we don’t get
paid, whereas, attorneys get paid whether they settle the case or not; you can see why this would be a
motivating factor when a business owner is deciding who to engage to represent them.

Advantages and disadvantages

Parties often seek to resolve disputes through arbitration because of a number of perceived potential
advantages over judicial proceedings:
Page 108 of 167
  In contrast to litigation, where one cannot "choose the judge", arbitration allows the parties to choose
their own tribunal. This is especially useful when the subject matter of the dispute is highly technical:
arbitrators with an appropriate degree of expertise (for example, quantity surveying expertise, in the
case of a construction dispute, or expertise in commercial property law, in the case of a real estate
dispute) can be chosen.
 Arbitration is often faster than litigation in court
 Arbitration can be cheaper and more flexible for businesses
 Arbitral proceedings and an arbitral award are generally non-public, and can be made confidential
 In arbitral proceedings the language of arbitration may be chosen, whereas in judicial proceedings the
official language of the country of the competent court will be automatically applied
 Because of the provisions of the New York Convention 1958, arbitration awards are generally easier
to enforce in other nations than court judgments
 In most legal systems there are very limited avenues for appeal of an arbitral award, which is
sometimes an advantage because it limits the duration of the dispute and any associated liability

Some of the disadvantages include:

 Arbitration may be subject to pressures from powerful law firms representing the stronger and
wealthier party. Generally speaking, by their nature, arbitration proceedings tend not to be subject
to appeal, in the ordinary sense of the word. However, in most countries, the court maintains a
supervisory role to set aside awards in extreme cases, such as fraud or in the case of some serious
legal irregularity on the part of the tribunal. Only domestic arbitral awards are subject to set aside
procedure.

 Arbitration agreements are sometimes contained in ancillary agreements, or in small print in other
agreements, and consumers and employees often do not know in advance that they have agreed to
mandatory binding pre-dispute arbitration by purchasing a product or taking a job
 If the arbitration is mandatory and binding, the parties waive their rights to access the courts and to
have a judge or jury decide the case
 In some arbitration agreements, the parties are required to pay for the arbitrators, which adds an
additional layer of legal cost that can be prohibitive, especially in small consumer disputes
 In some arbitration agreements and systems, the recovery of attorneys' fees is unavailable, making it
difficult or impossible for consumers or employees to get legal representation; however most
arbitration codes and agreements provide for the same relief that could be granted in court
 If the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be
an inherent incentive to rule against the consumer or employee
 There are very limited avenues for appeal, which means that an erroneous decision cannot be easily
overturned
 Although usually thought to be speedier, when there are multiple arbitrators on the panel, juggling
their schedules for hearing dates in long cases can lead to delays
 In some legal systems, arbitral awards have fewer enforcement options than judgments; although in
the United States arbitration awards are enforced in the same manner as court judgments and have the
same effect
 Arbitrators are generally unable to enforce interlocutory measures against a party, making it easier
for a party to take steps to avoid enforcement of member or a small group of members in arbitration
due to increasing legal fees, without explaining to the members the adverse consequences of an
unfavorable ruling
 Rule of applicable law is not necessarily binding on the arbitrators, although they cannot disregard
the law
 Discovery may be more limited in arbitration or entirely nonexistent
Page 109 of 167
  The potential to generate billings by attorneys may be less than pursuing the dispute through trial
 Unlike court judgments, arbitration awards themselves are not directly enforceable. A party seeking
to enforce an arbitration award must resort to judicial remedies, called an action to "confirm" an award
 Although grounds for attacking an arbitration award in court are limited, efforts to confirm the award
can be fiercely fought thus necessitating huge legal expenses that negate the perceived economic
incentive to arbitrate the dispute in the first place.

Arbitration procedures
Like inquisitors, arbitrators decide what the outcome of a dispute between two parties will be. A major
difference between the two intervention strategies is that arbitrators do a more thorough job of considering
the disputants' concerns.

Arbitrators conduct "hearings" where the disputants explain their concerns and their preferences. When the
arbitrators decide that they have heard enough from both sides, they make a "ruling" that they perceive to be
fair and appropriate. Even though conducting thorough hearings takes more time than inquisitions, arbitrators
can still regulate how much time is spent resolving the conflict when they arbitrate. Disputants are likely to
be more satisfied with the arbitration process than they are with inquisitions. To the extent that they get a
fair hearing of their concerns, they'll be inclined to believe that the process was fair.

Arbitration isn't much more empowering for disputants than inquisition interventions though. Managerial
arbitration of staff members' disputes demonstrates who's in control. As mentioned above, that control can
help ensure that the resolution chosen is compatible with the organization's policies and objectives. However,
retaining so much control is not empowering to the disputants, and they will tend to blame the arbitrator for
decision they don't like. Consequently, their commitment to and willingness to comply with the resolution
may be low.

HUMAN RESOURCE MANAGEMENT

Guidelines for Recruitment and Selection

1. Submit Recruiting Documents

2. Selection Process
3. Search Committee/Interview Panel
4. Interviewing
5. During the Interview
6. Reference Checks
7. Making Hiring Decision
8. Documention

Don't let panic set in. Whether your departing employee was a strong or mediocre performer, this is your opportunity
to analyze and revise the position description, and determine the qualifications, both technical skills and behavioral
factors, you will seek in a new employee. Is this a time to reorganize, reclassify, or make other major changes?
Perhaps the position description needs only a few adjustments. Once you are sure that the position description
reflects accurately the responsibilities of the position, consider the qualifications you will seek in a new employee.
What technical skills will the employee need to carry out their job duties? What type of job behaviors will they need?
Think about past employees in the position. If they were outstanding, what made them outstanding. If they were
marginal employees, identify their weaknesses. Talk with co-workers or other managers. What skills and qualities do
they value in this position? Make a list. This information should guide you (and the Employment Manager) in
preparing job postings, newspaper advertisements, and planning the overall selection process. Time invested in
thoughtfully planning the recruitment and selection process can make the difference between a good or poor hiring
decision.

Page 110 of 167

Submit Recruiting Documents

The Employment Manager in Human Resources coordinates the hiring process for classified employees; to initiate a
search, you must submit a Request to Hire form and an updated position description. The Employment Manager will
prepare a job posting and a newspaper ad for your review based on information from the job description, and can
advise you on other parts of the recruitment and selection process.

If you have an unclassified vacancy, you should follow the academic appointment process. For administrative
positions, the Employment Manager is available to assist you in preparing postings and advertisements and in
designing a selection process.

Selection Process

Once you have identified the technical skills and job attributes you are seeking in a new employee, you should
consider the most effective way to identify and assess these in candidates. Go over the position description, point by
point, and ask yourself, "How best can I learn about the applicant's ability to perform this function?"

The job interview will be a primary source of information about applicants. However, it may not be the best source
for some information. A job reference may be the most effective way to learn about dependability, follow through,
and ability to get along with coworkers. Written application materials may provide insight into educational
background and general written communication skills.

Consider using work samples to ascertain specific job skills. For an office position, applicants can be asked to
complete a word processing exercise in which they prepare, edit, and/or print documents. The supervisor evaluates
and documents the quality and quantity of work completed in the time allotted. Other examples include setting up a
spread sheet, creating a database, preparing correspondence, or prioritizing a list of tasks to complete a project. For
maintenance positions, applicants could be asked to identify repairs needed in a room or to actually perform a repair.
One supervisor, hiring a Plasterer, asked applicants to mix and apply plaster to a wall. The supervisor evaluated and
documented the results and used this information in determining the most qualified candidate. In setting up a work
sample exercise, as with other parts of the selection process, you may need to make reasonable accommodations for
applicants with a disability. The Employment Manager can assist you with the reasonable accommodation process.

As you review applicant qualifications, eligible veteran and disabled veteran applicants must be given a 5%
(veterans) or 10% (disabled veterans) preference.

Search Committee/Interview Panel

The academic appointment process requires the use of a search committee. For classified searches, it is optional, but
recommended. Supervisors may ask a committee to participate in the overall process including evaluating written
materials and serving on an interview panel, or they may choose to evaluate written materials themselves and
convene a panel to participate in interviews only. Panel members are valuable because they can provide different
perspectives on the qualifications of candidates. The search committee/interview panel could be comprised of other
staff members, managers in other departments on campus, or "customers" from campus departments. You may want
to include an individual who holds a similar position to the one being filled. It is recommended that panel members
include both men and women and, if possible, members of different racial or ethnic groups.

It is your responsibility to give the committee or panel members information about the position such as the position
description, the essential functions of the job, and the qualifications you are seeking. You should also charge the
committee with advancing the university's affirmative action goals.

Interviewing

Page 111 of 167

The purpose of an interview is to elicit information from an applicant to determine his or her ability to perform the
job. Successful interviewers learn how to ask the right kind of questions, how to keep the applicant talking about
relevant information, and how to listen.

Much of what is learned about applicants in an interview is based on their past experience. Past performance is our
best indicator of future performance. This does not mean that someone who had performed poorly in the past cannot
improve in skills and attitude. Generally, however, you can see a trend in performance through several jobs or
assignments. Sometimes interviewers assume that a candidate who has done something has done it well or that
longevity on a position is a sign of success. These are not well founded assumptions! A reference check can verify
the quality of the work performance.

Non-Directive and Directive Questions

How you phrase a question can affect the type and amount of information you get from the candidate. The main
characteristic of non-directive questions is that they do not give the applicant any indication of the desired answer.
Structurally, the questions are in the news reporter's style of who, what, when, where and how. Often they begin with
the words "describe" or "explain". Examples of non-directive questions include:

... What do you consider to be the most important responsibilities of an office manager?
... Why does this position interest you?
... How has your background prepared you for this position?
... What types of equipment did you operate regularly on your job at XYZ Company?
... Describe your experience with word processing on your last job.

You may need to ask follow-up questions if the responses to your questions are unclear or incomplete. Clarify and
verify any piece of information you do not understand by asking the candidate to explain his or her answer again or
to elaborate on the given answer.

... Can you tell me more about that?

... Could you give me an example of what you mean?
... What makes you feel that way?

Directive questions are useful for drawing out specific information. In direct questioning, the interviewer asks,
directs, or guides the applicant to specifics. Often, these questions result in a "yes"; or "no" response. Examples of
directive questions include:

... Do you currently have a Limited Maintenance Electrical license?

... Are you still employed at XYZ Company?
... Can you set up a computer spreadsheet using Excel?

Special Questions

There are several types of questions that can elicit important information as well as add interest and variety to your
interview.

A good technique to learn about an applicant's problems solving skills and judgment is to ask "situation-problem"
questions. Create a scenario that is common on the job, and ask the applicant how they would handle it. As a follow
up, ask if they ever faced this situation on a job before. An example of this type of question:

... Assume you are hired as a receptionist in our department. Our front desk is very busy with walk-in traffic and
phone calls. There are several people waiting at your desk for assistance and you are on the phone with someone who
is very upset because of an error on her transcript. This phone conversation seems to be going on and on. How would
you handle this situation? Have you faced this situation on a previous job?
Page 112 of 167
Another type of information that is frequently asked of applicants is self-evaluative information. One type of question
asks about the applicant's likes and dislikes. Self-evaluation questions are also a good way to learn about an
applicant's perception of their strengths and weaknesses. Keep in mind, however, that the answers are highly
susceptible to different interpretations. Examples of self-evaluation questions include:

... What did you like best about that job (class, teacher, supervisor, etc.)?
... How would your last supervisor rate your ability to deal effectively with the public?
... What do you see as your strengths? Weaknesses?
... Why were you the one promoted to lead worker on that job?

"Behavior description" questions can be a powerful tool in an interview. This type of question asks the applicant to
describe as closely as possible the actual behavior that went on in a particular situation. The use of superlative
adjectives (i.e., most, least, best, worst, toughest, etc.) tends to stimulate specific events in the mind of the
interviewee and therefore makes it easier to respond. As with other types of questions, these should be based on
essential functions of the job you are filling. An example of a behavior description question would be:

... Tell me about your best accomplishment in your last job. Start with where you got the idea, how you implemented
the plan, and how you dealt with any obstacles to your idea.

It is imperative to evaluate the same criteria for each of the candidates, however, this does not mean that you have to
rigidly stick to the same control questions. Some applicants may be forthcoming with information but you may need
to ask follow-up or directive questions of others. Some candidates may provide (or withhold) information that raises
concerns or issues that should be investigated more fully in your questioning.

During the Interview

After you have developed the questions you will ask of each applicant, it is recommended that you develop a form
that includes the questions, interviewer name, date, name of applicant, position being filled. The form should have
plenty of room for noting responses to questions, follow-up questions, and space for additional comments. Each
interviewer should have an interview form for each applicant.

Some interviewers find that they spend a lot of time in interviews describing the position and providing general
information for applicants. Think about what you want applicants to know about the job, your department, the
University as a whole, UO benefits, and so forth. Instead of sharing information verbally in each interview, it may be
more efficient to provide written materials for applicants. The focus of the interview can then be on the applicant and
their qualifications.

When calling applicants to schedule interviews, let them know who will be present during the interview and the
approximate duration. Schedule the interview in a room that is accessible to people with disabilities and free of
interruptions or other distractions.

The first step of a successful interview includes building rapport with the applicant. Introduce interview panel
members including their title and relationship to the position being filled. Let the applicant know that they will be
given the opportunity to ask questions at the end of the interview. Give a time frame (e.g., "We expect the interview
to last about 30 minutes and have questions for you").

