10: Contract Law and Risk for Engineers
March 22, 2004
ES 498G:
Engineering Ethics,
Sustainable Development
and the Law (Section 2)
Joel Adams
jadams@uwo.ca
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.1 Key Course Topics
1. Professionalism, Ethics, the Code, Enforcement
• Professionalism, Ethical Theory, the Code
• Engineers in Industry, Management, Private Practice
• Negligence, Misconduct, Incompetence, Enforcement
2. The Legal System, Torts, and Contracts
• The Canadian Legal System, Business Organization
• Tort Law: Standard of Care, Liability, Product Safety
• Contract Law: Requirements, Discharge, Breach
3. Risk Management, Engineers and the Environment
• Ethics and Management of Risk
• Environmental Ethics and PEO Guidelines
• Sustainable Development
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.2 Last Class
1. Tort Law
• Review of Tort Law for Professionals
• Product Liability, Tort Limitations, other Torts
• Further Historical and Sample Case Studies
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.3 Today’s Class
1. Contract Law for Engineers
• Purpose and Elements of a Contract
• Preview of Breaches and Remedies
•
Assignment(s)
• Case Study due in one Week!
• DUE Monday, March 29 by 4:00PM in the Locker for
Section 2 – turnitin.com code will be posted shortly
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.4 Contract Law
•
What is a contract?
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What is the purpose?
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What form does it take?
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How can it be broken?
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What are the remedies for broken contracts?
•
Why is this relevant to engineers?
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.5 Introduction to Contracts
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Contracts are “legal relationships” between parties
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All contracts are promises, but not all promises are contracts –
non-binding promises are “gratuitous”
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Contracts require a “meeting of the minds” on the terms and
conditions of the promise(s)
•
Contract law allows parties to create their own rights and duties
that can be enforced under civil law
•
More complex agreements and other requirements exist, but
simple contracts require 5 essential elements to be met…
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.6 Five Key Elements of a Contract
•
Essential Elements to every “simple” contract:
1. Offer made and accepted
2. Mutual intent to enter into the contract
3. Consideration
4. Capacity to contract
5. Lawful purpose
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.7 Before we get started…
•
Trust is Key!!! You might not want to do business with
someone if you have to rely entirely on a contract
•
Contracts can help but can never totally prevent bad situations
from occurring so risk management is important
•
Contracts are not an excuse for laziness or bad business deals
•
Contract rights are assignable (can be passed onto or sold to
someone else) unless specifically agreed to otherwise,
• So know the other party and their intentions
• Prepare for (or limit) the possibility that the contract could be
handed over to someone else!
•
Put important contracts in writing and consult a lawyer
• Put educate yourself first and even write a draft to reduce $$$
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.8 #1: Offer Made and Accepted
•
First Essential Condition of a Contract
• Offer is a promise to another party
• Offeror and Offeree (or Promisor and Promisee)
•
Doesn’t have to be in writing!!!
• Documentation provides better evidence (and clarity)
•
May be withdrawn by offeror (unless irrevocable)
• Or, will lapse if not accepted within reasonable time
•
Acceptance must be clearly communicated
• Do not have accept all terms, but…
• This becomes a “counter offer”
•
•
Irrevocable offers, usually state limited time
Option contracts must have value exchanged for the option
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.9 #1: Communications of Offers and Acceptance
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Timing
• Making an Offer – When received
• Accepting an Offer – When “posted”or received
• Revoking an Offer – When received
• Communicate quickly and carefully…
• You can specify the means of communication for acceptance
•
Governing Law
• Usually the law where the offer becomes effective
• Choose and specify in the terms to avoid confusion
•
Forms
• Make sure to understand conditions and if you are the offeror or
offeree (you may be making a counteroffer)
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.10 #2: Intent
•
Second Essential Condition of a Contract
• Both parties must intend to enter into a legal contract and
understand and intend to agree to all of the included terms
•
Mutual Intent
• Make sure that the contract clearly specifies all essential terms of
the agreement between the parties
• Hard to prove misunderstandings or lack of intent
•
Letters of Intent
• Expression of Interest
• Does not contain all contractual details
• Cannot enter into “a contract to enter a contract”
• Cover yourself with express terms
•
•
Example: this Letter of Intent does not represent…
Ask your lawyer
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.11 #3: Consideration
•
Third Essential Condition of a Contract
• Consideration is not “time to think about the contract”, rather it is
a requirement that value changes hands
•
Consideration is usually an exchange of money or promises
that represent value
•
No contract exists without consideration except for “sealed
contracts” (corporation or individuals)
•
“Gratuitous promises” (promises without consideration) are not
contracts and are not legally binding, even amendments may
require additional consideration
•
Can be overturned if made under duress, coercion
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.12 #3: Equitable (or Promissory) Estoppel
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Is it fair to make a gratuitous promise?
