ENGINEERING PROFESSIONALISM CONTRACT LAW Contract Law PART I: WHAT IS A CONTRACT? 1 © University of Pretoria Contract Law 1. Introduction What is a contract? 1. A contract is a verbal or written agreement between two or more consenting parties who both have the legal capacity to conclude the agreement. a. The agreement must be legally executable (not contain any illegal content that cannot be executed by both parties due to legislative restrictions). b. Its purpose is to give rise to a binding legal commitment by both parties in which both parties have rights and obligations. 2. A contract is therefore an agreement entered into by specified parties with the specific intent to create obligations which are binding and as a result thereof, legally enforceable. 3. It is of the utmost importance to always indicate where and when a contract was concluded between parties: a. WHERE – the place where is always relevant, as it determines in which court’s jurisdictional area it was signed. If a party is in breach of that contract the disadvantaged party can approach the court where the contract was signed to exercise its remedies. b. WHEN – is paramount, as it determines at what time the parties’ rights and obligations came into effect. 4. These obligations [the performance] can be can be divided into three (3) different subcategories, namely: a. To do something b. To refrain from doing something; c. To give/surrender something. Characteristics of contracts Warranty There must be at least two parties to an agreement Bonae fidei Consensual WHAT ARE THE CHARACTERISTIC FEATURES Reciprocity Promises or undertakings on one or both sides. OF A CONTRACT? Consideration = Freedom of contract = Performance – Something of value must be given or Parties can agree to anything that is Immediately or at a future promised in return possible and lawful. date 2 © University of Pretoria Contract Law 2. Requirements for a valid contract REQUIREMENTS OF A VALID CONTRACT CAPACITY FORMALITIES The parties must Where the have the necessary agreement is capacity to required, contract. unusually, to be in CONSENSUS The minds of the parties must meet (or at least appear to meet) on all PHYSICALLY EXECUTABLE The agreement must be lawful – a certain form (for material aspects of their agreement. LEGALITY Person may either example, in writing have (i) no capacity and signed), these (ii) limited capacity formalities must be (iii) full capacity. observed. The obligations that is, not undertaken must be prohibited by (i) determinable and statute or (ii) capable of common law. performance when the agreement is entered into VOID CONTRACT VOID CONTRACTS • VOIDABLE CONTRACTS Void contracts are – ▪ • Contracts where one or more of the Voidable contracts are – ▪ requirements for a valid contract are concluded between the parties, but a missing. • Contracts where an agreement was material deficiency was present at the For example: If one of the parties is not allowed to time when the contract was contract due to common law or legislative concluded. restrictions (minors, unrehabilitated insolvents, • mentally incapable) The material deficiency may be based on – ▪ Misrepresentation ▪ Duress ▪ Undue Influence ▪ Economic Bribery ▪ Unconscionable Conduct – Sec 40 of the Consumer Protection Act 3 © University of Pretoria Contract Law CONTENT OF A CONTRACT ESSENTIALIA NATURALIA INCIDENTALIA Those distinctive terms used to Terms automatically included in any The terms other than the identify or classify a contract as one contract belonging to one of the classes naturalia and essentialia. of the specific contracts recognised of They are the additional terms by our common law. recognised by our law. agreed upon by the parties that The essentialia of a contract of sale: They can therefore be said to be implied supplement or modify the Are terms stipulating that property by law (ex lege). rights and duties incorporated specific contracts traditionally must be delivered and that the by law into the particular purchase price must be paid. contract in question – namely, the naturalia. 3. Commercial contracts A commercial contract in itself is relevant to the world of business transactions and professional relationships. Commercial agreements need to take into account the following principles: 1. Risk Management 2. Tax efficiency 3. Business Practice 4. Trade Usages 4. Commercial contracts and contracts for engineering Engineers in general offer one or more of the following: 1. Service – where the Engineer offers specific knowledge as the “product” he/she sells; 2. Products – where the engineer works for a company that offers certain products or specified systems; 3. When these products, services or a combination of the above are offered to another party, a contract is usually concluded between the aforesaid. Preferably any and all contracts should be reduced to writing, to ensure that both parties enjoy the appropriate protection in the event of breach. A verbal contract is extremely difficult to prove, unless the circumstances surrounding the agreement serve as irrefutable evidence of the agreement itself, as well as the terms thereof. 4 © University of Pretoria Contract Law PART II: HOW IS CONTRACT A FORMED? 