Contract Law

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Contract

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Voluntary agreement between two or more parties that set out the rights, responsibilities, and liabilities of the parties to each other. Often written but oral contracts are also legally enforceable.

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3 principles of drafting a contract

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1. Reflect the business arrangement between parties.

2. Provide guidance to parties in resolving future disputes by defining risks and obligations

3. Provide proper incentives and protections

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7 contract issues

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1. Agency

2. Indemnities

3. Change orders

4. Subcontracts

5. Unforeseen conditions

6. Specifications

7. Contract administration

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Letter of intent

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Also known as a term sheet, this is a document that sets out the basic terms of a business arrangement in advance of agreeing to all the finer detailed contract terms.

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5 reasons for voiding a contract (MiMiFUD)

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Misrepresentation, mistake, frustration, unconscionability, duress

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Misrepresentation

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An untrue factual statement that is made by one party that induces the other party to enter into the contract. Three categories:

1. Innocent

2. Negligent (without due care or skill)

3. Fraudulent (aware of falsity)

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Mistake

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Misunderstanding of contract terms. Must have three features:

1. Significant and not trivial (material mistake)

2. Mutual mistake. (Made by both parties)

3. Existed at the time the agreement was made.

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Duress

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Improper threats, pressure or coercion used to induce a party to enter into a contract. This would include forcing a party to enter adjust a contract by forcing a delay on them.

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Unconscionability

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So unfair, oppressive and one sided, that it would be offensive for the court to enforce it.

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Frustration

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Otherwise known as impossibility, this is where an unforeseen event or circumstance makes the performance of the contract not possible or of no value.

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Estoppel

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A legal principle that precludes a party from asserting something contrary to what is implied by a previous action. For example, a landlord that consistently accepts payments on the third of the month.

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Quantum meruit

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“For what it’s worth”. This is when one party should compensate the other for work performed. There must not be a valid contract in place to perform the work.

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Change directive

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Similar to a change order, but this allows the project to carry on with the understanding that the contractor will get paid by the owner at a later date on a cost plus basis. The result it similar to quantum meruit.

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5 elements of an enforceable contract.

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1. Offer and acceptance

2. Legality

3. Intention to be legally bound

4. Capacity to contract

5. Consideration

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4 potential reasons for breach of contract

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1. Inability of one party to perform the contract (ie lack of resources)

2. Inadvertence (unintentional failure to perform)

3. Disagreement as to the requirements of the contract (may perform under protest)

4. Anticipated financial losses.

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Three conditions for recovering damages

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1. Mitigation (suffering party must take steps to reduce or mitigate their losses)

2. Remoteness (the loss must have been reasonably foreseeable)

3. Not speculative. (If claiming damages for lost profit, must prove profit was likely to be gained)

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Contract termination

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1. Fundamental breach: such as failure to pay, goes to the root of the contract, grounds for contract termination.

2. Simple breach: does not allow contract termination.

3. Repudiation: when a party tells the other it does not intend to perform. Without justification this is a fundamental breach.

4. Anticipatory breach: when a party tells the other they will not be performing/meeting a payment date in the future. Can be fundamental or simple.

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8 Canons of Contract Construction

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These are guidelines the courts use to interpret a contract.

1. Plain and ordinary meaning

2. Special meaning

3. Reading the contract as a whole

4. Giving effect to all parts of a contract

5. Restriction by express provisions

6. Commercial purpose

7. Context

8. Contra proferentum (where ambiguity exists, the court rules to favour the party that did not write the contract)

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8 Canons of Contract Construction

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These are guidelines the courts use to interpret a contract.

1. Plain and ordinary meaning

2. Special meaning

3. Reading the contract as a whole

4. Giving effect to all parts of a contract

5. Restriction by express provisions

6. Commercial purpose

7. Context

8. Contra proferentum (where ambiguity exists, the court rules to favour the party that did not write the contract)

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Parole evidence rule

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This states that where a contract is clear and unambiguous extrinsic evidence is not admissible.