Reinforcement

A good interviewer will be an active listener and use both verbal and nonverbal cues to encourage the applicant to
divulge pertinent information. Nonverbal skills include smiling, nodding your head, or leaning forward in your chair.
Another nonverbal cue is silence. It is an effective tool to indicate to the candidate that more information is desired.
If the candidate does not offer additional information, you should provide verbal cues or ask for the information
directly.
Page 113 of 167
Verbal cues can be interjected when you wish the applicant to continue a discussion of a particular subject. Positive
verbal cues can also be used to assist an applicant in talking about matters that may be embarrassing or produce other
emotional responses. Examples are: "Oh, I see," "Of course." The tone of voice used should be appropriate for the
situation. In an embarrassing or emotional situation, your tone should be supportive and understanding and the voice
low-keyed. If additional information is desired, your voice should be lighter and the tone interested or quizzical.

Controlling the Interview

Sometimes an applicant may digress in their response or may start to repeat what they have said previously. In these
instances, it is important for the interviewer to take control of the interview. When an applicant starts to digress, it is
generally a good idea not to cut them off immediately. The applicant may be using this time to relax. In addition, this
rambling may provide valuable data by giving some indication of the person's ability to organize his or her thoughts
or communicate effectively. If the candidate strays too far afield, or begins repeating, it is your responsibility to bring
them back on course. This should be done when the rambling is no longer job-related; this is especially true if the
applicant divulges personal information. A good way to handle this situation is to acknowledge the applicant's
comments and direct the conversation back to the original question. An example of this technique:

... An applicant is complaining about the disorganization of a previous employer and is beginning to repeat
information. Wait for a slight pause and interject something like, "I understand that that can be a frustrating
environment. However, I would be more interested in learning more about your experience with _____."

Sometimes an applicant is so interested in the position that he or she begins to interview you. If the applicant begins
asking questions and interrupts the flow of the interview, an effective response is to acknowledge their interest,
indicate there will be time for questions at the end of the interview, and return to the original question.

Listening

Good listening skills are an essential part of good communication and thus are very important in interviewing. Since
the purpose of an interview is to determine the applicant's knowledge, skills and abilities as they related to the
essential functions of the job, it is important for the applicant to do most of the talking; you cannot listen while you
are talking. There are several techniques to enhance your listening abilities.

... Empathize with the other person. Try to put yourself in the applicant's place.
... Ask questions when you do not understand.
... Concentrate of how something is said. We frequently concentrate so hard on what is being said that we miss the
importance of emotional reactions and attitudes. A person may be communicating more through emotions than the
actual content of the words.
... Do not interrupt too soon. Give people time to express themselves.
... Focus your attention on the other person's words, ideas and feelings related to the subject.
... Look at the person and attune yourself to their nonverbal communication. Watch face, eyes, hands and posture.
... Avoid distractions. Put down any papers, pencils or other items that can distract your attention. Try to control
outside noise levels and interruptions when you are trying to listen.
... Be aware of your emotions and prejudices. Push your worries, fears and problems outside the meeting room.
Control your anger or other emotional reactions to the other person.
... Avoid jumping to assumptions. Do not assume that others use words the same way you do; that they did not say
what they meant, but you know what they meant; that they are avoiding looking you in the eye because they are
telling a lie.

Conclusion

A good way to improve your questioning technique is to experiment. Practice your phrasing of questions prior to
conducting interviews. Add some special questions to your interviews and evaluate the types of responses you

Page 114 of 167

receive. Critique each interview to determine how to improve your style. Good questioning skills can definitely
enhance your interviewing success.

Reference Checks

Completing reference checks is a critical part of the selection process. Information you have received in an interview
is biased and typically includes only what the applicant wishes you to know. A thorough reference check may
produce additional information to help insure that the most suitable candidate is hired. It is a way to clarify, verify
and add data to what has been learned in the interview and from other portions of the selection process. Never reveal
the information received from a previous employer to the candidate. This information should be kept confidential or
your sources for references will dry up quickly.

Legality of Reference Checks

In Oregon, in most instances employers who provide employment reference information about current or former
employees are protected from liability for their comments. Employers are protected if the information they provide is
offered in response to a request by the former employee or a prospective employer and is not knowingly false or
misleading and is not biased by prohibited discrimination, including prohibited retaliation.

It is legal and important for a prospective supervisor to consider job-related information learned from a reference
check. However, as in all employment decisions, information related to race, marital status, age, disability, religion,
color, national origin, veteran status, citizenship, sexual orientation and sex may not be considered and should not be
requested. Also, federal law establishes requirements for employers using outside parties to conduct reference checks
on their behalf. If you are considering using an outside entity to conduct reference checks, you will need to comply
with those laws.

Type of References

Your best source of information on any candidate is a former employer. On-the-job performance is the most useful
predictor of future success. Personal references (relatives, teachers, and clergy) generally have limited value.
Information available from a human resource office is usually limited to dates of employment and reason for leaving.
HR people generally do not have enough day-to-day contact with employees to rate their on-the-job performance and
ability. The supervisor can specify the quality and quantity of work, reliability, potential problem areas and job
behaviors. Do not rely on written references presented to you by candidates. Many are written at the time of
termination and some employers may over-inflate the applicant's qualifications.

When reference checking, the primary reference may extol the virtues of the employee. There is a chance that you
will become so satisfied with the positive comments that you may decide not to explore the person's background any
further.

Think again.

The primary reference may have felt sorry for the well-liked, but inept, former employee and might be willing to do
anything to help that person land a good job. Realizing that, it pays to be prudent and exercise some caution.

Don't be overly anxious to hire. Sometimes there is a tremendous anxiety to fill a job and prospective employers may
disregard anything negative said by the interviewee. Sometimes references may be checked using questions that are
unconsciously created to encourage the kind of answer the manager wants to hear. For example: "Do you think he
could handle the job"; or, "Is she a hard worker, loyal and honest?" The way these questions are worded encourages
only "yes" answers. It is to your advantage to avoid putting words in the mouth of a reference.

It is recommended that you check with at least two past employers to find consistent trends in the applicant's past
performance. Do not limit yourself to references listed by the applicant; make sure you talk with the most recent
Page 115 of 167
supervisor or those who employed the person in a position most clearly related to your own. Calling several
employers will also help balance the information you receive and may guard against making a decision based on an
unfounded reference. For instance, current supervisors may mislead you because they want the applicant to get
another job. Sometimes applicants request that their current employer not be contacted for a reference. It is
recommended that you honor this request until such time as the candidate is a finalist for the position. There is
cause for concern if an applicant does not want a current employer or supervisor to be contacted when they are a
finalist.

If you are unable to contact a former or current supervisor, consider getting a reference from other managers,
supervisors or personnel in the organization who may be in a position to evaluate and comment on an applicant's
experience and qualifications. In some instances you may not be able to get a reference from any source. You must
rely on information you learned in the other parts of the selection process in making your hiring decision.

Planning: a Key Part of Reference Checking

As with other stages of the selection process, it is important that the solicited information relates directly to the
applicant's ability to carry out the responsibilities of the position. If you check the reference of more than one finalist,
it is important to plan the general questions you will ask of the references of each applicant; however, you should
also include specific questions that will help clarify possible problems you perceive with each of the different
candidates.

To facilitate a uniform, structured approach and create an easy means of record keeping, it is a good idea to develop a
reference form. It should include: your name; date; name of applicant; position applied for; name, title, and company
of the reference; basic questions you will ask about each applicant. This form should have plenty of room for noting
responses to your questions and space for additional comments.

Questioning Techniques

To begin a reference check, identify yourself and the applicant and briefly describe the position. Assure the reference
that the information they provide you will be held in confidence. Ask the reference if he or she is willing to talk with
you and if this is a good time. Use good questioning techniques to make sure you are getting complete and accurate
information. A key to good reference checking is the ability to identify and utilize any verbal cues during the
conversation. The tone of voice and delivery (pauses or hesitancy) may indicate that additional questioning is
necessary. Your objective is to obtain more than superficial opinions.

Ask questions as you would in an employment interview. Identify key responsibilities of the position and ask
questions related to the applicant's ability and/or experience in that area. Ask about their scope of responsibility,
quality of performance, general output, and their ability to get along with supervisors, subordinates, and coworkers.
Keep in mind that the purpose is to elicit information from the past employer about the applicant's ability to perform
the essential functions of the job. Non-directive questioning should encourage this type of information. Use directive
questions to follow up, especially if the response is vague. Often a former employer will not disclose negative
information unless asked directly. Make sure you have a clear picture of the applicant's strengths and
weaknesses before you end the reference call.

As a standard practice, the following areas should be explored:

... confirmation of employment dates (month and year);
... job titles (formal and informal);
... dependability and follow through on assignments;
... reason for termination;
... possibility for rehire; (A former employer's reluctance to rehire should be cause for concern, however, some firms
have a general policy prohibiting rehires. If this is the case it should be noted.)
... performance problems.

Page 116 of 167

Tough Questions

To find the truth, you have to ask probing questions.

... How does the candidate compare to the person who is doing the job now? Or, what characteristics will you look
for in the candidate's replacement?
... When there was a particularly urgent assignment, what steps did the candidate take to get it done on time?
... Since none of us is perfect at everything we do, please describe some of his or her shortcomings.
... Have you seen the candidate's current resume? Let me read you the part that describes his or her job with your
organization. (Stop at each significant part, and ask the reference for a comment.)
... Not all employees like everyone with whom they work. What kind of people did the candidate have problems
with?
... Did you ever have to talk with the candidate about performance problems? If so, please indicate what the issues
were. Was the employee ever disciplined?

How to Evaluate References Effectively

Whether the initial reference is favorable or unfavorable, always get a second opinion.

Be objective. Neither longevity on the job, nor promotions and raises, are necessarily proof that an employee was
much more than adequate. Sometimes incompetent people who were very well-liked have been known to not only
survive on the job, but also to advance.

Conclusion

Take the time to check references. It's worth it. Checking references can be a time consuming task and some
managers have abandoned the idea of doing little more than a cursory verification of a few facts. Because the cost to
an organization of a hiring mistake is high, it is preferable to take the time to make the correct selection decision in
the first place.

Making Hiring Decision

After completing the selection process including evaluation of written materials, interview, work samples (if used),
and reference checking, it is now time to review all information gathered about your applicants. It is your task to rate
job-related skills and the candidate's fit with your department. Match applicant data with the skills and qualities
identified at the beginning of the selection process. In most cases, the basis for selection decision should be guided
by the candidate's predicted skill in doing the job. As you review applicant qualifications, eligible veteran and
disabled veteran applicants as defined in ORS 408.225 must be given a 5% (veterans) or 10% (disabled veterans)
preference. If two candidates are equally qualified, affirmative action should be considered. The UO affirmative
action policy states: "If among the finalists there is a woman or minority candidate, that candidate shall be chosen
unless another candidate is demonstrably better qualified." For classified positions, another factor to consider with
two equally qualified finalists is whether they are current classified employees. In this case, select the person with
greatest seniority.

If it is impossible to make a selection at this point, you may want to consider scheduling an additional interview or
conducting additional reference checks. If you feel none of the applicants are qualified, you may choose to re-recruit.
The Employment Manager is available for consultation.

Documentation

Once you have selected a top candidate for a classified position, you should notify the Employment Manager. If
hiring an academic position, a compliance statement should be completed and submitted to the Office of Affirmative
Action & Equal Opportunity for approval.
Page 117 of 167
Supervisors are responsible for maintaining all documentation related to a job search. Under current UO archive
rules, these records must be maintained for three years. This documentation helps protect the University and your
department in cases of complaints or charges of discrimination and also provides the framework for your next search.

Documentation should include items related to the vacancy: position description; recruiting announcement; copy of
ads (including where and when they were placed); list of recruitment sources; names of search/interview panel
members. Documentation must also include things related to all applicants: applications; resumes; reference letters;
supplemental questionnaires and rating forms; interview notes (include the names of note takers); reference check
notes; documentation of work samples. In short, document everything you take into consideration when making the
hiring decision.

Training and development

Training and development is a function of human resource management concerned with organizational activity
aimed at bettering the performance of individuals and groups in organizational settings. It has been known by several
names, including "human resource development", and "learning and development".

Practice

Training and development encompasses three main activities: training, education, and development.

 Training: This activity is both focused upon, and evaluated against, the job that an individual currently
holds.
 Education: This activity focuses upon the jobs that an individual may potentially hold in the future, and is
evaluated against those jobs.
 Development: This activity focuses upon the activities that the organization employing the individual, or that
the individual is part of, may partake in the future, and is almost impossible to evaluate.

The "stakeholders" in training and development are categorized into several classes. The sponsors of training and
development are senior managers. The clients of training and development are business planners. Line managers are
responsible for coaching, resources, and performance. The participants are those who actually undergo the processes.
The facilitators are Human Resource Management staff. And the providers are specialists in the field. Each of these
groups has its own agenda and motivations, which sometimes conflict with the agendas and motivations of the
others.

The conflicts that are the best part of career consequences are those that take place between employees and their
bosses. The number one reason people leave their jobs is conflict with their bosses. And yet, as author, workplace
relationship authority, and executive coach, Dr. John Hoover points out, "Tempting as it is, nobody ever enhanced his
or her career by making the boss look stupid." Training an employee to get along well with authority and with people
who entertain diverse points of view is one of the best guarantees of long-term success. Talent, knowledge, and skill
alone won't compensate for a sour relationship with a superior, peer, or customer.