5 © University of Pretoria Contract Law 5. Basic principles 5.1 The parties The parties 1. Always two or more parties to a contract. a. Who consent to the terms thereof (for example: X cannot force Y to sign the contract) b. Both have rights and responsibilities (to pay or render a service/receive goods or services) c. Both parties need to have the capacity and authority to contract. d. Two types of persons who can contract: i. Natural Persons ii. Juristic Persons PERSON TYPES NATURAL PERSONS • JURISTIC PERSONS Persons with FULL CAPACITY ▪ • Is conferred on those the law considers and are represented by specific individuals sane, sober or of an age where they can (natural persons) who have been appointed to understand their actions and the contract on their behalf. adjoining consequences. • • These entities cannot contract by themselves • These individuals are usually Directors or other Persons with NO CAPACITY: Persons whose individuals who have been specifically mental faculties are so undeveloped or impaired authorised to act on behalf of the company by that they cannot appreciate the nature and way of a resolution, or act as its agent. The consequences of their acts agent’s identity must ALWAYS be stated. ▪ Infants [Persons 1-6 Yrs old] ▪ Severely intoxicated persons (LTD) OR close corporations – CC OR ▪ Persons declared Mentally Insane by Statutory Entities such as the SABC the law OR Clubs and Churches. ▪ Persons with LIMITED CAPACITY: Persons who require the assistance or consent of another person to conclude a contract. ▪ Minors [Persons 7-17 Yrs old] ▪ Married Persons ▪ Sequestrated Insolvent ▪ Prodigal 6 © University of Pretoria Are for example: Companies — PTY Contract Law 6. Professionalism 1. As a professional individual, an engineer will always be subject to certain rules, regulations and codes of conduct. It is expected of you to uphold the ethical standards of the profession, not only for yourself, but to ensure that the profession itself is continuously regarded as one that promotes and upholds diligence. 2. When drafting a contract, always keep in mind that you are compelled to adhere to certain ethical standards. Here are a few questions to ask yourself before signing an agreement: a. Can you properly perform/deliver in terms of the agreement? (Competency) b. Is the terms of the agreement in accordance with my regulating body’s code of conduct? 7. Establishment of the contractual relationship There are numerous ways to enter into a bilateral or multilateral agreement: 1. Government or private company tender 2. Requests for Proposal. 3. Request for quote. 4. Public media & 5. Registered/Pre-approved suppliers. After the offer has been accepted, a contract is concluded between the parties, subject to the parties’ specific requirements and the offer that was tendered. REQUEST FOR PROPOSAL An offer made by a company to business suppliers in order for them to submit their business proposals, with the express goal to obtain a specified service or commodity. REQUEST FOR QUOTATION The main purpose of an RFQ is to invite bidders to enter their bids on specified products and/or services. A request for quotation is therefore also in some instances referred to as an invitation for bid. REQUEST FOR TENDER A RFT is a formal invitation to suppliers to bid to supply certain services or products. 7 © University of Pretoria Contract Law 8. Drafting a contract 1. As qualified Engineers, you might be tasked with drafting a contract on behalf of your companies/firms or as an individual. In most instances an Attorney is appointed to tend to the necessary, but it is always important to know how to draft and properly peruse an agreement, so that you may be able identify discrepancies in the agreement. 2. The content of a contract is determined by law, commercial reality, practical considerations and the circumstances of each individual case. Contracts are not always different and might in some instances use one contract as a template for numerous transactions. However, every transaction is in itself unique and should be approached with the utmost diligence to avoid negligence and subsequent fault or possible liability. 3. Look at possibilities like FIDIC, NEC(3) or JBC if appropriate. 9. Guidelines for drafting of contracts Guidelines for drafting a contract: 1. Establish what your requirements are and do proper research; 2. Provide for any eventuality that might become a potential dispute in the future; 3. Consider inserting a clause for arbitration (dispute resolution); 4. Keep the language simple and avoid ambiguous or vague terminology that can later prove to be problematic; 5. Ensure that the object of performance and the parties are properly described to avoid confusion; 6. Ensure that the agreement complies with all regulatory legislature and rules of Engineering practice; 7. Prepare a first draft and have it checked by a partner, colleague or attorney for advice. 8 © University of Pretoria Contract Law 10. Contract clauses 10.1 Common clauses or so-called “boiler plate” clauses It is common in practice to include in any agreement certain clauses of a general nature which facilitates the enforcement of the contract. 10.2 The “Whole Agreement” clause 1. This clause is standard in most agreements. Its purpose is to ensure that neither party can enforce external rights or remedies that are not included in that specific agreement. In short, it reads as follows: 2. This Document contains the whole agreement between the parties. No party will have any right or remedy arising from any undertaking, warranty or representation which is not included in this agreement. 