CONTRACT BASICS

Ryerson University
Law and Ethics in Engineering Practice
Rocco Sebastiano, P. Eng.
 WHAT IS A CONTRACT
• Promise the courts will enforce
• Usually means that damages will be
awarded if breach is proven
• Less often court will order defendant to
perform its obligation
WHAT PROMISES WILL THE
COURTS ENFORCE?
• Offer made and accepted
• Mutual intent to enter into Contract
• Consideration
• Capacity to Contract
• Lawful purpose
 OFFER AND ACCEPTANCE
• may be oral or written
• offer may be withdrawn anytime before
acceptance
• offer must be accepted in its entirety -
otherwise it is simply a counter-offer
• acceptance must be clearly communicated
 IRREVOCABLE OFFERS
• Most offers are revocable - even if stated to
be irrevocable
• Special formalities required to ensure
irrevocability
• Consideration or a seal
 COMMUNICATION
• Offers accepted by mail - contract is formed
upon mailing of the acceptance
• other means of acceptance - usually formed
upon receipt of acceptance
• these rules may affect the choice of
governing law
• battle of the forms - final shot usually wins
 INTENT
• both parties must have a mutual intention to
enter into a contract
• this is determined on an objective basis -
that is what do the party's words and actions
show
• Duress and Undue Influence are examples
of lack of intent
 LETTERS OF INTENT
• also referred to as memorandums of
understanding or MOU’s
• expression of interest to enter into a contract
or transaction
• might be a contract
• might be only an "agreement to agree"
• to be a contract, the letter of intent must
state all essential terms
 CONSIDERATION
• items of value that pass between the parties
• consideration may consist of exchange of
promises to provide something of value
• adequacy of consideration is not essential
• often see contracts in which the consideration is
one dollar
• alternative to actual consideration is a seal
 EQUITABLE ESTOPPEL
• gratuitous promises are not usually
enforceable
• but it is sometimes unfair to allow a party to
renege on its promise
• in such cases the doctrine of estoppel may
apply
• party arguing for estoppel must have relied
on the promise
 Conwest Exploration v. Letain
(1963) Supreme Court of Canada
• Farm in agreement - Conwest had to
explore to keep option alive
• Deadline expire but Letain allowed
Conwest to do the planned drilling
• Valuable minerals found
• Letain wouldn’t sell as he had agreed
• Letain was estopped from relying on the
strict term of the agreement
 John Burrows v. Subsurface
Surveys (1968) S.C.C.
• Defendant was continually late in payment of
instalments under promissory note
• Plaintiff acquiesced for a number of payments but
then insisted full rights
• Plaintiff was not estopped
• No negotiation
• plaintiff could have insisted on full rights the first
time payment was late
• what changed?
 CAPACITY
• Minors
• Drunks and Lunatics
• Corporations
 MINORS
• Contract is not enforceable against a minor
except for "necessaries"
• contract may be ratified by the minor - it is
then enforceable against her (except B.C.)
• Contract is enforceable by the minor
 DRUNKS AND LUNATICS
• not enforceable against the drunk or lunatic
if:
• other party knew of the drunkenness or
lunacy
• the contract is repudiated within a
reasonable time after regaining sobriety or
sanity
 CORPORATIONS
• most modern corporations have all the capacity of a
natural person
• older corporations and those incorporated for a special
purpose may have limits to their capacity
• e.g. - a railway company may not have the powers to
operate an airline - therefore a contract by the railway
to buy an air craft may not be enforceable
• one can usually rely on the "indoor management rule"
• corporation is usually bound by the acts of its officials
 LEGALITY
• contrary to statute
• contrary to common law
• contrary to Statute of Frauds
 CONTRARY TO STATUTE
• Bid rigging
• waiver of lien rights
• unlicenced contractor, unlicenced engineer
• in some provinces the Professional
Engineers Act specifically prevents
unlicenced persons from suing for
engineering work
 CONTRARY TO COMMON
LAW
• contract in restraint of trade - restrictive
covenants
• immoral contracts
 STATUTE OF FRAUDS
• most contracts are valid whether written or
verbal
• even if the contract is not covered by the
statute of frauds, it is advisable to reduce
contracts to writing
• this provides certainty as to the terms of the
contract
 Contracts Which Must be
Written:
• relating to interests in land
• contracts not to be performed within one
year
• guarantees
 MISREPRESENTATION
• a false statement of fact
• which induces a party to enter into the
contract
 Types of Misrepresentation:
• truly innocent
• negligent
• fraudulent
• remedy depends on the the type of
misrepresentation
 Effect of Misrepresentation
• party which was misled can always rescind
the contract
• innocent - no right to compensation
• negligence - no right to compensation in
contract law - may sue in tort in some
circumstances
• fraudulent - right to compensation and may
sue in deceit
 DURESS
• choice of not entering contract not available
• contract in voidable
• innocent party must take prompt action
when threat is removed
 Type of Duress:
• threatened violence or imprisonment
• economic duress
• undue influence
 Gotaverken Energy Systems v.
