Project Management Problems

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In answering the below questions you are to provide a brief analysis of the position at law, backed with citations of the relevant legal provisions, case-law and commentary. Address the points telegraphically in such a manner as to show that you have understood the principles that come into play and regulate the situation being described.

  1. Project Manager is approached by a client who would like to contract Project Manager’s services as a project manager. Project Manager would like to limit his exposure to damages in view of the fact that he will need to contract the services of various professionals to finish the job.
  1. How can he do that?

As stated in the Civil Code 960, ‘A contract is an agreement or an accord between two or more persons by which an obligation is created, regulated, or dissolved.’ This means that if the Project Manager is contracted by the Client, and in turn the Project Manager contracts third parties, the Project Manager directly will answer, in favour of the Client for the damages that are caused by those third parties that the Project would have engaged.

The primary method of minimising exposure to damages is to opt for an Indemnity insurance. This means that in case of damage, the insurance would compensate the Project Manager (or the client in question, directly). Moreover, the insurance company on payment of the indemnification, would be subrogated in the rights of its client/project manager, thereby it can turn against the party who is found to be responsible for the damages.

Alternatively, On the other hand, the Project Manager has two possible contractual agreements, each with different legal and practical implications:

  • A Contract with the client and a sub-contract with the third party professional (‘sub-contractors’). With a view to minimize the risks, the latter contract should reproduce the same risks and safeguards which would have been included in the main agreement, i.e. The agreement between the client and project manager.
  • A contract with the client for overseeing the project, where the client has a distinct contract with the third party professionals (the sub-contractors).

To limit exposure to damages, option 2 is safer, but may not be acceptable from the client’s point of view who himself would want to limit his exposure/risks. In this case, each contract would be one where, ‘the person undertaking the work shall bestow only his labour or skill, or that he shall also supply the materials.’ (Civil Code 1663). Moreover, the Project Manager would in turn be dissolved from any incompetency by the other professionals because as stated in the Civil Code 1037, ‘where a person for any work or service whatsoever employs another person who is incompetent, or whom he has not reasonable grounds to consider competent, he shall be liable for any damage which such other person may, through incompetence in the performance of such work or service, cause to others.’ In such cases, the client is considered to be a contractor, and therefore is liable ‘for the acts of the persons employed by him.’ (Civil Code 1642)

In the latter case, if a client files for damages against the Project Manager, said Project Manager may invoke the plea that he is not the one to answer for the damages of the third party sub-contractors (since he would not have contracted them) and may also call to the suit the said third parties or in turn file for damages against the sub-contractors, as stated under Article 1038 of the Civil Code ‘Any person who without the necessary skill undertakes any work or service shall be liable for any damage which, through his unskilfulness, he may cause to others.’

In the former case (where the Project Manager contracts directly with the Client), if the client files for damages against the Project Manager, the said Project Manager may not invoke the plea that he is not the one to answer for the damages of the third party sub-contractors (since he would not have contracted them). Moreover, he may arguably NOT sell to the suit the said third parties, but if found responsible (for the acts or omissions of the said third parties, which the client would have to prove anyway) then he MAY in turn file for damages against the sub-contractors, as stated under Article 1038 of the Civil Code ‘Any person who without the necessary skill undertakes any work or service shall be liable for any damage which, through his unskilfulness, he may cause to others.’

In any given case, noteworthy in the context being discussed, the principle contemplated under Article 1138 of the Civil which states that ‘Where the agreement provides that the party who fails to carry it out shall pay a certain sum by way of damages, it shall not be lawful to award to the other party a greater or lesser sum.’

  1. Does it make a difference if the client is a natural person contracting the job for his/her personal needs or if the client is a trader[SM1]? Why?

In this case, a distinction between Natural[SM2] and Legal person[SM3] has to be given. The natural person is generally a physical entity that is responsible in his own name for any omission[SM4], unless he proves that he has contracted on behalf of others. On the other hand, a legal person is one that is non-physical (like for example a company). A natural person and a legal person have the ability to either contract in their name or on behalf of others. Both parties enjoy the ability to enter into contracts. When a Project Manager is contracting with a legal person, he is contracting not with individuals but with the company itself, which enjoys a separate legal personality from its members/shareholders.

  1. Project Manager is an architect and, apart from acting as project manager, will be personally responsible for the construction/ alteration works. He would like to limit his exposure for defects as best he could.
  1. How can he do this contractually?