Typical roles in the field include executive and supervisory/management development, new-employee orientation,
professional-skills training, technical/job training, customer-service training, sales-and-marketing training, and
health-and-safety training. Job titles may include vice-president of organizational effectiveness, training manager or
director, management development specialist, blended-learning designer, training-needs analyst, chief learning
officer, and individual career-development advisor.

Talent development is the process of changing an organization, its employees, its stakeholders, and groups of people
within it, using planned and unplanned learning, in order to achieve and maintain a competitive advantage for the
organization. Rothwell notes that the name may well be a term in search of a meaning, like so much in management,

Page 118 of 167

and suggests that it be thought of as selective attention paid to the top 10% of employees, either by potential or
performance.

While talent development is reserved for the top management it is becoming increasingly clear that career
development is necessary for the retention of any employee, no matter what their level in the company. Research has
shown that some type of career path is necessary for job satisfaction and hence job retention. Perhaps organizations
need to include this area in their overview of employee satisfaction.

The term talent development is becoming increasingly popular in several organizations, as companies are now
moving from the traditional term training and development. Talent development encompasses a variety of
components such as training, career development, career management, and organizational development, and training
and development. It is expected that during the 21st century more companies will begin to use more integrated terms
such as talent development.

Washington Group International, in their paper "The Nuclear Renaissance, A Life Cycle Perspective" defined two
logical laws of talent development:

 First law of talent development: "The beginnings of any technology-rich business are all characterized by a
shortage of large numbers of technically trained people needed to support ultimate growth"
 Second law of talent development: "The resources will come when the business becomes attractive to the
best-and brightest who adapt skills to become part of an exciting opportunity"

Talent development refers to an organization's ability to align strategic training and career opportunities for
employees. Training can sometimes also be referred to as a tool for change management and improved organizational
culture. Referring to a study conducted in India titled "TO IDENTIFY THE TRAINING AND DEVELOPMENT
PRACTICES FOLLOWED IN ORGANIZATION: A case study of Birla Cement Work, Rajasthan", it was found
that trainees (employees) are aware of the training and development practices followed in the organization and they
very well know that the training programs are the tools for their overall development in organization. Using the
training, they also share their knowledge among their colleagues which is improving the work culture among the
organization.

Training and development practices also have their importance for professional education educators also. As there is
a need to evaluate the benchmark practices followed for professional education educators to find out that whether the
training programme which they opt is according to their training need or they are selecting these training programmes
at random.

Performance Appraisal Methods

“It is a systematic evaluation of an individual with respect to performance on the job and individual’s potential for
development.”

Definition 2: Formal System, Reasons and Measures of future performance

“It is formal, structured system of measuring, evaluating job related behaviors and outcomes to discover reasons of
performance and how to perform effectively in future so that employee, organization and society all benefits.”

Meaning of Performance Appraisals

Performance Appraisals is the assessment of individual’s performance in a systematic way. It is a developmental tool
used for all round development of the employee and the organization. The performance is measured against such
factors as job knowledge, quality and quantity of output, initiative, leadership abilities, supervision, dependability,
co-operation, judgment, versatility and health. Assessment should be confined to past as well as potential

Page 119 of 167

performance also. The second definition is more focused on behaviors as a part of assessment because behaviors do
affect job results.

Performance Appraisals and Job Analysis Relationship

Job Analysis à Performance Standards à Performance Appraisals

Describe the work and personnel Translate job requirements into Describe the job relevant
requirement of a particular job. levels of acceptable or strengths and weaknesses of
unacceptable performance each individual.

Objectives of Performance Appraisals

Use of Performance Appraisals

1. Promotions
2. Confirmations
3. Training and Development
4. Compensation reviews
5. Competency building
6. Improve communication
7. Evaluation of HR Programs
8. Feedback & Grievances

4 Goals of Performance Appraisals

General Goals Specific Goals

Developmental Use Individual needs

Performance feedback

Transfers and Placements

Strengths and Development needs

Administrative Decisions / Uses Salary

Promotion

Retention / Termination

Recognition

Lay offs

Poor Performers identification

Organizational Maintenance HR Planning

Training Needs

Organizational Goal achievements

Page 120 of 167

 Goal Identification

HR Systems Evaluation

Reinforcement of organizational needs

Documentation Validation Research

For HR Decisions

Legal Requirements

Performance Appraisal Process

1. Objectives definition of appraisal

2. Job expectations establishment
3. Design an appraisal program
4. Appraise the performance
5. Performance Interviews
6. Use data for appropriate purposes
7. Identify opportunities variables
8. Using social processes, physical processes, human and computer assistance

Difference between Traditional and Modern (Systems) approach to Appraisals

Categories Traditional Appraisals Modern, Systems Appraisals

Guiding Values Individualistic, Control oriented, Systematic, Developmental,

Documentary Problem solving

Leadership Styles Directional, Evaluative Facilitative, Coaching

Frequency Occasional Frequent

Formalities High Low

Rewards Individualistic Grouped, Organizational

TECHNIQUES / METHODS OF PERFORMANCE APPRAISALS

Numerous methods have been devised to measure the quantity and quality of performance appraisals. Each of the
methods is effective for some purposes for some organizations only. None should be dismissed or accepted as
appropriate except as they relate to the particular needs of the organization or an employee.

Broadly all methods of appraisals can be divided into two different categories.

 Past Oriented Methods

 Future Oriented Methods

Past Oriented Methods

1. Rating Scales: Rating scales consists of several numerical scales representing job related performance criterions
such as dependability, initiative, output, attendance, attitude etc. Each scales ranges from excellent to poor. The total
Page 121 of 167
numerical scores are computed and final conclusions are derived. Advantages – Adaptability, easy to use, low cost,
every type of job can be evaluated, large number of employees covered, no formal training required. Disadvantages –
Rater’s biases

2. Checklist: Under this method, checklist of statements of traits of employee in the form of Yes or No based
questions is prepared. Here the rater only does the reporting or checking and HR department does the actual
evaluation. Advantages – economy, ease of administration, limited training required, standardization. Disadvantages
– Raters biases, use of improper weighs by HR, does not allow rater to give relative ratings

3. Forced Choice Method: The series of statements arranged in the blocks of two or more are given and the rater
indicates which statement is true or false. The rater is forced to make a choice. HR department does actual
assessment. Advantages – Absence of personal biases because of forced choice. Disadvantages – Statements may be
wrongly framed.

4. Forced Distribution Method: here employees are clustered around a high point on a rating scale. Rater is
compelled to distribute the employees on all points on the scale. It is assumed that the performance is conformed to
normal distribution. Advantages – Eliminates Disadvantages – Assumption of normal distribution, unrealistic, errors
of central tendency.

5. Critical Incidents Method: The approach is focused on certain critical behaviors of employee that makes all the
difference in the performance. Supervisors as and when they occur record such incidents. Advantages – Evaluations
are based on actual job behaviors, ratings are supported by descriptions, feedback is easy, reduces recency biases,
chances of subordinate improvement are high. Disadvantages – Negative incidents can be prioritized, forgetting
incidents, overly close supervision; feedback may be too much and may appear to be punishment.

6. Behaviorally Anchored Rating Scales: statements of effective and ineffective behaviors determine the points.
They are said to be behaviorally anchored. The rater is supposed to say, which behavior describes the employee
performance. Advantages – helps overcome rating errors. Disadvantages – Suffers from distortions inherent in most
rating techniques.

7. Field Review Method: This is an appraisal done by someone outside employees’ own department usually from
corporate or HR department. Advantages – Useful for managerial level promotions, when comparable information is
needed, Disadvantages – Outsider is generally not familiar with employees work environment, Observation of actual
behaviors not possible.

8. Performance Tests & Observations: This is based on the test of knowledge or skills. The tests may be written
or an actual presentation of skills. Tests must be reliable and validated to be useful. Advantage – Tests may be apt to
measure potential more than actual performance. Disadvantages – Tests may suffer if costs of test development or
administration are high.

9. Confidential Records: Mostly used by government departments, however its application in industry is not ruled
out. Here the report is given in the form of Annual Confidentiality Report (ACR) and may record ratings with respect
to following items; attendance, self expression, team work, leadership, initiative, technical ability, reasoning ability,
originality and resourcefulness etc. The system is highly secretive and confidential. Feedback to the assessee is given
only in case of an adverse entry. Disadvantage is that it is highly subjective and ratings can be manipulated because
the evaluations are linked to HR actions like promotions etc.

10. Essay Method: In this method the rater writes down the employee description in detail within a number of broad
categories like, overall impression of performance, promoteability of employee, existing capabilities and
qualifications of performing jobs, strengths and weaknesses and training needs of the employee. Advantage – It is
extremely useful in filing information gaps about the employees that often occur in a better-structured checklist.
Disadvantages – It its highly dependent upon the writing skills of rater and most of them are not good writers. They
may get confused success depends on the memory power of raters.

Page 122 of 167

11. Cost Accounting Method: Here performance is evaluated from the monetary returns yields to his or her
organization. Cost to keep employee, and benefit the organization derives is ascertained. Hence it is more dependent
upon cost and benefit analysis.

12. Comparative Evaluation Method (Ranking & Paired Comparisons): These are collection of different
methods that compare performance with that of other co-workers. The usual techniques used may be ranking
methods and paired comparison method.

 Ranking Methods: Superior ranks his worker based on merit, from best to worst. However how best and
why best are not elaborated in this method. It is easy to administer and explanation.

 Paired Comparison Methods: In this method each employee is rated with another employee in the form of
pairs. The number of comparisons may be calculated with the help of a formula as under.

Future Oriented Methods

1. Management By Objectives: It means management by objectives and the performance is rated against the
achievement of objectives stated by the management. MBO process goes as under.

 Establish goals and desired outcomes for each subordinate

 Setting performance standards

 Comparison of actual goals with goals attained by the employee

 Establish new goals and new strategies for goals not achieved in previous year.

Advantage – It is more useful for managerial positions.

Disadvantages – Not applicable to all jobs, allocation of merit pay may result in setting short-term goals rather than
important and long-term goals etc.

2. Psychological Appraisals: These appraisals are more directed to assess employees potential for future
performance rather than the past one. It is done in the form of in-depth interviews, psychological tests, and discussion
with supervisors and review of other evaluations. It is more focused on employees emotional, intellectual, and
motivational and other personal characteristics affecting his performance. This approach is slow and costly and may
be useful for bright young members who may have considerable potential. However quality of these appraisals
largely depend upon the skills of psychologists who perform the evaluation.

3. Assessment Centers: This technique was first developed in USA and UK in 1943. An assessment center is a
central location where managers may come together to have their participation in job related exercises evaluated by
trained observers. It is more focused on observation of behaviors across a series of select exercises or work samples.
Assessees are requested to participate in in-basket exercises, work groups, computer simulations, role playing and
other similar activities which require same attributes for successful performance in actual job. The characteristics
assessed in assessment center can be assertiveness, persuasive ability, communicating ability, planning and
organizational ability, self confidence, resistance to stress, energy level, decision making, sensitivity to feelings,
administrative ability, creativity and mental alertness etc. Disadvantages – Costs of employees traveling and lodging,
psychologists, ratings strongly influenced by assessee’s inter-personal skills. Solid performers may feel suffocated in
simulated situations. Those who are not selected for this also may get affected.

Advantages – well-conducted assessment center can achieve better forecasts of future performance and progress
than other methods of appraisals. Also reliability, content validity and predictive ability are said to be high in

Page 123 of 167

assessment centers. The tests also make sure that the wrong people are not hired or promoted. Finally it clearly
defines the criteria for selection and promotion.

4. 360-Degree Feedback: It is a technique which is systematic collection of performance data on an individual

group, derived from a number of stakeholders like immediate supervisors, team members, customers, peers and self.
In fact anyone who has useful information on how an employee does a job may be one of the appraisers. This
technique is highly useful in terms of broader perspective, greater self-development and multi-source feedback is
useful. 360-degree appraisals are useful to measure inter-personal skills, customer satisfaction and team building
skills. However on the negative side, receiving feedback from multiple sources can be intimidating, threatening etc.
Multiple raters may be less adept at providing balanced and objective feedback.

Potential benefits of appraisal

There are a number of potential benefits of organizational performance management conducting formal performance
appraisals (PAs). There has been a general consensus in the belief that PAs lead to positive implications of
organizations. Furthermore, PAs can benefit an organization’s effectiveness. One way is PAs can often lead to giving
individual workers feedback about their job performance. From this may spawn several potential benefits such as the
individual workers becoming more productive.

Other potential benefits include:

 Facilitation of communication: communication in organizations is considered an essential function of worker

motivation. It has been proposed that feedback from PAs aid in minimizing employees’ perceptions of
uncertainty. Fundamentally, feedback and management-employee communication can serve as a guide in job
performance.

 Enhancement of employee focus through promoting trust: behaviors, thoughts, and/or issues may distract
employees from their work, and trust issues may be among these distracting factors. Such factors that
consume psychological energy can lower job performance and cause workers to lose sight of organizational
goals. Properly constructed and utilized PAs have the ability to lower distracting factors and encourage trust
within the organization.

 Goal setting and desired performance reinforcement: organizations find it efficient to match individual
worker’s goals and performance with organizational goals. PAs provide room for discussion in the
collaboration of these individual and organizational goals. Collaboration can also be advantageous by
resulting in employee acceptance and satisfaction of appraisal results.