Cariboo Pulp & Paper
• contractor threatened to reduce work force
to single shift
• work was supposed to be completed during
a planned plant shutdown
• forced owner to agree to pay time &
material instead of agreed stipulated price
• owner felt it had a gun to its head
 MISTAKE
• Rectification
• Unilateral Mistake
• Application to Tendering Mistakes
 Rectification
• common mistake in writing down the
agreement
• very difficult to establish
• one side will be trying to use the mistake to
its advantage
 UNILATERAL MISTAKE
• contract is usually enforceable if non-
mistaken party did not know of mistake
when she entered the contract
• Courts will not let one party knowingly take
advantage of another’s mistake
• not enforceable if the one party knew of the
mistake made by the other
 TENDERING ISSUES
• Old Approach - Belle River - Mistake doctrine
applicable
• “New” Approach - Ron Engineering – Contract A
and Contract B
• Compliant Bids and Privilege Clauses - MJB
• Duty of Good Faith – Wimpey and Naylor
• Requests for Proposals – Legal obligations and
duty of fairness
Belle River Community Arena v.
Kaufmann
• Still the law everywhere else but Canada
• Contactor advised owner of error soon after
tenders were opened
• Owner accepted tender about a month later
• Tender is an offer which cannot be accepted
if there is a known error
 Ron Engineering v. The Queen
• Owner is a party to a contract with each
bidder “Contract A”
• Bidder promises to enter into a contract if
asked
• Contract A imposes both duties and rights
on the owner
• Owner has obligation to evaluate tenders in
accordance with established criteria
 Recent Cases
• MJB Construction v. Defence Construction
(1999) Supreme Court of Canada
– Owner must accept only a un-qualified bid
• Wimpey v. Hamilton (1999) Ont. C.A.
– Owner must evaluate bids in good faith
• Naylor v. Ellis-Don (2001) Supreme Court
of Canada
– Obligations of contractor to subcontractors
 Recent Cases
• Buttcon v. Toronto Hydro - Requests for
proposals and duty of fairness
• Double N Earthmovers v. City of Edmonton
– Owner’s duty to investigate bids
– When does Contract A come to an end?
 Tenders
• Most often prepared by the Owner’s consultant
• Tender Documents should provide:
– general description of project
– plans and specifications
– other information or where it may be obtained
– form of contract
– details of tender and evaluation procedure
 Contract A
• Tender package or instructions to bidders will
contain the terms of Contract A
• Specific terms should be carefully considered
given binding consequences
• Criteria to select winning bidder:
– If want to look at more than just price, need more than
the usual “lowest or any tender will not necessarily be
accepted” clause
 Contract Interpretation
• Liberal Approach - tries to find the intent of
the parties
• Strict Construction - literal - often
dictionary definition of words
• Approach depends on type of clause
 General Principles
• Courts should use ordinary meaning
• Very strict construction will be used for
limitations and exclusions
• Liberal construction will be used when
appropriate
• E.g. unsophisticated parties, poorly drafted
contract
 Specific Issues
• Contra Proferentum
• Parole Evidence
• Implied Terms
 Contra Proferentum
• Ambiguous clause construed against the
party which prepared the contract
• Generally applies to printed form contracts
• Will be applied against owner where the
owner called for tenders on its form
• Important to avoid ambiguities
 Parole Evidence Rule
• Extraneous evidence will not be allowed to
interpret a clear contract term
• Oral evidence and written evidence (e.g.
