Contract Model 1; Rights and Obligation
Just to gear you up for the next few entries I will lay some basic Models to help you comprehend the information in a much structure way. The first model will be rights and obligations in the contract. This is a very basic model to “think about” when reading contracts. Models, in general, will give you a way to breakdown and structure information that you process. For example, when I wrote about procurement a couple of months ago I provided you the RIBA plan of work as a Model to introduce you to procurement. It makes it easier to process as you can see a bigger picture
In this entry, I will cover a very basic model that will help you understand rights and obligations in contracts and contractual mechanisms (novation, assignment, collateral warranties, etc..) much better.
A contract is an agreement between the named parties. The contract will, of course, have many terms implied and expressed. Most clauses will have descriptive terms, but you will notice that the “actionable” clauses are split in two; rights & obligations. If you start to look out for these when reading contracts, it’ll give you a better structure to comprehend and apply the terms. This is something I’ve picked up when reading contracts.
I won’t go into the finest detail of what they are but think about it this way; a right is giving you permission to do something, but you’re not obligated to do it and if you don’t, you miss out on something. An obligation is something that you or someone else must do and if it is not undertaken it becomes a breach.
A point to consider with rights is that if you don’t use them, you lose them. For example, if you are a subcontractor and you have an expressed right to suspend your works by issuing a seven-day notice under the housing grants etc… act for none payment and walk off site – you are now in breach.
Another example is if you have the expressed right to raise a variation request within 21 days of identifying the event, and you don’t raise it you lose the right to claim money for it.
A good way to spot clauses giving your “rights” is to look out for keywords such as “may” or “could”. This is not an obligatory clause and gives the parties to the contract a choice of taking that action.
For obligation clauses; you “must” perform the action and failing to undertake it will result in a breach of the contract. For example; a contractor is obligated to deliver a project on a specific date agreed in the contract. If the contractor fails to deliver the works by the date, they are in breach, and they are liable for any damages suffered by the client. Of course, you can limit it by having a Liquidated Ascertained Damage term agreed in the contract, but if nothing is limiting the damages, you’re fully liable for the cost.
The breach will allow the other party to set off the cost and may potentially not pay you for that particular work.
Another example is where the terms state that the contractor must comply with any instruction of the contract administrator. This means that the contractor must comply with the instruction, failing will result in a breach.
With obligations, the performance under the contract must be undertaken. You can spot these by looking at keywords such as “must” or “comply”.
Try it out
Maybe next time when you read a contract try to spot the clauses giving right or obligations on a party. Once you spot them, try to categorise it and see who the rights and obligations belong to. This will make your life easier when you are trying to understand contracts.
Did you enjoy this? Please let me know in the comments. I’d also love to hear what you guys think about my entries.