 Performance improvement: well constructed PAs can be valuable tools for communication with employees
as pertaining to how their job performance stands with organizational expectations. “At the organizational
level, numerous studies have reported positive relationships between human resource management (HRM)
practices" and performance improvement at both the individual and organizational levels.

 Determination of training needs: “Employee training and development are crucial components in helping an
organization achieve strategic initiatives”. It has been argued that for PAs to truly be effective, post-appraisal
opportunities for training and development in problem areas, as determined by the appraisal, must be offered.
PAs can especially be instrumental for identifying training needs of new employees. Finally, PAs can help in
the establishment and supervision of employees’ career goals.

Potential complications

Despite all the potential advantages of formal performance appraisals (PAs), there are also potential drawbacks. It
has been noted that determining the relationship between individual job performance and organizational performance
can be a difficult task. Generally, there are two overarching problems from which several complications spawn. One
Page 124 of 167
of the problems with formal PAs is there can be detrimental effects to the organization(s) involved if the appraisals
are not used appropriately. The second problem with formal PAs is they can be ineffective if the PA system does not
correspond with the organizational culture and system.

Complications stemming from these issues are:

 Detrimental to quality improvement: it has been proposed that the use of PA systems in organizations
adversely affect organizations’ pursuits of quality performance. It is believed by some scholars and
practitioners that the use of PAs is more than unnecessary if there is total quality management. [

 Subjective evaluations: Traditional performance appraisals are often based upon a manager's or supervisor's
perceptions of an employee's performance and employees are evaluated subjectively rather than objectively.
Therefore the review may be influenced by many non-performance factors such as employee 'likeability',
personal prejudices, ease of management, and/or previous mistakes or successes. Reviews should instead be
based on data-supported, measurable behaviors and results within the performers control.

 Negative perceptions: “Quite often, individuals have negative perceptions of PAs”. Receiving and/or the
anticipation of receiving a PA can be uncomfortable and distressful and potentially cause “tension between
supervisors and subordinates”. If the person being appraised does not trust their employer, appraiser or
believe that they will benefit from the process it may become a "tick box" exercise.

 Errors: Performance appraisals should provide accurate and relevant ratings of an employee’s performance as
compared to pre-established criteria/goals (i.e. organizational expectations). Nevertheless, supervisors will
sometimes rate employees more favorably than that of their true performance in order to please the
employees and avoid conflict. “Inflated ratings are a common malady associated with formal" PA.

 Legal issues: when PAs are not carried out appropriately, legal issues could result that place the organization
at risk. PAs are used in organizational disciplinary programsas well as for promotional decisions within the
organization. The improper application and utilization of PAs can affect employees negatively and lead to
legal action against the organization.

 Performance goals: performance goals and PA systems are often used in association. Negative outcomes
concerning the organizations can result when goals are overly challenging or overemphasized to the extent of
affecting ethics, legal requirements, or quality. Moreover, challenging performance goals can impede an
employees’ abilities to acquire necessary knowledge and skills. Especially in the early stages of training, it
would be more beneficial to instruct employees on outcome goals than on performance goals.

 Derail merit pay or performance-based pay: some researchers contend that the deficit in merit pay and
performance-based pay is linked to the fundamental issues stemming from PA systems.

Improvements

Although performance appraisals can be so easily biased, there are certain steps that can be taken to improve the
evaluations and reduce the margin of errors through the following:

 Training - Creating an awareness and acceptance in the people conducting the appraisals that within
a group of workers, they will find a wide range in difference of skills and abilities.

 Providing Feedback to Raters - Trained raters provide managers who evaluated their subordinates
with feedback, including information on ratings from other managers. This reduces leniency errors.

Page 125 of 167

  Subordinate Participation - By allowing employee participation in the evaluation process, there is
employee-supervisor reciprocity in the discussion for any discrepancies between self ratings and
supervisor ratings, thus, increasing job satisfaction and motivation.

Disciplinary procedure and guidelines

Practice Note

Progressive discipline generally includes a series of increasingly severe penalties for repeated offenses, typically
beginning with counseling or a verbal warning. Progressive discipline policies can be a useful tool for warding off
potential unionization in the nonunion setting, given that most unions typically point to unfair disciplinary actions to
promote the benefits of unionization. Such procedures also help ensure uniformity and consistency in the
administration of disciplinary action, and thus minimize exposure to discrimination claims.

However, in states where an employee handbook or manual creates contractual or enforceable rights, the existence of
a progressive discipline policy might be construed to require employers to follow that policy no matter the
circumstances. Moreover, if a progressive discipline policy requires the employer to follow a series of steps before
certain terminations occur, the policies may hinder an employer’s ability to take swift termination action.

When a progressive discipline system is used, it must be designed carefully, backed up by clear procedures and
administered by well-trained supervisors.
The policy below establishes a disciplinary process to be used or adapted as needed for all behavior and performance
issues. For an example of a progressive discipline policy that outlines four categories of misconduct, based on the
severity of the misconduct, and establishes a different disciplinary process for each category.

Purpose

[Company Name]’s progressive discipline policy and procedures are designed to provide a structured corrective
action process to improve and prevent a recurrence of undesirable employee behavior and performance issues. It has
been designed consistent with [Company Name] organizational values, human resource (HR) best practices and
employment laws.

Outlined below are the steps of [Company Name]’s progressive discipline policy and procedure. [Company Name]
reserves the right to combine or skip steps depending on the facts of each situation and the nature of the offense. The
level of disciplinary intervention may also vary. Some of the factors that will be considered are whether the offense is
repeated despite coaching, counseling or training, the employee’s work record, and the impact the conduct and
performance issues have on the organization.

Procedure

Step 1: Counseling and verbal warning

Step 1 creates an opportunity for the immediate supervisor to schedule a meeting with an employee to bring attention
to the existing performance, conduct or attendance issue. The supervisor should discuss with the employee the nature
of the problem or the violation of company policies and procedures. The supervisor is expected to clearly describe
expectations and steps the employee must take to improve performance or resolve the problem.

Within five business days of this meeting, the supervisor will prepare written documentation of a Step 1 meeting. The
employee will be asked to sign this document to demonstrate his or her understanding of the issues and the corrective
action.

Step 2: Written warning

Page 126 of 167

Although [Company Name] hopes that the employee will promptly correct any performance, conduct or attendance
issues that were identified in Step 1, [Company Name] recognizes that this may not always occur. The Step 2 written
warning involves more formal documentation of the performance, conduct or attendance issues and consequences.

During Step 2, the immediate supervisor and a division manager or director will meet with the employee to review
any additional incidents or information about the performance, conduct or attendance issues as well as any prior
relevant corrective action plans. Management will outline the consequences for the employee of his or her continued
failure to meet performance or conduct expectations.

A formal performance improvement plan (PIP) requiring the employee’s immediate and sustained corrective action
will be issued within five business days of a Step 2 meeting. A warning outlining that the employee may be subject to
additional discipline up to and including termination if immediate and sustained corrective action is not taken may
also be included in the written warning.

Step 3: Suspension and final written warning

There may be performance, conduct or safety incidents so problematic and harmful that the most effective action
may be the temporary removal of the employee from the workplace. When immediate action is necessary to ensure
the safety of the employee or others, the immediate supervisor may suspend the employee pending the results of an
investigation.

Suspensions that are recommended as part of the normal progression of this progressive discipline policy and
procedure are subject to approval from a next-level manager and HR.

Depending on the seriousness of the infraction, the employee may be suspended without pay in full-day increments
consistent with federal, state and local wage-and-hour employment laws. Nonexempt/hourly employees may not
substitute or use an accrued paid vacation or sick day in lieu of the unpaid suspension. Due to Fair Labor Standards
Act (FLSA) compliance issues, unpaid suspension of salaried/exempt employees is reserved for serious workplace
safety or conduct issues. HR will provide guidance so that the discipline is administered without jeopardizing the
FLSA exemption status.

Pay may be restored to the employee if an investigation of the incident or infraction absolves the employee.

Step 4: Recommendation for termination of employment

The last and most serious step in the progressive discipline procedure is a recommendation to terminate employment.
Generally, [Company Name] will try to exercise the progressive nature of this policy by first providing warnings, a
final written warning or suspension from the workplace before proceeding to a recommendation to terminate
employment. However, [Company Name] reserves the right to combine and skip steps depending on the
circumstances of each situation and the nature of the offense. Furthermore, employees may be terminated without
prior notice or disciplinary action.

Management’s recommendation to terminate employment must be approved by HR and the division director or
designate. Final approval may be required from the CEO or designate.

Appeal Process

Employees will have the opportunity to present information that may challenge information management has used to
issue disciplinary action. The purpose of this process is to provide insight into extenuating circumstances that may
have contributed to the employee’s performance or conduct issues while allowing for an equitable solution.

If the employee does not present this information during any of the step meetings, he or she will have five business
days after that meeting to present such information.
Page 127 of 167
Performance and Conduct Issues Not Subject to Progressive Discipline

Behavior that is illegal is not subject to progressive discipline, and such behavior may be reported to local law
enforcement authorities.

Similarly, theft, substance abuse, intoxication, fighting and other acts of violence at work are also not subject to
progressive discipline and may be grounds for immediate termination.

Documentation

The employee will be provided copies of all progressive discipline documentation, including all PIPs. The employee
will be asked to sign copies of this documentation attesting to his or her receipt and understanding of the corrective
action outlined in these documents.

Copies of these documents will be placed in the employee’s official personnel file.

Important note: Nothing in this policy provides any contractual rights regarding employee discipline or counseling,
nor should anything in this policy be read or construed as modifying or altering the employment-at-will relationship
between [Company Name] and its employees.

Examples of Misconduct/Gross Misconduct

The following examples are not exhaustive but indicative of conduct that the University considers may warrant
disciplinary action up to and including summary* dismissal in the case of gross misconduct:

Examples of misconduct

 Unsatisfactory attendance at work e.g. unauthorised or unreported absence or persistent lateness

 Misuse of internet, email and other University facilities
 Refusing or failure to carry out a reasonable management instruction
 Failure to comply with agreed working practices
 Failure to take reasonable care of University property or using it for personal use without necessary
authorisation

Persistent offences of misconduct may lead to the termination of employment.

Any misconduct of a sufficiently serious nature may be deemed to be gross misconduct and dealt with accordingly.
Examples of behaviour that may constitute gross misconduct are shown below. Again these examples are not
exhaustive.

Examples of gross misconduct

 Academic misconduct – such as falsification of research data

 Assault on another employee, student or member of the public
 Breach of Confidence – serious and/or persistent breaches of confidence
 Dishonesty – Theft, fraud or falsification of records
 Unlawful Discrimination – intentional unlawful discrimination or serious bullying and harassment of
employee or student

*Summary dismissal - is dismissal for gross misconduct which takes immediate effect and there is no notice period
or pay in lieu of notice given as a result of the dismissal.

Appendix B: Illustrative levels of authority to take disciplinary action

Page 128 of 167
 Head of Department IS line Head of Department IS NOT
Level of disciplinary action
manager line manager

Suspension
Head of Department or member of Head of Department or member of
Note: the decision to suspend will be taken
Senior Management Group Senior Management Group
after consultation with HR

Action or sanction less than dismissal

Note: this includes Informal, Written warning Head of Department Line Manager
(level 1), Final written warning (level 2)

Formal dismissal Head of Department Head of Department

Appeal for sanction less than dismissal Senior manager Senior manager

Three Senior managers not Three Senior managers not

Appeal for dismissal
previously involved in the case. previously involved in the case.

This table is illustrative and not exhaustive. The principles are that the line manager where sufficiently senior can
deal with disciplinary action up to and including dismissal. Individuals can nominate a deputy as the authorised
manager (with the exception of dismissal – although if not available or previously involved another equivalent
manager could be involved, e.g. HoD of another department) but the principles of independence and having not
previously been involved in the case or managing others involved in the case should apply.

Remuneration

The short version

Remuneration is essentially determining how much you as an employee get paid – the salary or wage you receive in
return for your time/skills/experience. Often HR Professionals within this function will also monitor/develop and
deliver the benefit packages that employees receive, these can include issuing of company shares, health and/or life
insurance, discounts on products which are sold or manufactured by your employer.

The long version

I worked in remuneration for a good number of years, and while I have experience across a wide range of generalist
and specialist HR areas (including recruitment & selection, change management, workforce planning and a few more
for good measure), without doubt remuneration is one of the most fascinating and interesting areas I’ve worked in
yet. Remuneration very much has its own language, so as we work through this topic I’ll introduce and outline a
number of different key terms – understanding these terms is critical to your understanding of this area of HR.

Remuneration starts outside of HR, it actually starts with the owners of the business or with the Board of Directors
(often a subcommittee of the board of directors – typically called the Remuneration Board/Committee). It starts at
this senior most level because it is so central to the organization, both in terms of viability of the business (payroll
costs are for most organisations the single largest cost), and where the organisation positions itself in the employment
market – which segway’s nicely into the first key term we’ll look at.

Methods of remuneration

Remuneration consists of the rewards that employees receive from their work. Employees that work for modern
companies and other major UK companies will receive a range of money based and other rewards ranging from
discounts on company products, to subsidised company pension schemes. There are various ways of rewarding

Page 129 of 167

employees, including the following.