letters or memos) may be excluded
• Exceptions exist - to prove a requirement
for a condition precedent
Parole Evidence Rule - continued
• Rule applies to documents or happenings
prior to, or contemporaneous with the
making of the contract
• Does not apply to amending agreements
• Judges don’t like the rule
 Implied Terms
• When the parties “overlook” something
• Courts will imply a term when necessary to
give the contract “business efficacy”
• It must be necessary to imply the term
• Some terms always implied unless
specifically excluded - e.g. fitness for
purpose
 The Moorcock
• Plaintiff rented dock space for his steamship
• Tide went out and left the ship high and dry
• Ship was damaged - owner sued
• Implied term that the vessel would have
been safe at low tide
 Discharge of Contracts
• Completion
• Agreement
• Discharge pursuant to express terms
• Frustration
• Force Majeure
 Frustration
• Circumstances radically change
• Performance becomes impossible (not just
more difficult or more expensive)
• Or performance is a different thing
altogether
 Metropolitan Water Board v.
Dick, Kerr and Company
• Six year construction project starts in 1914
• Contract ordered suspended in 1916
because of World War One
• Character and duration of the suspension
changed the nature of the contract
• Contract held to be frustrated
 Davis Contractors Ltd. v.
Fareham Urban District Council
• Contract to build houses in eight month
period
• Labour shortage caused contract to extend
to 22 months!
• Contract not frustrated
 Force Majeure
• Events that occur during the performance of
a contract that are beyond a person’s control
• Examples:
– Acts of God: hurricane, earthquake
– Fire, war, civil disobedience
– Stop work orders from a court
– Strikes and labour disputes
 Consequences of Force Majeure
Events
• Performance of contract is usually delayed
• Party affected by event is excused or given
more time to complete (i.e., contract time is
extended)
• Usually, the affected party does not get
monetary relief from other party to cover
delay costs
 Breach of Contract
• Damages - (almost) always available
• Termination - available only in specific
circumstances
• Specific Performance
• Injunction
 Termination
• Breach of a “condition”
• Breach of a fundamental term
• Breach renders it purposeless to continue
• Termination is available if right is explicitly
set out in contract
 Repudiation
• One party announces by words or actions
that it has no intention of completing
contract
• Innocent party may accept repudiation;
– Damages calculated as of date of repudiation
• Or, innocent party may elect to continue (if
possible)
– Has a right to contract price
 Damages - General Principle
• Should put the innocent party in same
position as if contract had been performed
• Damages which fairly and reasonably
considered to arise naturally from the
breach; or
• reasonably supposed to be in the
contemplation of both parties
 Hadley v Baxendale
• Carrier not liable for damage for delay in
delivery
• Special circumstances (mill was down) not
known to carrier
 Direct Damage
• Actual cost to remedy breach
• Examples:
– Extra cost to complete contract
– Cost to remedy deficiencies in work
 Indirect or Consequential
Damages
• Arise as a “consequence” of the breach
• Examples:
– Lost profit or revenue
– Fine
– Loss of use of the facility or project
 Penalty Clauses - Liquidated
Damages
• Courts will not enforce “penalties”
• Courts will enforce genuine pre-estimates of
damages
• Liquidated damage clauses help avoid time
consuming proof of damage
• Liquidated damage clauses also “cap”
damages
 Quantum Meruit
• As much as is deserved
• Principal applied when no contract
provision respecting price
• Also applied when contract price terms may
not be applicable
 Substantial Compliance
• Court will not impose drastic remedies for
minor imperfections
• Entitled to receive contract price less cost to
rectify deficiencies
• Principle is explicitly stated in modern
construction contracts
 Specific Performance &
Injunction
• Court requires defendant to perform
contract rather than pay damages
• Applied when damages insufficient
• Performance must be relatively simple to
determine
• Most often applied in sale of land cases
• Injunction - to enforce a promise not to do
something
 Fundamental Breach and
Limitation Clauses
• Clause which limits or absolve party from
damages
• Common on tickets and other “contracts of
adhesion”
• Often perceived as unfair
• Limitation clauses often serve a legitimate purpose
– Companies can charge a lower price to most customers
– Customer with special need can insure elsewhere
 Harbutt’s Plasticine v. Wayne
Tank and Pump
• 1970 - English Court of Appeal
• Design-build contract for storage tanks
• Clause in contract limited liability to £2,300
• Factory burned to the ground
• Contractor in “fundamental breach of contract”
• Court of Appeal created “doctrine of fundamental
breach”, enabling court to disregard exemption
clause in circumstances of a fundamental breach
 Hunter v. Syncrude
• Gear boxes supplied to Syncrude for bucket wheel
excavators
• Gears failed just after warranty period expired
• Two companies supplied gear boxes - Hunter and
Allis-Chalmers
• Implied warranty of fitness for purpose applied in
Hunter contract - they were liable
• Implied warranty expressly excluded in Allis-
Chalmers contract - they were not liable even
though contract was fundamentally breached
 Tercon Contractors v. B.C.