First and foremost, one cannot take it for granted that the Project Manager is the architect, meaning that if the Project Manager did not directly take part in the plans and construction of the project, he/she shall not be found liable on the basis of the fact that he also happens to be an architect by profession. Moreover, one has the right to even decrease contractually the 15 year time span in case of defects. Such timespan is given in the Civil Code (1638),’If a building or other considerable stone work erected under a building contract shall, in the course of fifteen years from the day on which the construction of the same was completed, perish, wholly or in part, or be in manifest danger of falling to ruin, owing to a defect in the construction, or even owing to some defect in the ground, the architect and the contractor shall be responsible therefor.’

  1. Does it make a difference if the client is a natural person acting in his/her personal capacity or a trader?

As previously mentioned, a natural person is generally a physical entity that is responsible in his own name, unless he proves that he has contracted on behalf of others. On the other hand, a legal person (trader)[Di5] is one that is non-physical (like for example a company). There is a presumption that whoever contracts does so in his own name, unless he proves that he has contracted in the name of another person. The debtor has the obligations to make it clear that he is contracting in the name of a company. The foregoing considerations apply whether the client is a natural person (individual or trader) or a legal person (company).

  1. Project Manager is engaged and in order for him to fulfil his engagement he issues requests for quotations to three suppliers of materials. He stipulates a cap. They all reply with a quote within the cap.
  1. Has an agreement been formed?

No, an agreement has not been formed. Invitations to offer occurred when the Project Manager asked for a quote. If this is not accepted, no contract has been formed. Said offer is subject to acceptance until and unless that offer is accepted, there is no contract.

  1. If so, at what stage[SM6]?[Di7]

A contract is ‘an agreement reached between two or more parties which is legally enforceable when executed in accordance with specific requirements.’ Note that contracts should be specific to the project in question, as well as reflecting the agreement between the parties in question. Contracts are binding agreements, which is why it is of great importance that all parties understand the terms entailed by said contract, including rights and responsibilities.

Every contract consists of the following:

  • Offer;
  • Acceptance;

'Acceptance' occurs when both parties arrive to an unqualified agreement of all the offered terms. However, a period of negotiation usually occurs. The aim of the negotiations is to introduce new terms and conditions and counter offers to the original offer, so as to arrive to an agreement that satisfies all parties.

Communication of acceptance

The acceptance of the contract offer occurs only when the acceptance is communicated to the offeror. This includes methods like:

  • By telephone
  • Written
  1. If not, why? And what is required to form the contract?

No acceptance has been given by the Project Manager to any of the provided quotes. For a contract to be formed, an exchange of an offer from, in this case the suppliers, and an acceptance from the Project Manager must occur. Note that both parties must have the intention to bind themselves. Moreover, both offer and acceptance must be genuine acts of volition that manifest the relevant consent.

It is worth nothing that a contract is valid despite being not written, i.e. Acceptance by word of mouth or email is also a contract, unless the law expressly requires that the agreement should be in writing. These requisites of offer and acceptance are not mentioned in the Civil Code (unlike Italian Civil Code). They are specifically mentioned in the Commercial Code and Electronic Commerce Act.

The civil code (under 966) only spells what is required for the validity of a contract:

(a) Capacity of the parties to contract;

(b) The consent of the party who binds himself;

(c) A certain thing which constitutes the subject-matter of the contract;

(d) A lawful consideration.

  1. The most favourable quote, from A, comes with a clause stating that “An agreement must be made in writing and all payments must be made in advance.” Project manager writes to A accepting the quote. Is this sufficient?

Yes, in this case, there is sufficient proof that a contract has been formed. An offer has been given by A, which was then accepted ‘in writing’ by the Project Manager, a stage of affairs which is then confirmed by the fact that works would subsequently be undertaken, in pursuance of and in accordance with the same quote.

  1. Project manager pays the price and A provides the materials, but these are found not to be in line with the specifications requested. What is the effect of this? What are Project Manager’s options at law?

When a seller is selling construction material, he is ‘bound to warrant the thing sold against any latent defects which render it unfit for the use for which it is intended, or which diminish its value to such an extent that the buyer would not have bought it or would have tendered a smaller price..’ (Civil Code Article 1424)

When such required are not met, the following occurs:

  • Client dissatisfaction
  • Delays in project completion

The seller is ‘answerable for latent defects, even though they were not known to him, unless he has stipulated that he shall not in any such case be bound to any warranty.’ As a result of this, the Project Manager has two options at law;

Actio Redhibitoria

To return the material and have the price repaid to him. Compensation for damages may be also implemented.

Actio Aestimatoria

To retain the material and have a part of the price repaid to him which shall be determined by the court.