1. Basic pay for standard hours. An employee works to a set contract e.g. £x per hour for a 30 hour week, of a salary
of £y per month. This scheme alone does not provide an incentive to work harder, but if the rewards are good relative
to those offered for similar work then this will act as a motivating factor in itself.

2. Additional hours rewards. Employees are usually paid extra for working unsocial hours (e.g. a night shift) or for
working longer hours (overtime rates).

3. Commission. Sales staff are typically paid on a commission basis. The commission rate depends on their success
rate so acts as an incentive to employ effective selling techniques.

4. Bonuses are another form of incentive to meet particular targets. Typically these will be used to encourage and
motivate employees to work harder when required, e.g; offering football players an incentive bonus to win an
important game.
5. Performance related pay. Many companies operate some form of performance related pay scheme. Pay is then
related to the achievement of objectives and targets. The performance that is measured may be at company wide
level, plant level, team level or individual level.

6. Profits related pay. Employees pay and bonuses may be related directly to the profits that a company makes.

7. Payment by results. This is a similar form of incentive scheme to profit related pay. The results measured will be
key results areas for a company such as sales.

8. Piece rate reward systems relate to paying employees according to their level of output. Where such a scheme
operates it is essential that there is a good quality checking procedure to make sure that the 'pieces' are of the required
standard.

Human resource management

In addition to payment systems many jobs involve some form of benefits, including:

 A company pension scheme. The employee may subsidise the contributions made by an employee into a
company pension scheme. The employee may also be able to benefit from a range of other subsidised
services such as insurance etc.
 Subsidised canteen, and leisure facilities.
 Use of a company car/phone with mileage/phone bills paid.
 Access to and use of other company facilities e.g. computer facilities, on-site creche and hairdressing etc.

The remuneration package therefore consists of a range of payment methods and accompanying benefits which can
be used as motivators by modern companies and are all part of the human resource management philosophy prevalent
in modern business.

Human Resource Management involves treating employees as the most important resource of the organisation.

Human relations movement

Human relations movement refers to the researchers of organizational development who study the behaviour of
people in groups, in particular workplace groups and other related concepts in fields such as industrial and
organizational psychology. It originated in the 1930s' Hawthorne studies, which examined the effects of social
relations, motivation and employee satisfaction on factory productivity. The movement viewed workers in terms of
Page 130 of 167
their psychology and fit with companies, rather than as interchangeable parts, and it resulted in the creation of the
discipline of human resource management.

Mayo's work

Mayo stressed the following:

1. The power of natural groups, in which social aspects take precedence over functional organizational
structures.
2. The need for reciprocal communication, in which communication is two way, from worker to chief
executive, as well as vice versa.
3. The development of high quality leadership to communicate goals and to ensure effective and coherent
decision making.[1]

It has become a concern of many companies to improve the job-oriented interpersonal skills of employees. The
teaching of these skills to employees is referred to as "soft skills" training. Companies need their employees to be
able to successfully communicate and convey information, to be able to interpret others' emotions, to be open to
others' feelings, and to be able to solve conflicts and arrive at resolutions. By acquiring these skills, the employees,
those in management positions, and the customer can maintain more compatible relationships.[2]

Human Resource Management and Industrial Relations (HRM & IR)

Human Resources Management

The human resource management (HRM) function of an organisation manages the individual aspects of the
employment relationship - from employee recruitment and selection to international employment relations, salaries
and wages. HRM is a complex blend of science and art, creativity and common sense. At one level, HR practice
draws on economics, psychology, sociology, anthropology, political studies, and strategic and systems thinking. At
an operational level, success depends on interpersonal relationships.

Industrial Relations

Industrial relations is also a multidisciplinary field that studies the collective aspects of the employment relationship.
It is increasingly being called employment relations (ER) because of the importance of non-industrial employment
relationships. IR has a core concern with social justice through fair employment practices and decent work. Industrial
relations covers issues of concern to managers and employees at the workplace, including workplace bargaining,
management strategy, employee representation and participation, union-management co-operation, workplace
reform, job design, new technology and skill development

Leadership Development for HR Professionals (LDHRP)

Business strategy drives talent needs — putting HR leaders front-and-center in the quest for organizational success.

As HR functions take on greater strategic importance, their leaders need additional skills. They are challenged to:

Understand where the organization is headed and use the HR function to help lead the way.

Influence senior business leaders and leverage HR's perspective and potential.

Support the business strategy and planning process - and carry out effective talent strategies.

Page 131 of 167

ACCOUNTING RECORDS

Defn. Manual or computerized records of assets and liabilities, monetary transactions; various journals,
ledgers, and supporting documents (such as agreements, checks, invoices, vouchers), which an organization
is required to keep for certain number of years.

Accounting records are all sources of information and evidence that are used in preparing, verifying and
or auditing financial statements. Accounting records also includes documentation to prove ownership of
assets creation of liabilities and evidence of monetary and non monetary transactions.

Accounting records can take on many forms and include:

 Ledgers;
 Journals;
 Bank statements;
 Contracts and agreements;
 Verification statements;
 Transportation receipts;
 Invoices;
 Vouchers, etc.

Accounting records can be in physical or electronic formats.

In many countries the accounting bodies prescribes rules on dealing with accounting records from a
presentation of financial statements and/or auditing perspective. The rules vary in different countries and
different industries may have specific record-keeping requirements.

Accounting records are important for all types of accounting including financial accounting, cost
accounting as well as for different types of organizations corporations, partnerships, LLCs, and for not for
profits or for profits.

Annual accounts/ Annual report

Definition; the accounts prepared at the end of a financial year

An annual report is a comprehensive report on a company's activities throughout the preceding year.
Annual reports are intended to give shareholders and other interested people information about the
company's activities and financial performance. They may be considered as grey literature. Most
jurisdictions require companies to prepare and disclose annual reports, and many require the annual report
to be filed at the company's registry. Companies listed on a stock exchange are also required to report at
more frequent intervals (depending upon the rules of the stock exchange involved).

Typical annual reports will include:

 General Corporate Information

 Accounting policies
 Balance sheet
 Cash flow statement
 Contents: non-audited information
 Profit and loss account
Page 132 of 167
  Notes to the financial statements
 Chairpersons statement
 Director's Report
 Operating and financial review
 Other features
 Auditors report

Other information deemed relevant to stakeholders may be included, such as a report on operations for
manufacturing firms or corporate social responsibility reports for companies with environmentally or
socially sensitive operations. In the case of larger companies, it is usually a sleek, colorful, high-gloss
publication.

The details provided in the report are of use to investors to understand the company's financial position and
future direction. The financial statements are usually compiled in compliance with IFRS and/or the
domestic GAAP, as well as domestic legislation (e.g. the SOX in the U.S.).

Statement of Directors' responsibilities for the shareholders' financial statements

The Directors are responsible for preparing the Annual Report and the financial statements in accordance
with applicable law and Generally Accepted Accounting Practice, including the accounting standards
issued by the Accounting Standards Board and published by The Institute of Chartered Accountants.
Company law requires the directors to prepare financial statements for each financial period which give a
true and fair view of the state of affairs of the company and of the profit or loss of the company for that
period.

In preparing these financial statements, the Directors are required to:

 select suitable accounting policies and then apply them consistently

 make judgments and estimates that are reasonable and prudent
 prepare the financial statements on the going concern basis unless it is inappropriate to presume that
the Company will continue in business

Preparing your annual accounts

Nine areas to address when preparing your annual accounts

Preparing your company's annual accounts can be a daunting task, but if you generate all of the information
your accountant needs this can be a relatively simple and inexpensive exercise. The following guide
summarises the nine areas that you will need to address.

1 Legal requirement

Ultimately, the business owner is legally responsible for ensuring the accuracy of the accounts and that they
are submitted on time (within nine months of your company's year end). The accounts you submit to HM
Revenue & Customs (HMRC) with your corporation tax return form will become the benchmark for the
company's tax calculations each year. As a limited company, you must also make sure your accounts are
publicly available by filing them with Companies House.

2 Financial statements

Page 133 of 167

The financial information in a company's annual accounts is referred to as financial statements. These
usually consist of four sections:

• An overview by the business owner

• A balance sheet outlining the company's financial position at year end

• A profit and loss account showing the trading performance over the accounting period

• Notes on any tax provisions

The Companies Act sets out how the accounts should be presented and the format must comply with UK
accounting standards, which also dictate how certain transactions should be classed.

3 Accounting records

For small businesses, the minimum accounting records would be:

• Bank statements, cheque books and paying-in books

• Original invoices for all purchases and copy invoices for sales

• PAYE records

• VAT records if you are registered

• Stock or uncompleted work at year end

• A schedule of fixed assets

4 Purchases and sales

Your accounting records should be clear and logical with all entries cross-referenced. List the sales made
before the year end that have not yet been paid for as outstanding debtors. Include the amount, invoice
number and invoice date. List the purchases made before the year end, which you have not yet paid for, as
outstanding creditors. Include the amount, the supplier's name and the payment due date.

5 Stock and uncompleted work

Stock value is a key element for all businesses, whether you are a retailer or a service provider. The cut-off
between stock, purchases and sales is one of the main areas for potential errors. If a purchase has arrived in
the warehouse, but an invoice has not been received, the cost is included in the accounts. If you have sold
(and invoiced) but not yet delivered the product, exclude these goods from the valuation of your stock. The
sale will already be in your accounts as a debtor. Unless stock is a minor item in your accounts, you will
need to carry out a stocktake. Once the stock has been counted, it needs to be valued. For service providers
they should include work-in-progress and are required to include partly completed work to completion
method at this stage. For example, if a contract is 75% complete at the year end, then 75% of the contract
value would be included in the year end accounts as uncompleted work.

Page 134 of 167

6 Fixed assets

Businesses need to keep fixed assets register, which details all the assets that they own. Break it down into
different types of asset, including purchase date and price, description and location for each item. Give your
accountant a copy of relevant purchase or sales invoices or any other documents. The cost of fixed assets
should be written off over time to the business, through a depreciation charge. These details can be
recorded on the asset register. Generally depreciation cannot be offset against tax. Instead, you claim for
some assets a capital allowance, using a rate of deduction which is fixed by HMRC.

7 Employees

The business is liable for incorrectly deducted tax and National Insurance, not the employee so keep
records for all payroll and expense claims, as these will be needed to complete a P11D tax form. Since this
form can be very time consuming ask your accountant about getting a dispensation (P11D). This is a formal
statement by HMRC, allowing your business to not record expense payments on the forms. HMRC must be
satisfied that you reimburse nothing more than the legitimate costs incurred by your staff. But you will still
need to keep records of any payments made.

8 Feedback meeting

Once the accounts have been completed, a feedback meeting with your accountant will take place. This is
an opportunity to discuss ideas and gain advice on how your business practices can be improved.

9 Key dates for your calendar

It is vital to be aware of all relevant tax dates to ensure you prepare and send off your accounts in good
time. Or, in the case of reclaiming tax, the date by which your application must have been received.

Concept of Double Entry

Every transaction has two effects. For example, if someone transacts a purchase of a drink from a local
store, he pays cash to the shopkeeper and in return, he gets a bottle of dink. This simple transaction has two
effects from the perspective of both, the buyer as well as the seller. The buyer's cash balance would
decrease by the amount of the cost of purchase while on the other hand he will acquire a bottle of drink.
Conversely, the seller will be one drink short though his cash balance would increase by the price of the
drink.

Accounting attempts to record both effects of a transaction or event on the entity's financial statements.
This is the application of double entry concept. Without applying double entry concept, accounting records
would only reflect a partial view of the company's affairs. Imagine if an entity purchased a machine during
a year, but the accounting records do not show whether the machine was purchased for cash or on credit.
Perhaps the machine was bought in exchange of another machine. Such information can only be gained
from accounting records if both effects of a transaction are accounted for.

Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr). Accounting
system is based on the principal that for every Debit entry, there will always be an equal Credit entry. This
is known as the Duality Principal.

Debit entries are ones that account for the following effects:
Page 135 of 167
  Increase in assets
 Increase in expense
 Decrease in liability
 Decrease in equity
 Decrease in income

Credit entries are ones that account for the following effects:

 Decrease in assets
 Decrease in expense
 Increase in liability
 Increase in equity
 Increase in income

Double Entry is recorded in a manner that the Accounting Equation is always in balance.

Assets - Liabilities = Capital

Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity (Cr)
and vice-versa. Hence, the accounting equation will still be in equilibrium.

The Basics of Double-Entry Bookkeeping

All businesses, whether they use the cash-basis accounting method or the accrual accounting method, use
double-entry bookkeeping to keep their books. A practice that helps minimize errors and increase the
chance that your books balance, double-entry bookkeeping gets its name because you enter all transactions
twice.

When it comes to double-entry bookkeeping, the key formula for the balance sheet (Assets = Liabilities +
Equity) plays a major role.

In order to adjust the balance of accounts in the bookkeeping world, you use a combination of debits and
credits. You may think of a debit as a subtraction because you’ve found that debits usually mean a decrease
in your bank balance. And, you’ve probably found unexpected credits in your bank or credit card account
that mean more money has been added in your favor. Now forget what you’ve learned about debits or
credits. In bookkeeping, their meanings aren’t so simple.

The only definite thing when it comes to debits and credits in the bookkeeping world is that a debit is on
the left side of a transaction and a credit is on the right side of a transaction.