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Express authority

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Otherwise known as actual authority, it is often created by contract. An agreement for design services should define the authority limits.

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Agent

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Person authorized to act on behalf of another party known as the principle. Often in construction contracts that is the owner (principle) and engineer (agent). M

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Third party

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Contractor is third party to the owner generally

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Apparent authority

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Also known as ostensible or implied, this is created by representations (oral or conduct). Often this is the case between the owner and the contractor. Agent has a duty to act in best interest of principle. However consultants are not always agents such as in the case of impartiality (reports)

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Indemnity

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Agreement by one party to bear the financial loss of another party for a specific event.also known as a “hold harmless agreement. Used a means of allocating risk.

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Change order

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An agreement to change the scope of work performed under a contract. Increase in contract price are deferred to extras, whereas decreases are credits.

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Impact claim

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Claim for costs that arise from inefficiency caused by delay, sequencing of work, etc. Often the result of a change order. The costs must be captured up front; submitting an impact at the end of the project is inadequate.

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5 additional issues with subcontracts

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1. Subcontract formation through the bidding process

2. Pay-if-paid Clauses

3.incorporation by reference

4. One-tier bonds

5. Project delivery

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Pay-if-paid clause

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Shifts the risk of non payment by the owner from the general contractor to the sub contractor. In contrast to pay-when-paid

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Incorporation by reference

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Intended to incorporate the terms of the prime contract into the subcontract .

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One-tier payment bond

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In larger construction projects, this bond is a labour and materials payment bond provided by the prime contractor which provides additional remedy’s for unpaid sub contractors.

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A call for tenders

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A request from a buyer of goods or services (owner) to a group of providers of goods/services (bidder)

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7 Concepts of Choosing Whom to Contract With

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1. Request for Qualifications (RFQ)
2. Tender
3. Request for Quotation (informal)
4. Request for Standing Offers (buyer arranges prices for frequently purchased goods)
5. Request for Proposals (RFP) (buyer to propose a potential solution to a problem and price)
6. Prequalification (screening process based on credentials)
7. Hybrid Methods

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5 Methods of Choosing How to Contract

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1. Design-Bid-Build
2. Design-Build

3. Design-Build-Operate
4. Design-Build-Operate-Finance
5. Construction Management

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5 Methods of How to Pay

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1. Fixed Price or Stipulated Sum

2. Cost-Plus

3. Unit Price

4. Alliance

5. Public-Private Partnership

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Project Risks

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design, time requirements, warranty, changes in legislation, site conditions (subsurface), revenue losses from project not functioning correctly, cost increases, ability to perform, authorities and permits, environmental impacts, limitations on liability, termination rights, insurance, weather, responsibility for insurance, transfer of ownership, liability of 3rd party claims.

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Tendering Contract Creation

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The submission of a bid is referred to as contract A. Upon the acceptance of the bid, contract B is formed. Non compliant bid means no contract A, unaccepted bid means no contract B.

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Contract A Terms

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Contractor has the right to recover the tender deposit 60 days after the opening of tenders, contractor cannot revoke the bid, both parties are obliged to enter into contract B upon acceptance of the bid, buyer generally must accept the low bid. f

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8 Construction contract types

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1. Fixed price (lump sum including overhead/profit.)

2. Cost plus (cost of services + a fee for profit and overhead. Target price may be used to incentivize the contractor to save money for owner)

3. Unit price (cost per unit performed, such as cubic metre of concrete poured)

4. Construction management (hired to manage the sub trades/project)

5. Design build (contracted out design, construction and inspection)

6. Alliance agreement (built to share risk/reward between all parties and eliminates adversarial relationship)

7. Public-private partnership (hospitals, wastewater, etc. Sometimes called a P3 (PPP)), shares risk reward - benefit to public.)

8. Integrated Project Delivery (elements of P3 and alliancing, the owner engages professionals early to help with design.

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3 professional service agreements

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Engineering, architectural and geoscientist services

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Limitation clause (consequential damages).

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Think of the 5$ oring seal causing $10,000 in damage example.