Civil Code Article 1434, ‘The buyer, even though there be no agreement to that effect, is bound to pay interest on the price up to the day of payment at the rate of five per cent per annum, indiscriminately in the following cases:

(a) if the thing sold and delivered yields fruits or other profits;

(b) if, even though the thing yields no fruits or other profits, he has been called upon by means of a judicial intimation to pay the price;

(c) if the delivery of the thing, being movable, has not taken place through the fault of the buyer, and the seller has called upon him, by means of a judicial intimation, to take delivery of the thing:

Provided that in the cases mentioned in paragraphs (b) and (c), interest shall run only from the day of the service of the said judicial intimatation.

  1. Project manager has also engaged the services of an electrician, B. The contract stated that B had to complete the works within two months according to a schedule of works agreed to. Following the first month it is clear that B has not completed 1/3 of the works he was to complete within the period of one month. It is clear to project manager that B will not complete the works within two months and now it will be possible for Project Manager to keep to the timelines imposed on him by client only if he hires a larger organisation to do the works instead of B. But these alternative service providers will be more expensive.
  1. What are the Project Manager’s options?

The Project Manager has the right to file for damages due to non-performance against the Electrician but would have to wait that the term of the contract has expired, as follows:

  • Termination of Contract due to non-performance,’ Civil Code 1640. (1) it shall be lawful for the employer to dissolve the contract, even though the work has been commenced. (3) If the employer has valid reason for the dissolution, he is to pay the contractor only such sum which shall not exceed the expenses and work of the contractor, after taking into consideration the usefulness of such expenses and work to the employer as well as any damages which he may have suffered.’

In such cases, opting for Termination of Contract could result in further delays. One of the Project Manager’s main roles is to minimise damages, and therefore the option of termination may not be viable and commercially practical. Penalties would have been set up contractually that the party in question (in this case Electrician B), should pay a certain amount for every day of delay. Naturally the Project manager would be exposed to liability towards the client but at least he would have safeguarded himself against the Electrician..

  1. Who will have to bear the increase in costs if Project Manager engages these new service providers?

The increase in costs are to be incurred by the Electrician B. This includes the following:

Article 1135 of the Civil Code,’…damages due to the creditor are, generally, in respect of the loss which he has sustained, and the profit of which he has been deprived.

Article 1136 of the Civil Code,’the debtor shall only be liable for such damages as were or could have been foreseen at the time of the agreement.’

  1. Will it make a difference if Project Manager is acting as principal or agent?

When a Project Manager is acting as principal, he has to answer for the actions delays. If he’s acting as an agent for a third party, he would be answering in the name of the party, provided that it is clear that the project manager is acting in the name of that third party.

  1. Project Manager requires paint. He is approached by a person who states that he is the local agent of an internationally renowned manufacture and the said “agent” offers a very advantageous price. Project Manager orders the paint, this is supplied and Project Manager pays for it. But before the paint is used Project Manager sees a Notice in the newspaper saying that the international manufacturer has nothing to do with the “agent” and that the “agent” is a fraudster. Project Manager does not want to use the paint as he will not be covered by the “international guarantee” that was supposedly provided by the international manufacturer. What are his options at law?

In the case of fraud, the Project Manager has the right to file for nullity of the agreement in question. As stated in Article 981 of the Civil Code,’Fraud shall be a cause of nullity of the agreement Fraud. When the artifices practised by one of the parties were such that without them the other party would not have contracted.’

The debtor, which in this case is the agent supplying the paint, is to pay ‘the compensation in respect of the loss sustained by the creditor, and of the profit of which he was deprived, shall only include such damages as are the immediate and direct consequence of the non-performance.’ (Civil Code Article 1137). When the mandatory (supplier of paint) acts beyond the authority given to him by the mandate, he may be found responsible for those actions in his own name.

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[SM1]A trader as such is considered to be a natural person

[SM2]Refers to a physical person

[SM3]Refers to a non-physical person (an entity like a company)

[SM4]This is not wholly correct – a natural person and a legal person can either contrct in their name or on behalf of others. Both enjoy the so-called legal personality which is the ability to enter into contracts. Plase see my amendments which should reflect this comment SM4.

[Di5]I think this is what the lecturer meant. Taking a legal person as a trader

[SM6]With reference to your comment Di7 below, I think you ahve to explain HOW a contract is formed, in relation to the issue of an invitation to quote/offer, quote (offer), & acceptance

[Di7]Is he referring to the stages where a contract is formed or the 3 factors that form a contract?