Transaction #1: Purchasing an item with cash

Here’s an example of the practice in action. Suppose you purchase a new desk that costs $1,500 for your
office. This transaction actually has two parts: You spend an asset — cash — to buy another asset —
furniture. So, you must adjust two accounts in your company’s books: the Cash account and the Furniture
account. Here’s what the transaction looks like in a bookkeeping entry:

Page 136 of 167

Purchasing a New Office Desk

Account Debit Credit

Furniture $1,500

Cash $1,500

In this transaction, you record the accounts impacted by the transaction. The debit increases the value of the
Furniture account, and the credit decreases the value of the Cash account. For this transaction, both
accounts impacted are asset accounts, so, looking at how the balance sheet is affected, you can see that the
only changes are to the asset side of the balance sheet equation:

Assets = Liabilities + Equity

Furniture increase = No change to this side of the equation

Cash decrease

In this case, the books stay in balance because the exact dollar amount that increases the value of your
Furniture account decreases the value of your Cash account. At the bottom of any journal entry, you should
include a brief description that explains the purpose for the entry.

Transaction #2: Purchasing items on credit

To show you how you record a transaction if it impacts both sides of the balance sheet equation, here’s an
example that shows how to record the purchase of inventory. Suppose that you purchase $5,000 worth of
widgets on credit.

These new widgets add value to your Inventory Asset account and they also add to your Accounts Payable
account. (Remember, the Accounts Payable account is a Liability account where you track bills that need to
be paid at some point in the future.) Here’s how the bookkeeping transaction for your widget purchase
looks:

Purchasing Widgets for Sale to Customers

Account Debit Credit

Inventory $5,000

Accounts Payable $5,000

Here’s how this transaction affects the balance sheet equation:

Assets = Liabilities + Equity

Inventory increases = Accounts Payable increases + No change

Page 137 of 167
In this case, the books stay in balance because both sides of the equation increase by $5,000.

You can see from the two example transactions how double-entry bookkeeping helps to keep your books in
balance — as long as you make sure each entry into the books is balanced. Balancing your entries may look
simple here, but sometimes bookkeeping entries can get very complex when more than two accounts are
impacted by the transaction.

The Basic Accounting Equation:

There is another viewpoint one can take of the basic accounting equation and what is known as the five
elements of accounting...

Have you ever heard of the terms financing and investing?

Financing is the act of getting money. Financing means where you get your money from. Financing is the
source of money.

Investing is the spending of money.

But to spend money one would need to have it first. Thus one would always need financing to occur first
before engaging in any investing activities.

Financing can be obtained from the owner or from a lender (such as the bank). Financing can also be
obtained internally from the profit you make.

One can spend money on (invest in) things that provide only immediate benefits, or in things that provide
continuing benefits into the future.

How do the above statements relate to the accounting equation?

Well, the elements on the right side show where money comes from. These are the sources of finance.
Equity and liabilities are external sources of finance. Income is the business itself creating finance for
more assets.

The two items that increase on the left side show what has been invested in. One can invest in items
that provide immediate benefits (expenses) or future benefits (assets).

The telephone bill for January (for example) is an expense as the benefits for that month have been
immediately consumed and there will be no more benefits arising from the January phone bill in future.
(the telephone bill for February is a separate expense that will be paid later and that will provide benefits
specifically for February.)

Page 138 of 167

In contrast to this, a delivery vehicle purchased in January is an asset as it will provide benefits for the
business well beyond January.

Debits and Credits:

What They Really Mean

The diagram above shows what is known as the five elements of accounting: assets, liabilities, owners
equity, income and expenses.

It also summarizes what side each of these five elements occur or increase on.

The side that assets, liabilities and the owner’s equity occur or increase on is the same as where we've
shown them so far in our original accounting equation.

We then looked at how income and expenses relate to the owner’s equity, and accordingly worked out what
sides they occur or increase on.

So now we know what side they each occur or increase on. Along the same line of thinking, these five
elements decrease on the opposite side to that side where they increase.

Thus an asset or expense decreases on the right side.

The owner’s equity, liabilities or income decrease on the left side.

This is simply the opposite of what we just did above.

Page 139 of 167

Here is a summary of all elements, increasing and decreasing:

The following two terms are the most misunderstood in the whole subject of accounting:

DEBIT

...means left or left side or making an entry on the left side.

CREDIT

...means right or right side or making an entry on the right side.

Debit does not mean less money, more money, more owing, less owing, or anything else. It means left
or left side or making an entry on the left side.

Credit does not mean less money, more money, more owing, less owing, or anything else. When using
it in its "debit and credit" sense, it means right or right side or making an entry on the right side.

So next time you are driving, when you indicate to turn left, repeat to yourself: debit, debit, debit. When
you make a right turn repeat to yourself: credit, credit, credit.

Any time you record any entry on the left side, such as when an asset increases or when a liability
decreases, you are debiting the asset or liability.
Page 140 of 167
Any time you record any entry on the right side, such as when income occurs or when an asset
decreases, you are crediting the income or asset.

General ledger

A general ledger is the master set of accounts that summarize all transactions occurring within an entity.
The general ledger contains all of the accounts currently being used in a chart of accounts, and is sorted by
account number. Either individual transactions or summary-level postings from subsidiary-level ledgers are
listed within each account number, sorted by transaction date.

A general ledger contains all the accounts for recording transactions relating to a company's assets,
liabilities, owners' equity, revenue, and expenses. In modern accounting software or ERP, the general
ledger works as a central repository for accounting data transferred from all subledgers or modules like
accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. The
general ledger is the backbone of any accounting system which holds financial and non-financial data for
an organization. The collection of all accounts is known as ledger account. This may be a large book.

The statement of financial position and the statement of income and comprehensive income are both
derived from the general ledger. Each account in the general ledger consists of one or more pages. The
general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as
credits (right side), and amounts as debits (left side), in the pages of the general ledger. Additional columns
to the right hold a running activity total (similar to a checkbook).

The listing of the account names is called the chart of accounts. The extraction of account balances is called
a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement
preparation process, to ensure the equality of the total debits and credits.

The general ledger should include the date, description and balance or total amount for each account. It is
usually divided into at least seven main categories. These categories generally include assets, liabilities,
owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be
further subdivided into subledgers to include additional details of such accounts as cash, accounts
receivable, accounts payable, etc.

Because each bookkeeping entry debits one account and credits another account in an equal amount, the
double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus
maintaining the accounting equation:

General Ledger Overview

Each entry in the general ledger includes a reference number that states the source of the information.The
source may be a subsidiary ledger, such as the sales journal or cash disbursements journal, or it may be a
journal entry.

It is extremely easy to locate information pertinent to an accounting inquiry in the general ledger, which
makes it the primary source of accounting information. For example:

Page 141 of 167

  A manager reviews the balance sheet and notices that the amount of debt appears too high. The
accounting staff looks up the debt account in the general ledger and sees that a loan was added at
the end of the month.
 A manager reviews the income statement and sees that the bad debt expense for his division is very
high. The accounting staff looks up the expense in the general ledger, drills down to the source
journal entry, and sees that a new bad debt projection system was the cause of the increase in bad
debt expense.

As the examples show, the source of an inquiry is frequently the financial statements; when conducting an
investigation, the accounting staff begins with the general ledger, and may drill down to source documents
from there to ascertain the reason(s) for an issue.

General Ledger Example

An entry in the general ledger may come from a variety of sources and in different formats, but the most
basic transaction source is the journal entry, which is created in a simple debit and credit format. For
example, if you were to create a journal entry to record depreciation, it might look like this:

J/E number 174, 6/30/x1 Debit Credit

Depreciation expense (account 7410) 15,000
Accumulated depreciation (account 1510) 15,000
To record depreciation for the month ended 6/30/x1

The information would then appear in the general ledger in two places, in the accumulated depreciation
account and the depreciation expense account. For example, the entry would appear in the accumulated
depreciation account in the general ledger in a format similar to the following:

Account 1510 - Accumulated Depreciation

Date Source Debit Credit
5/31/x1 Ending balance 1,419,000
6/30/x1 J/E 174 15,000
Ending balance 1,434,000

There may also be a "balance" column on the far right side of the general ledger, which lists a running total
of the balance in each account.

This is only a sample general ledger format; there are many variations on the layout presented here.

Page 142 of 167

What Is The Sales Day Book?

The sales day book is a manually-maintained ledger in which is recorded the key detailed information for
each individual credit sale to a customer. This information is usually added to the sales day book at the end
of each business day, based on the company's copies of all customer invoices issued.

The daily total of the sales listed in the sales day book is then transferred into the sales ledger. Thus, the
most detailed recordation of credit sales is the sales day book, with only daily totals of credit sales
appearing in the sales ledger.

The sales day book is only used in manual accounting systems. It is not used in computerized accounting
systems, since accounting software automatically stores and aggregates all customer invoices prepared
through the computer system; there is no need to prepare a sales day book.

The sales day book is also knows as the sales book.

The sales daybook

In many businesses most of the sales will be made on credit rather than for immediate settlement of the
amount. For some businesses all sales will consist entirely of credit sales, while for some other firms, all
will be for cash settlement. It is realistic to expect most firms to have some cash and some credit sales. All
credit sales should be entered into the sales daybook.

The source document for the sales daybook is the sales invoice. A sales invoice is simply a business
document containing all the details of the sale made. The business will keep a copy and will send another
copy of the invoice to the customer. Details contained on the invoice would include:

 Name of customer
 Address of customer
 Date of sale
 Value of sales
 Any trade discount
 Any cash discount - and details of the conditions
 Invoice number

Trade discounts

Firms may have different types of customers. Some firms will offer further discounts to either regular
customers or to other firms.

This type of discount is known as a trade discount. There is no double entry for trade discounts. The trade
discount may be referred to on the sales invoice, but it should not show up in either the sales daybook or
the ledger accounts. To compare with cash discounts:

Trade discounts: are not shown in double entry accounts.

Cash discounts: are shown in double entry accounts.

Page 143 of 167

When calculating the actual amount that needs to be paid or is expected to be received it is vital that the
discounts are dealt with in the correct order. The correct procedure is to deduct the trade discount first
before calculating the cash discount - do not simply add the discounts together then calculate them!

Making entries in the sales journal

From the sales invoice the firm will enter the value of the sales (after deduction of any trade discount but
before any cash discount) and other relevant information into the sales daybook. If we use the above
example of an invoice as the first entry and then include some more credit sales, the sales daybook for the
month of January 2002 would appear as follows:

Also, the above example does not have a folio column. If this was the case then each entry in the sales book
would have a reference as to where the account would be found. For example, by the entry for D Atkinson
on January 1st, the reference could say, 'SL24'. This means that D Atkinson's account would be on page 24
of the sales ledger. By the total figure for the month could be something like 'GL3', which means that the
total is transferred to the sales account, found in the general ledger on page .

In the ledger accounts each account mentioned above would have the reference 'SB 2' - that they were
original entered on page 2 of the sales daybook.

Posting from the daybook to the ledger

Credit sales are posted to the debit side of each customer's account in the sales ledger and at the end of each
period the total of the credit sales is posted to the credit of the sales account in the general ledger.

Effect on sales ledger:

D Atkinson

2002 - £ 2002 - £

Jan 1 Sales 816 - - -

C Reynolds

2002 - £ 2002 - £

Jan 3 Sales 1,640 - - -

Each of these items is posted (transferred from the daybook to the personal account) when the sale occurs.
However, at the end of the month, it is the total for the month that is transferred from the daybook to the
sales account in the general ledger.

Effect on general ledger:

Page 144 of 167

 Sales

2002 - £ 2002 - £

- - - Jan 31 Total credit sales for month 3,776

By doing it this way, we save cluttering up the sales account with lots of entries. The customer accounts
will remain with each individual entry posted to them when it occurs.

Purchases

Purchase is the cost of buying inventory during a period for the purpose of sale in the ordinary course of the
business. It is therefore a kind of expense and is hence included in the income statement within the cost of
goods sold. Purchases may include buying of raw materials in the case of a manufacturing concern or
finished goods in the case of a retail business.

However, in accounting, we have to differentiate between purchases as explained above and other
purchases such as those involving the procurement of a fixed assets (e.g. factory machine or building).
Such purchases are capitalized in the statement of financial position of the entity (i.e. recognized as assets
of the entity) rather than being expensed in the income statement.

Accounting for Purchases

As purchase results in increase in the expense and decrease in assets of the entity, expense must be debited
while assets must be credited. A purchase also results in increase in inventory, however the accounting for
inventory is kept separate from accounting for purchase as will be further discussed in the inventory
accounting section.

A purchase may be made on Cash or on Credit.

Cash Purchase

When a cash purchase is made, the following double entry is recorded:

Debit Purchases (Income Statement)

Credit Cash

Purchase is debited to account for the increase in expense.

Cash is credited to account for the decrease in cash of the entity..

Credit Purchase

In case of a credit purchase, the following double entry is recorded:

Page 145 of 167
Debit Purchases (Income Statement)

Credit Payable

The double entry is same as in the case of a cash purchase, except that the credit entry is made in the
payable ledger rather than the cash ledger.

When the payable is paid his due, the payable balance will be reduced to nil. The following double entry is
recorded:

Debit Payable

Credit Cash

Recognition of Purchases

It may be confusing to identify the point when a purchase occurs. Do we recognize purchase when the
goods are dispatched by the supplier, when we receive the goods, or when we pay supplier in respect of
those goods? In case of purchase of goods, purchase is generally said to occur when the seller transfers the
risks and rewards pertaining to the asset sold to the buyer. This generally happens when buyer has received
the asset. The payment to supplier is not relevant to when purchase is recognized since expenses are
recorded under the accruals basis.