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Can you be held to a promise to give a charitable donation?
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Can you be held to a promise to pay someone for something
they already did without a contract or to changes made to an
existing contract without consideration (waiver of fees, etc.)?
•
Perhaps morally, but not necessarily legally if no consideration
•
But, sometimes, strict conditions of contracts can be equitably
“estopped” based on the conduct of the contracting parties
•
Estoppel occurs when the court decides that someone relied
on a gratuitous promise to their detriment and the court finds
the promisor liable for damages
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.13 #4: Capacity
•
Fourth Essential Element of a Contract
• All parties must have the necessary legal capacity
•
Minors (Infants), Drunks, and Lunatics
• Don’t usually have capacity to enter into contracts
• Necessary items – goods for sale, etc. may be exceptions
• Otherwise, usually unenforceable by the adult or sober party
• For drunks (etc.) the other party must be aware and the
incapacitated party must repudiate the contract within a
reasonable period of time
•
Corporations
• Can enter contracts with people and other corporations
• Must be within their limitations as a corporation
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.14 #5: Legality
•
Fifth Essential Element of a Contract
• A contract cannot be enforced if the purpose or terms of the
contract are illegal or otherwise against statue or common law
•
Examples of Statutes and Public Law that may Limit Legality
• Providing a service without Licence
• Charging illegal interest (e.g., 60%)
• Competition acts
• Bankruptcy acts
• Worker’s Compensation acts
• Criminal Code
•
Examples of Common Law Principles that may Limit Legality
• Contrary to public policy and interest (interference, etc.)
• Torts, dishonest or indecent acts, restraints of trade
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.15 Form of Contracts and Statue of Frauds
•
Under common law, simple contracts may be verbal, written, or
even implied while “formal” contracts are always written
• Formal contracts AKA “covenants” such as power of attorney
•
Statute of Fraud
• States that even some simple contracts must be written
• Contracts relating to interests in land
• Agreements to be performed more than a year away
• Guarantees of indebtedness
•
Unenforceable Contracts Not Void
• Contract may be unenforceable but not void
• For instance, contract my be unenforceable, but one party may
have to return a deposit cheque
•
When in doubt (or even when not) write it down!!!