• RFP issued by B.C. Dept of Transportation
• Limitation of liability clause in RFP document:
“... no Proponent shall have any claim for compensation
of any kind whatsoever, as a result of participating in this
RFP, and by submitting a Proposal each Proponent shall
be deemed to have agreed that it has no claim.”
• Exclusion clause was found not to apply because
clause only covered claims arising “as a result of
participating in RFP”
• Doctrine of fundamental breach finally eliminated
 Limitations In Commercial
Context
• Limitation Clause strictly construed
• Contra Proferentum rule will be applied if
ambiguous
• Clear clauses will be enforced
• Exception will be made for unconscionable
cases - (not yet applied in a commercial
context)
 Agreements between Client and
Engineer
• Standard of Care
• Agency Relationship
• Remuneration
• Standard Form Agreements
• Limitation of Liability
 Standard of Care
• Often not explicitly stated in a contract
• Law will imply the same standard as in tort
law
• Note applicable statutes setting out the
minimum standard of care for professional
engineers
 Agency
• Engineer will often be required to act as
client’s agent
• Powers as agent may be limited
• Will bind the client if acting within scope of
ostensible authority
• Be careful to ensure that you do not exceed
the scope of actual authority
 Fees and Estimates
• Fees should be agreed upon before work is
done
• Engineer must use due care in the provision
of estimates
 Standard Forms and Limitation
of Liability
• Standard forms are useful
• Scope and limitations should be carefully
understood
• Limitations of liability are permitted
• Very low limitations should be avoided
• Popular compromise is the limit of
insurance coverage
 Concurrent Liability
• Engineer may be concurrently liable in
contract and tort
• Implied duty of care in contract is same as
duty in tort
• Depending on contract, duty may differ
• May be appropriate to limit duties and
obligations to those in the contract
 Construction Contracts
• Engineer not normally a party to a
construction contract
• Engineer often administers contract
• Engineer may be an independent consultant
or an employee
 Role of Engineer as
Administrator
• Engineer authorized to make decisions affecting
the rights of owner and contractor
• Usually “in the first instance”
• Such decisions may be appealed or reviewed
• Sometimes the engineer’s decision is final and
binding
• Engineer has duty of care in making decisions
 Inspection Services
• Engineer has a duty of care
• Problems arise when contractor has covered
up the work
 Dabous v. Zuliani
• Contractor installed chimney too close to
wooden joist
• Installation was done on weekend because
job was behind
• Architect should have had “gyprock”
(wallboard) removed
• Similar result in recent case against City of
Toronto
 Advising Contractor
• Means and methods usually the contractors
responsibility
• Advising contractor may result in claim for
interference
• Contractor may also have claim in tort - if it
relied upon the advice
 Contract Administration
• Ensure contract is administered according to
its terms
• Problems:
– work proceeds without written change orders
– notices not given
• Estoppel arguments then arise
• Detailed notes and minutes of meetings
should be kept
 Notice Provisions
• Notices required by the contract must be
given
• Otherwise contractor may not recover extra
costs
• Notice may be “constructive”
• Waiver and estoppel arguments may also be
available
 Drawings and Specifications
• Ensure they are complete
• Courts have great sympathy for contractors
• Contractors must rely on the specifications -
don’t have time to review the design
 Prime and Subcontracts
• Plans and specifications govern only the
prime contract
• Unless the the prime contractor incorporates
them into its subcontracts
• Prime contract should be encouraged or
required to do so
 Engineer as Expert Witness
• Expert testimony is permitted where court
does not have expertise
• Experts allowed to state their opinion
• Engineers engaged as expert must take role
seriously
– Will be cross-examined
– Significant preparation required