In any organisation where company buys and sells the goods on credit, at that organisation, we need to
divide journal into subsidiary books. One of these subsidiary books is purchase book. In purchase book, we
record all transactions relating to credit purchases of goods only and these goods are trading goods.
Company deals in these goods and products. In this book, accountant does not record cash purchases and
purchase of assets in which company does not deal. Suppose shop of furniture's product is furniture and its
credit purchase will be recorded in purchase book. Its other name is bought book, purchase journal and
purchase day book. This book is maintained on the basis of invoice. Accountant records quantity of
products, rate and amount from invoice. Each transaction is recorded by giving invoice no.

Page 146 of 167

Posting of Purchase Book
To fulfill double entry system, purchase book will be posted two accounts. One account will be purchase
account and other account will be creditor's account. In purchase account, we will write total of purchases
on credit basis. We also open the creditors accounts by writing the name of creditor. Suppose, we have
purchased goods on credit from madan lal. In madan lal account's credit side, we will write by purchases
and will show Rs. 200. Like this, we open all creditor's account.

Advantages of Purchase Book

1. With this book, we can find, how much goods have been bought by us?
2. It also tells us, how much many has to whom?
3. This book is also helpful to make final accounts.

Returns daybooks

Page 147 of 167

The customer can return goods sold to the original supplier. This can be viewed from firm's perspective as
both a customer and a supplier. Sales returned will be treated as returns inwards and purchases returned
will be treated as returns outwards.

Each type of returns has its own daybook - one for returns inwards and one for returns outwards.

Returns inwards

If a customer is unhappy with the goods received then they may return them to the firm. This does not
happen automatically but returns inwards are a common feature of business transactions (if they were not
then why would we bother with a full daybook solely for each type of returns?). If a firm agrees to accept
returns inwards (i.e. customer sending goods back) then the source document used as the basis of recording
this transaction is the credit note. The credit note is sent by the firm to the customer who has been allowed
to return the goods. The credit note takes its name from the fact that because the firm has agreed to accept
returns inwards, we will credit that customer's personal account (thus reducing the debtor balance on that
account). A credit note would appear similar to the sale invoice and would mainly contain details of the
goods to be returned, and the value of these goods as recorded in the account when the sale was originally
made. The credit notes may appear as follows - they may appear in red to avoid confusion with sales and
purchases invoices:

Returns inwards journal

The information from the credit notes will be used as the basis for filling out the returns inwards daybook.
When posting entries from the returns inwards daybook, we should post each individual entry to the credit
side of the personal account of each customer (found in the sales ledger). The total for the monthly returns
inwards will be posted to the debit side of the return inwards account in the general ledger. This is
completed for the above example below:

Effect on sales ledger:

S Hopkinson

2002 - £ 2002 - £

- - - Mar 3 Returns inwards 225

M Skipsey

2002 - £ 2002 - £

- - - Mar 7 Returns inwards 90

Effect on general ledger:

Page 148 of 167

 Returns inwards

2002 - £ 2002 - £

Mar 31 Total returns inwards for month 770 - - -

Returns outwards

Goods returns by the firm to the original supplier are known as returns outwards. The source document
used is the debit note. The firm will send a debit note back to the original supplier which will give details of
the goods being returned and the reason(s) for their return. An example of a debit note appears below:

To: A Powell

58 Oxford Road

Sheffield

S6 5TU

G Thompson 6 April 2002

29 Swann Road
-
Manchester

M12 5RE

DEBIT NOTE 143 - -

- Per Unit Total

- £ £

4 sheets of fibre glass - incorrect specifications 50 200

Less 20% Trade Discount - 40

- - 160

Page 149 of 167

Returns outwards journal

The debit notes sent to the original suppliers are used as the basis for completion of the firm's returns
outwards daybook.

When posting entries from the returns outwards daybook, we will post each individual entry to the debit
side of the personal account of each supplier we are retuning goods to (found in purchases ledger). The
total returns outwards of the month would be then posted to the credit side of the returns outwards account
in the general ledger.

Effect on purchases ledger:

G Thompson

2002 - £ 2002 - £

Apr 6 Returns outwards 160 - - -

S Cracknell

2002 - £ 2002 - £

Apr 17 Returns outwards 55 - - -

Effect on general ledger:

Returns outwards

2002 - £ 2002 - £

Apr 30 Total returns outwards for month 425 - - -

Sales Returns

Sales returns, or returns inwards, are a normal part of business. Goods may be returned to supplier if they
carry defects or if they are not according to the specifications of the buyer.

Accounting for Sales Returns

There is need to account for sale returns as though no sale had occurred in the first place.

Hence, the value of goods returned must be deducted from the sale revenue.

Page 150 of 167

If sale was initially made on credit, the receivable recognized must be reversed by the amount of sales
returned. If the sales in respect of the returns were made for cash, then a payable must be recognized to
acknowledge the liability to reimburse the customer the amount he had paid for those purchases.

Sales Return - Credit Sale

In case of credit sale, the following double entry must be made upon sales returns:

Debit Sales Return (decrease in income)

Credit Receivable (decrease in asset)

Example:

Bike LTD sells a mountain bike to XYZ for $100 on credit. XYZ later returns the bike to Bike LTD due to
a serious defect in the design of the bike.

The initial sale will be recorded as follows:

$ $

Debit XYZ (Receivable) 100

Credit Sales 100

Upon the return of bike, the following double entry will be passed:

$ $

Debit Sales Return 100

Credit XYZ (Receivable) 100

No further entry will be required as the receivable due from XYZ has been reversed.

Sales Returns - Cash Sales

In case of cash sale, the following double entry must be made upon sales returns:

Debit Sales Return (decrease in income)

Credit Payable (increase in liability)

Page 151 of 167

Example:

Bike LTD sells a mountain bike to XYZ for $100 on cash. XYZ later returns the bike to Bike LTD due to a
serious defect in the design of the bike.

The initial sale will be recorded as follows:

$ $

Debit Cash 100

Credit Sales 100

Upon the return of bike, the following double entry will be passed:

$ $

Debit Sales Return 100

Credit XYZ (Payable) 100

When Bike LTD will pay XYZ $100 in respect of the sales return, the following double entry will be
recorded:

$ $

Debit XYZ (Payable) 100

Credit Cash 100

Purchase return journal or purchase return day book

When we purchase goods for the purpose the reselling them, it’s likely that some of the goods would be
defective and therefore, we return these defective goods to supplier. When we return goods to supplier, we
record these purchases return in purchase return journal

Purchase return journal is used to record the entries or transactions for purchases return

Simple double entry for credit purchase

Debit--> Creditor-Supplier’s name/description

Credit-->Purchases return or return outward

Page 152 of 167

What Is A Profit And Loss Statement?

A profit and loss statement reveals the financial results of a business. The statement (or P&L) contains the
revenues, expenses, gains, losses, and net profit or loss of a business for a specific period of time, such as
for a month, quarter, or year. If it is being reported by a publicly held company, the P&L also includes both
basic and diluted earnings per share information. The document is identical to an income statement.

The profit and loss statement is considered by many to be the most crucial of the financial statements, for it
reveals the ability of the reporting business to generate a profit. The statement is particularly useful when
viewed on a trend line, to see how an organization is faring over time.

The general format of the profit and loss statement, as presented from top to bottom, is as follows:

 Gross revenues
 Sales returns and allowances
 Net revenues
 Cost of goods sold
 Selling, general and administrative expenses
 Operating profit
 Income taxes
 Net profit

The outcome of a P&L can vary, depending on whether a business is using the cash basis or accrual basis
of accounting. These different methods can be impacted by the timing of cash flows entering and departing
a business.

The P&L is part of the financial statements, which are also comprised of the balance sheet and the
statement of cash flows. A more comprehensive view of the P&L is provided in the income statement
overview article.

The easiest way to create a profit and loss statement is to print it directly from the company's accounting
software package. If the books are being kept manually, then it is necessary to first create the trial balance
report, then extract the line items from that report pertaining to the income statement, and then aggregate
this information into the proper format for the statement.

Trading Profit

Definition: The phrase trading profit has two definitions. They are as follows:

 Investments. The earnings achieved by someone who invests in short-term securities. Because of the
short (less than one year) holding period of these investments, trading profits are taxed at the higher
ordinary income tax rate, rather than the lower long-term capital gains rate that is allowed for
investments that someone has held for at least one year.

For example, a day trader buys securities for $1,000 and sells them a few hours later for $1,025, resulting in
a trading profit of $25.

 Operations. Trading profit is equivalent to earnings from operations. Thus, it does not include any
financing-related income or expenses, nor does it include any extraordinary gains or losses, or gains

Page 153 of 167

 or losses on the sale of assets. This is a good indicator of the ability of the core operations of a
business to generate a profit.

For example, ABC International has revenues of $1,000,000, cost of goods sold of $650,000, selling and
administrative expenses of $250,000, interest expense of $75,000, and a gain on the sale of assets of
$10,000. The trading profit for ABC excludes the interest expense and gain on asset sale, resulting in a
trading profit of $100,000.

Similar Terms

In regard to the operational form of trading profits noted above, trading profit also known as operating
income.

Trading and Profit and Loss Accounts

The main objective of businesses is referred to as profit maximization, whereby the managers or owners of
the firm will aim to make as much profit as is possible. The calculation of these profits is one of the most
important functions of accounting. The owner will wish to know the profit for various reasons, such as:

 Comparing performance - with other firms or with previous periods of time to see if the firm is
moving in the appropriate direction
 Planning ahead - profits will allow the firm to expand
 Obtaining a loan - most bank managers and other lenders would want to see that the firm is
profitable before lending money
 Income tax purposes - tax payable will usually be based on the profits earned by the firm

The calculation of profit will involve the calculation of both revenue and expenses incurred by the firm
over a period of time. In the case of the sole trader, the profit for a firm is calculated in an account known
as the trading and profit and loss account.

For a trading organisation it is not only the final profit figure that is important. Managers and owners will
also want to know how the profit is made on the actual sales that take place before other general expenses
are deducted. So this can be seen, the overall trading and profit and loss account is split into two sections;
the trading account, which calculates gross profit and the profit and loss account, which calculates net
profit.

 Trading account - to calculate gross profit (the profit earned on the buying and selling of goods -
before all other expenses have been deducted)
 Profit and loss account - to calculate net profit (the profit after all overhead expenses have been
deducted from the gross profit - this is the overall profit earned by the firm)

It is possible that the firm may make a gross loss, where the cost of purchases is greater than the sales
revenue, but this is unusual. More likely, a firm may make a gross profit, but may find that the other
expenses are greater than the gross profit and the firm has made a net loss.

You will find that most questions will be concerned with firms that buy and sell goods. In reality, many
firms will not sell physical goods, and that they will provide services. In this case, the firm would only need
a profit and loss account rather than a full trading and profit and loss account.

Page 154 of 167

We will consider firms that actually make their own goods later in Module 3 (manufacturing accounts). To
construct a trading and profit and loss account we will need to use information from the firm's trial balance.
In this example, we will use the following trial balance:

In the double entry accounts we have no single account for stock. The value for closing stock would have
to be calculated by taking an actual stock count. As stated in the section on trial balances, any stock which
remains unsold (closing stock) will be listed underneath the trial balance.

Trading account

In the trading account we calculate the firm's gross profit. To calculate the gross profit we use the following
calculation

Sales - cost of goods sold = gross profit

The cost of goods sold is simply the cost to the firm for those goods that were actually sold. The total cost
of purchases would be the cost of the goods sold. However, if any stock were unsold at the end of the year
then we would not count this, as it has not contributed towards the value of sales. Hence, cost of sales:

What we bought during the period Purchases

Less: Goods bought but not sold during the period Closing stock

= Cost of goods sold

From our example, closing stock at the close of business (i.e. 31 December 2003) was valued at £300. The
cost of goods sold for D Ball will therefore be:

- £

Purchases 4000

Closing stock 300

Cost of goods sold 3700

To transfer balances from the double entry accounts we 'close down' the ledger account and transfer all that
was paid or received during the year to the trading and profit and loss account. In effect we are 'emptying
out' the relevant accounts for the year and we will start filling them, up in next year.

The double entry accounts will have already been balanced off and their balances will have been brought
down for us to close off.

For sales, we should make the following entries:

Page 155 of 167

  Debit the sales account, thus closing it.
 Credit the trading account.

Sales

2003 - £ 2003 - £

Dec 31 Trading account 6,000 Dec 31 Balance b/d 6,000

The balance of the purchases is transferred to the trading account by:

 Debit the trading account.

 Credit the purchases account.

Purchases

2003 - £ 2003 - £

Dec 31 Balance b/d 4,000 Dec 31 Trading account 4,000

Although there is no double entry account for stock left unsold at the end of the period we actually now
create one. The value of closing stock is found by a physical count on the quantity of stock - a process
known as stocktaking.

 Debit the stock account with the value of closing stock.

 Credit the trading account.

Stock

2000 - £ 1995 - £

Dec 31 Trading 300 - - -

It is usual for the trading and profit and loss accounts to be shown under one heading. The trading account
is the top section and the profit and loss account is the lower section.