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.16 Failure to Create Enforceable Contracts
Four general situations that could create unenforceable contracts:
1. Misrepresentation
• Innocent Misrepresentation
• Fraudulent Misrepresentation
• Misrepresentation by Non-Disclosure
2. Duress
3. Undue Influence
4. Mistake
• Mistake of Law
• Mistake of Fact
• Unilateral and Mutual Mistake
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.17 Misrepresentation
•
Fraudulent Misrepresentation
• False statement or false assertion of Material Fact
• Must have relied on the statement and not known it was wrong
• Generally three kinds:
•
•
•
Knowingly, without belief in its truth, or carelessness
The misled party can have the contract rescinded at their option
Can also sue for costs and damages under the Tort of Deceit
•
Innocent Misrepresentation
• False statement of material fact discovered after entering contract
• Can be remedied by rescission of the contract at option of misled
• Must be done within a reasonable length of time
• Deceived party can usually claim costs but not damages
•
Misrepresentation by Non-Disclosure
• Special cases only such as “utmost good faith” and partnerships
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.18 Duress and Undue Influence
•
Duress
• Contract induced through intimidation
• Threatened or actual violence or imprisonment
• Must be directed at party (not property) or close relation
• Makes contract voidable by the threatened party
• Cases includes threats of disclosure to the public
• Economic duress includes threats of work slowdowns
•
Undue Influence
• Similar to duress but probably more common
• Special relationships may create positions of unfair advantage
•
•
•
Parent-Child, Doctor-Patient, Lawyer-Client, etc.…
Dominant party must show bargain was fair and adequate, other
party had full disclosure, and free to seek alternatives and advice
Otherwise, weaker party may be able to repudiate (void) contract
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.19 Mistake
•
Types of Mistake
• Mistake of Law – no longer different from mistake of fact
• Mistake of Fact – must be factual and important – not opinion
•
Mutual Mistake
• Simple “rectification” is available when both parties agree that
change is required, especially for typos and other minor errors
• Mistaken amendments may fall back on intent of prior agreement
•
Unilateral Mistake
• One party’s mistake, may be similar to misrepresentation
• No duty to point out minor errors, but a party may not generally
enforce a contract with a mistake that they knew about and if the
mistake is an important term of the contract
•
Case law provides some specific situations…
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.20 Mistake Case Law
•
Belle River v. Kaufman
• Contractor submits a bid with a mistake and try to withdraw it
• Plaintiff refuses withdrawal, tries to accept bid, and is forced to
accept a higher priced bid so sues contractor for the difference
• Courts decide that the mistake was an honest clerical error, not a
substantial mistake, and no one should profit from such a mistake
• “An offeree cannot accept an offer that he knows has been made
by mistake and that affects a fundamental term of the contract”
•
Queen in Right of Ontario v. Ron Engineering
• Another tender was submitted with a BIG mistake ($750,000 out
of $2.748 million) and a bid deposit of $150,000
• Contractor tries to withdraw ONE Hour after submission, but is
refused return of their deposit so they sue to get it back
• Judge ruled against the contractor but is overturned in appeals
• But Supreme Court overrules Belle River precedent & Ron loses
• Said that tenders are offers and form a contract when accepted
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.21 Tendering Issues – “Contract A”
•
In Ron Engineering, the Supreme Court confirmed the
“Contract A” principle of contract law for tenders
• Very significant, new, and controversial
•
There are two types of contract arising from tenders
• Contract A (invitation to tender, contract of irrevocability)
• Contract B (actual construction contract with “winner”)
•
Issues with Contract A
• Invitation to tender is generally 100% enforceable as a contract
by the “owner” if the contractor (or subcontractor) submits a bid
• Owner may submit multiple (different) Contract A invitations for
tender but can be liable if they are incompatible with each other
or if the owner does not apply consistent criteria (lowest bid, etc.)
• Courts have found that “there cannot be an implied term which
conflicts with an express term…” in case where the owner
explicitly inserted limitation clauses and right to use other criteria
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.22 Interpretation of Contracts
•
Contract Interpretation
• Parties may dispute the meaning of a part(s) of the contract
• Canada prefers “strict” interpretation (but not unconsciousable)
•
•
May rely on dictionary definitions and use of wording and law
Courts may also use “liberal” interpretation (fair and reasonable)
•
Intent over wording, may use witnesses and other evidence
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Rule of “Contra Proferentem”
• Ambiguous provisions usually are interpreted against the drafter
•
Parol Evidence Rule
• Terms agreed to outside or before the contract do not exist –
unless the omitted terms were clearly a condition of contract
•
Implied Terms
• Skill, workmanship, and legality may be implicitly expected
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.23 Discharge of Contract
•
Discharge by Performance
• Contract is at an end when all parties complete their promises
•
Agreement to Discharge
• Amend the contract can include termination with mutual consent
•
Discharge pursuant to Express Terms
• A contract can stipulate that certain events may end the contract
•
Discharge by Frustration
• Very rare significant (external) factors that would result in work,
if performed, resulting in a different thing than contracted for
• Also related is “Force Majeure”clauses - war, floods, strikes, etc.