10.3 Variation clause 1. The variation clause serves as a security mechanism and prevents either party from altering the terms of the agreement. A normal variation clause reads as follows: 2. “This agreement or any part thereof can only be waived, varied, added to or cancelled by way of a further written agreement by both parties and signed by both parties” 10.4 Jurisdiction of the magistrates’ court 1. Both parties can consent to the jurisdiction of the magistrates’ court, as these courts are usually less expensive to institute litigation in. An example could read as follows: 2. “Each party to this agreement consents to the jurisdiction of the Magistrates’ Court in terms of Section 45 of the Magistrates’ Court Act of 1944 in respect of any litigation proceedings pursuant to this agreement” 10.5 Addresses for service To simplify the exchange of important documentation and/or service of these documents on the other party. The parties can determine the manner of exchange, but in most cases every possible form of communication medium is inserted in this clause, including mail address, fax and e-mail. Faxes and emails are regulated by the Electronic Communications and Transactions Act to establish precisely when a communique was sent and/or received by either party. 10.6 Costs This clause is normally included in a contract to formally address if one or all of the parties will be responsible for the costs involved with the drafting of the contract. It is usually included when corporate attorneys are employed to draft the agreement. Some contracts require a lot of research and negotiation and can therefore incur very expensive legal fees. 9 © University of Pretoria Contract Law 10.7 Alternative dispute resolution The purpose of an ADR clause is to avoid costly litigation procedures, by means of negotiation/mediation or arbitration. [This clause will be discussed in detail during the lecture] 10.8 Breach It is very important to include a breach clause in every contract. It serves as the paramount protective mechanism in each agreement. 10.9 Example: “In the event of either party being in breach of the agreement and failing to remedy such breach within a period of ten days after receiving notice of said breach to be remedied, the party aggrieved thereby shall be entitled, without prejudice to: 1. Claim specific performance of the terms of this agreement as well as damages it has suffered as a result of the breach 2. Cancel this agreement and claim damages 3. Keep this agreement in force and claim damages.” 10.10 Governing law When drafting an agreement, one must specify which country’s laws will be applied to govern the agreement. For example: “The agreement will be subject to and governed by the laws and statutes of the Republic of South Africa”. The above clauses are just examples of boiler plate clauses and are by no means a closed list. 10.11 Other essential clauses Other essential clauses [will be discussed during the lecture]: 1. Definitions 2. Interpretation 3. Penalty 4. Obligations/duties of parties 5. Insurance 6. Commencement 7. Force Majeure 8. Subcontracting 9. Remuneration 10. Duration of agreement and termination date 11. Requirements of third parties (certificates from municipalities etc.) 12. Non-competition —NB!!!! Discussion in class 10 © University of Pretoria Contract Law PART III: HOW IS A CONTRACT TERMINATED? 11 © University of Pretoria Contract Law 11. Breach of Contract SPECIFIC FORMS OF BREACH RECOGNISED MORA DEBITORIS POSITIVE PREVENTION OF REPUDIATION MORA CREDITORIS PERFORMANCE MALPERFORMANCE The debtor The creditor Either party Either party culpably fails to The debtor performs culpably fails to indicates an renders make timeous in a defective or cooperate unequivocal performance of the performance of his incomplete manner timeously with the intention not to contract debtor so that the honour the impossible Relates to the latter may perform agreement Relates to the time content of the his or her of the performance. performance made. obligations or her obligations 12. Remedies for breach of contract DIFFERENT TYPES OF REMEDIES REMEDIES AIMED AT KEEPING THE REMEDIES AIMED AT CANCELLING REMEDIES AIMED AT COMPENSATING CONTRACT ALIVE THE AGREEMENT THE INNOCENT PARTY FOR LOSS OR HARM CAUSED BY THE BREACH ADIMPLETI In certain circumstances, the innocent CONTRACTUS: The innocent party is entitled party is entitled to the remedy of These remedies can be claimed in to refuse to render his or her own performance cancellation, in terms of which the addition until such time as the breaching party has agreement is summarily terminated. mentioned above and include: THE EXCEPTIO NON 1. performed in full. CLAIM FOR SPECIFIC PERFORMANCE: to any of the remedies A claim for contractual damages or delictual damages The innocent party asks for a court order 2. forcing the breaching party to render his or her A claim for interest on amounts owing performance. AN INTERDICT: The innocent party asks the court for an order to prevent a breach of contract that has not yet happened, but which is threatening or imminent. 12 © University of Pretoria Contract Law 13. Termination of the agreement There are numerous ways in which a contract can be terminated. To name but a few: 1. COMPLIANCE – where the parties have satisfied the requirements and provisions of the agreement and both parties have performed fully; 2. NEW CONTRACT – The parties can agree that a new agreement be concluded between them that incorporates the previous contract, or disregards it in total; 3. DEBT COMPARISON – where the parties owe one another a certain amount of money, they can write of their mutual debt; 4. FORCE MAJEURE — So called “acts of god” 13 © University of Pretoria