It is possible to present the trading account and the profit and loss account as double entry accounts.

This would be known as the horizontal presentation. However the practice is fast becoming outdated and
now nearly every trading and profit and loss account you will see will be presented in the vertical manner.

Page 156 of 167

Remember the rules for the titles of financial statements. It should say who it is for, what it is, and for what
period of time we are dealing with. Both the trading account and the profit and loss account are drawn up
for a period of time and not on a particular date. This is because the profit can only be earned over a period
of time.

D Ball - Trading Account for year ended 31 December 2003

- £ £

Sales - 6000

Less Cost of goods sold: - -

Purchases 4000 -

Less Closing stock 300 3700

Gross Profit - 2300

Notice how we use both columns, not as debits and credits but for performing sub-totals. Sometimes there
will be two, three or even four columns. There are no formal rules as to how many columns you should use.
As long as it is presented well then that is fine. In this case, the subtotal for purchases less closing stock is
carried over into the right hand column.

Profit and loss account

The profit and loss account can now be drawn up. This is where we use all the other balances for types of
income and other expenses that are not connected directly with the buying and selling of goods.

For most firms, there will be only one or two other forms of income. In our example, the only other form of
income is the entry for discounts received. This, and other forms of income would be directly added on to
the gross profit. All the other expenses (known as overhead expenses) will be listed in one column, then
totalled up, and then deducted from the total income for the firm to give us the overall net profit.

As before, we will have to transfer the totals form each account by closing the account down for the year.
This is done below:

Insurance

2003 - £ 2003 - £

Dec 31 Balance b/d 650 Dec 31 Profit and loss 650

Page 157 of 167

 Lighting and heating

2003 - £ 2003 - £

Dec 31 Balance b/d 450 Dec 31 Profit and loss 450

General expenses

2003 - £ 2003 - £

Dec 31 Balance b/d 120 Dec 31 Profit and loss 120

Discounts allowed

2003 - £ 2003 - £

Dec 31 Balance b/d 130 Dec 31 Profit and loss 130

Discounts received

2003 - £ 2003 - £

Dec 31 Profit and loss 110 Dec 31 Balance b/d 110

Although machinery was purchased during the year and is a sort of expense it should not be transferred to
the profit and loss account. This is because the purchase of machinery is known as an item of capital
expenditure that means that it is not 'used up' completely in this single year and therefore it would be
inappropriate to transfer the value of this expense in the profit and loss account. We will see how we deal
with this later in module 3.

All the other balances relate to balances on asset, capital and liability accounts. These are not to be used
here as they will be used later on when we construct the balance sheet for the firm.

The full trading and profit and loss account will appear as follows:

D Ball - Trading Account for year ended 31 December 2003

- £ £

Sales - 6000

Page 158 of 167

Less Cost of goods sold: - -

Purchases 4000 -

Less Closing stock 300 3700

Gross Profit - 2300

Add Discount received - 110

Less Expenses: - 2410

Insurance 650 -

Lighting & heating 450 -

General expenses 120 -

Discounts allowed 130 1350

Net profit - 1060

Note that it is common to refer to the trading and profit and loss account as just the profit and loss account.
This may be confusing initially but you will soon get used to the idea.

To summaries:

Gross profit = Sales - cost of goods sold

Net profit = Gross profit - expenses

Opening stock

So far, we have looked at a firm that has only recently begun trading. If a firm has been trading for more
than one accounting period then it is likely to have stock that remains unsold from an earlier period. This
stock is referred to as opening stock.

Opening stock is available for use and for resale, therefore we should add this on first when calculating he
cost of goods sold. Opening stock, the stock in business sat the start of the current accounting period will be
in the trial balance as a debit entry. Closing stock, however, is always outside the trial balance.

Stock in the trial balance

Page 159 of 167

Opening stock Debit entry

Closing stock As a note to trial balance

Carriage

Carriage refers to the costs of transporting goods to and from the firm. In most cases, the cost of
transporting goods to the customers will be paid for by the customers, but on some occasions this will also
be paid for by our firm. The terms used to refer to these types of transport and distribution costs are as
follows:

Carriage inwards Cost of transporting goods form the suppliers (in)to the firm

Carriage outwards Costs of transporting goods (out) of the firm to the customers

Each type of carriage will be an expense and therefore will have a debit balance in the trial balance.

However, these will appear in different sections of the trading and profit and loss account.

Carriage inwards is connected with the cost of getting goods into the firm and ready for sale. As a result, it
will be added on in the calculation for the cost of goods sold. Carriage outwards does not have anything to
do with the cost of getting goods into saleable condition. Therefore it will appear with all the other
overhead expenses and the profit and loss account.

Returns

You may remember that earlier in the section on double-entry bookkeeping (1.1.1) we dealt with the idea
that goods purchased and sold could be returned to wherever they originated. Sales could be returned back
to us as returns inwards and purchases could be returned by us to the original supplier as returns outwards.

In this case, we should make adjustments in the trading account by adjusting the purchases and sales
figures for these deductions.

When adjusting the cost of goods sold for returns inwards and carriage inwards, there is no exact rule on
which one should be adjusted first. The best advice is to decide on one method and stick to it - this way it
will help you memorise it earlier.

Carriage outwards would appear as a normal expense in the profit and loss section

You must always be careful when drawing up a trading account. Questions may include some or all of the
above adjustments. For example, returns inwards may appear without returns outwards. You should not
write down an entry for each adjustment until you have verified that it will be included.

Page 160 of 167

Illustration » Problem
To get an understanding and feel of the process of final accounting, let us go through an example of an
organizations accounting consisting of a few transactions during an accounting period.

Following are the transactions relating to M/s Trinity Foods, over an accounting period from 1st June 2005
to 30th June 2006.

 Started business with Capital Rs. 1,00,000

 Paid into Bank Rs. 10,000
 Bought Furniture and paid cash Rs. 25,000
 Bought goods for cash Rs. 50,000
 Bought goods from Ram on Credit Rs. 15,000
 Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank directly
 Sold the remaining goods on credit for Rs. 50,000 to Rahim
 Paid Salaries and Wages Rs. 5,000
 Paid rent by cheque Rs. 8,000

Illustration » Solution [Trial Balance]

The trial balance is nothing but a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Trinity Foods" as on 30th June 2005

Debit Amount Credit Amount

Particulars L/F
(in Rs) (in Rs)

Cash a/c — 10,000

Capital a/c —
Bank a/c — 77,000 1,00,000
Furniture a/c — 25,000
Purchases a/c — 65,000
Ram a/c —
Sales a/c — 15,000
Rahim a/c — 50,000 1,25,000
Salaries and Wages a/c — 5,000
Rent Paid a/c — 8,000

Total 2,40,000 2,40,000

Page 161 of 167

Preparing Trading and Profit and Loss Account : Journal & Ledger
Consider the above Trial Balance. There are a total of 4 nominal accounts with either debit or credit
balances.

 Purchases a/c [Debit Balance]

 Sales a/c [Credit Balance]
 Salaries and Wages a/c [Debit Balance]
 Rent Paid a/c [Debit Balance]

To ascertain the profit or loss made by the organisation, the balance in these accounts should be
transferred to the "Trading and Profit & Loss a/c". The journal entries for these transfers would be:

» Trading and Profit & Loss a/c

The "Trading and Profit & Loss a/c" would be

Dr Trading and Profit & Loss a/c Cr

Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)

30/06/05 To Purchases a/c – 65,000 30/06/05 By Sales a/c – 1,25,000

" To Salaries & Wages a/c – 5,000
" To Rent Paid a/c – 8,000

sub-total 78,000 sub-total 1,25,000

30/06/05 To Bal (Profit) – 47,000

Total 1,25,000 Total 1,25,000

Since the credit side total is greater, the account has a credit balance. Since a credit balance in a nominal
account indicates a gain, we can say that there is a profit.

Trial Balance Redrawn/Remade

The trial balance is a list of ledger account balances at an instance when it is drawn. If we consider the
instance after having prepared the "Trading and Profit & Loss a/c", we do not find a balance in any
nominal account. All the nominal accounts are closed by transfer to the "Trading and Profit & Loss a/c",
thereby leaving a nil balance in all of them.

The "Trading and Profit & Loss a/c" is also a nominal account and has a credit balance if there is a profit
and a debit balance if there is a loss. If we make a trial balance after having prepared the "Trading and

Page 162 of 167

Profit & Loss a/c" we will find only real and personal accounts in it apart from the nominal account
"Trading and Profit & Loss a/c".

Trial Balance of M/s Trinity Foods" as on 30th June 2005

[After closing Nominal accounts]

Debit Amount Credit Amount

Particulars L/F
(in Rs) (in Rs)

Cash a/c — 10,000

Capital a/c — 1,00,000
Bank a/c — 77,000
Furniture a/c — 25,000
Ram a/c — 15,000
Rahim a/c — 50,000
Trading and Profit & Loss a/c — 47,000

Total 1,62,000 1,62,000

Introduction to Balance Sheet

The accounting balance sheet is one of the major financial statements used by accountants and business
owners. (The other major financial statements are the income statement, statement of cash flows, and
statement of stockholders' equity) The balance sheet is also referred to as the statement of financial
position.

The balance sheet presents a company's financial position at the end of a specified date. Some describe the
balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in
time. For example, the amounts reported on a balance sheet dated December 31, 2012 reflect that instant
when all the transactions through December 31 have been recorded.

The Balance Sheet

A balance sheet is used to inform a reader of the ending balances in a company's asset, liability, and equity
accounts as of the date stated on the report. The information listed on the report must match the following
formula:

Total assets = Total liabilities + Equity

The most common use of the balance sheet is as the basis for ratio analysis, to determine the liquidity of a
business. Liquidity is essentially the ability to pay one's debts in a timely manner.

Page 163 of 167

The balance sheet is one of the key elements in the financial statements, of which the other documents are
the income statement and the statement of cash flows.

The format of the balance sheet is not mandated by accounting standards, but rather by customary usage.
The two most common formats are the vertical balance sheet (where all line items are presented down the
left side of the page) and the horizontal balance sheet (where asset line items are listed down the first
column and liabilities and equity line items are listed in a later column). The vertical format is easier to use
when information is being presented for multiple periods.

The line items to be included in the balance sheet are up to the issuing entity, though common practice
typically includes some or all of the following items:

Current Assets:

 Cash and cash equivalents

 Trade and other receivables
 Investments
 Inventories
 Assets held for sale

Non-Current Assets:

 Property, plant, and equipment

 Intangible assets
 Goodwill

Current Liabilities:

 Trade and other payables

 Accrued expenses
 Current tax liabilities
 Current portion of loans payable
 Other financial liabilities
 Liabilities held for sale

Non-Current Liabilities:

 Loans payable
 Deferred tax liabilities
 Other non-current liabilities

Equity:

 Capital stock
 Additional paid-in capital
 Retained earnings

Here is an example of a balance sheet:

Page 164 of 167

 Domicilio Corporation
Balance Sheet

(000s) as of 12/31/x2 as of 12/31/x1

ASSETS
Current assets
Cash and cash equivalents $135,000 $110,000
Trade receivables 70,000 62,000
Inventories 65,000 58,000
Other current assets 8,000 31,000
Total current assets 278,000 261,000

Non-current assets
Property, plant, and equipment 275,000 260,000
Goodwill 40,000 40,000
Other intangible assets 72,000 70,000
Total non-current assets 387,000 370,000

Total assets $665,000 $631,000

LIABILITIES AND EQUITY

Current liabilities
Trade and other payables $105,000 $100,000
Short-term borrowings 50,000 90,000
Current portion of long-term borrowings 7,000 6,000
Current tax payable 21,000 14,000
Accrued expenses 5,000 3,000
Total current liabilities 188,000 213,000

Non-current liabilities

Page 165 of 167

 Long-term debt 40,000 35,000
Deferred taxes 29,000 21,000
Total non-current liabilities 69,000 56,000

Total liabilities 257,000 269,000

Shareholders’ Equity
Capital $150,000 $150,000
Additional paid-in capital 30,000 30,000
Retained earnings 228,000 182,000
Total equity 408,000 362,000

Total liabilities and equity $665,000 $631,000

Within the balance sheet, the following should be classified as current assets:

 Cash. This includes all liquid, short-term investments that are easily convertible into cash. Do not
include in current assets cash that is restricted, or to be used to pay down a long-term liability.
 Marketable securities. This includes all securities that are held for trading.
 Accounts receivable. This includes all trade receivables, as well as all other types of receivables that
should be collected within one year.
 Prepaid expenses. This includes any prepayment that is expected to be used within one year.
 Inventory. This includes all raw materials, work in process, and finished goods items, less an
obsolescence reserve.

In general, any asset is classified as a current asset when there is a reasonable expectation that the asset will
be consumed within the next year, or within the operating cycle of the business. All other assets are to be
classified as non-current.

Within the balance sheet, the following should be classified as current liabilities:

 Payables. This is all trade payables related to the purchase of goods or services from suppliers.
 Accrued expenses. This is expenses incurred by the business, for which no supplier invoice has yet
been received.
 Short-term debt. This is loans for which payment is due within the next year.
 Unearned revenue. This is advance payments from customers that have not yet been earned by the
company.

Page 166 of 167

In general, a liability is classified as current when there is a reasonable expectation that the liability will
come due within the next year, or within the operating cycle of the business. All other liabilities are to be
classified as non-current.

Page 167 of 167