•
Discharge by Breach
• When a party fails to meet their obligations under a contract…
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.24 Breach of Contract
•
•
•
Breach of Contract
• A breach occurs when a party has “defaulted” (failed) on their
promises under a contract – they have “breached” the contract
• Breach almost always entitles the innocent party to damages, but
does not always allow them to discharge the contract
• Only a breach that is fundamentally important to the contract will
automatically entitle the innocent party to discharge
• Some contracts provide for a discharge if a breach occurs
Repudiation
• When a party notifies (or through conduct) that they will meet
their obligations
Remedies
• The non-defaulting party is entitled for losses that naturally flow
from the breach and/or were foreseeable at the time of contract
• Other remedies exist for special cases
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.25 Remedies for Breach
•
Direct and Indirect Damages
• Direct and indirect damages were discussed under Tort law
• Contracts often seek to limit indirect or “consequential” damages
•
Duty to Mitigate
• A party that suffers loss or damages should take reasonable steps
to mitigate or minimize the amount or this will be used in court
•
Penalty Clauses
• Should be pre-estimated, usually based on foreseeable damages
• Contracts should use term “liquidated damages” not “penalty”
•
Quantum Meruit “as much as is reasonably deserved”
• Applies when an agreement was not reached or discharged, but
work was performed and a party is seeking recovery
• Usually provides for time spent and materials used
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.26 Other Issues of Breach
•
•
•
•
Substantial Compliance
• Contractor may comply with the terms but fail to comply with a
minor aspect of the contract
• Contractor is entitled to payment less any damages caused by the
failure to fully perform
Specific Performance and Injunction
• Equitable remedies by the court that provide special relief and
supplement damages
Specific Performance
• Court forces vendor or contractor to perform a contractual
obligation such as sale of land, product, or completion of service
Injunction
• Court order that prohibits or restrains the performance of an act
• Examples include promises not to compete or commit a breach
• Court requires a “negative covenant” to exist, and considers
reasonableness, public policy, and restraint of trade
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.27 Fundamental Breach
•
Doctrine of Fundamental Breach
• A breach that strikes at the “heart” of the contract
• Problems occur when “exception clauses” limit liability
•
Harbutt’s Plasticine v. Wayne Tank and Pump
• Poor design caused factory fire, but contact limited liability
• Court found Wayne to be in “Fundamental Breach” because the
design was so “wholly” unsuitable for the contracted purpose
• Harbutt’s Plasticine was awarded costs of repair
•
UK and Canada have changed approach over the years
• Parties should have the freedom to agree to exception clauses
• Principle of “Contra Proferentem” – ambiguities in any exception
clause are usually held against the party relying on it
• Clearly constructed exception clauses are usually enforced, but
extreme fundamental breaches might override them in Canada
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.28 Other Contracting and Legal Issues
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•
•
•
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Agreement between Clients and Engineers (Ch. 21)
• Agency, fees, forms, limiting liability, complying with laws
Concurrent Liability in Tort and Contract (Ch. 22)
• Tort duty may be above and beyond contractual obligations
The Duty of Honesty (Ch. 23)
• Dishonesty and bribes can result in criminal charges
Construction Contracts (Ch. 24)
Other topics and chapters relevant to Professional Practice
Exam
• Arbitration and ADR (Ch. 28)
• Lien Legislation (Ch. 30)
• Regulatory Aspects and Ethics (Ch. 32)
• Industrial Property (Ch. 33)
• Employment Laws (Ch. 36)
Engineering Science 498G © J. Adams 2003-2004
Contract Law for Engineers
10.29 Next Class: Monday March 29, 2004
• Topics
• Interpretation and Breach of Contracts
• Product Safety, Design and Risk for Engineers
• Readings
• Law Text, Ch. 14-22
• Review Course Notes, Part II: (Pages 117-175)
• Assignments
• Case Study DUE Monday, March 29 by 4:00PM in the
Locker for Section 2 – turnitin.com code will be posted
Engineering Science 498G © J. Adams 2003-2004