Download - Contract Law

CONTRACT LAW

ByBabulayi Wilson

University of Botswana

IMPORTANCE OF LAW TO ENGINEERS

Professional involvement in Litigation or Arbitration

Affected by Legal Matters Awareness of the main principles of Law

and the Legal SystemUnderstand Framework for Contract LawUnderstand Principles of giving Expert

Evidence for Trial or Arbitration

THE LEGAL SYSTEM

Classification of the law

Administration of the law

Sources of law

Tribunal System

CLASSIFICATION OF THE LAW (1OF 5)

Different Categories (Two Considered)

1. Criminal Law

2. Civil Law

CLASSIFICATION OF THE LAW (2OF 5)

Criminal Law – Characteristics

the offence is against societythe state prosecutesthe trial is in a Magistrate Courtthe offender is found guilty or not

guilty, andthe offender is punishedComplainant often becomes State

Witness

CLASSIFICATION OF THE LAW (3 OF 5)

Civil Law – Characteristics

the dispute is between individuals or Parties

the Plaintiff sues the Defendantthe trial is in a High Courtthe Defendant is found liable or not

liable, and the Plaintiff is compensated

CLASSIFICATION OF THE LAW CONT (4 OF 5)

Further Classification of Civil Law

Contract Law - legal binding agreements

Tort - civil wrong (origin of Consultancy Contracts)

Property – recognizes Real & Personal Property

Commercial Law - business transactions

CLASSIFICATION OF THE LAW (5 OF 5)

Family Law - marriage, divorce, custody of children, maintenance and adoption

Company Law - legal person or artificial person

Employment Law – special contract law that governs employment or industrial realtions

SOURCES OF LAW (1 OF 10)

Two Main SourcesLegislation

– known as statute law since it involves creation of Acts by Parliament

– codified in Acts of Parl e.g. Sale of Goods Act 1893

– statutes are more commonly used where social legislation is required e.g. HSW Act 1974 and Trade Union and Labour Relations Act 1974

– In some areas of law statutes are common (e.g. Criminal law & Revenue law etc)

– most law is derived from judicial precedent (case law) and statutes are used to revise or adapt legal rules made by courts

SOURCES OF LAW (2 OF 10)

Acts of Parliament

Statutes begin life as bills originating from government departments

Introduced into Parliament by a government minister

SOURCES OF LAW (3 OF 10)- Legislation

Subordinate/Delegated Legislation

drafted by ministries and local authorities etc

called subordinate since it is made by bodies with limited powers

subject to amendment by Act of Parliament

may also be held invalid by courts unlike statute law (examples are Building Act and Bylaws)

SOURCES OF LAW (4 OF 10)- Legislation

Interpretation of Acts of Parliament

Courts have no power to alter/amend Acts of Parliament but

can have an important impact on the application of statutes since they must interpret the words, and

apply them to the case consideredthe situation is often that the wording is ambiguous court is assisted by Interpretation Act that provides

a number of definitions unless the contrary is shown

SOURCES OF LAW (5 OF 10) - Judicial Precedent

Judicial Precedent (Case Law) - decisions of courts made in the course of litigation (apply in subsequent cases by certain courts where the facts are largely the same)

judge must decide in favour of one party & give reasons for his decision (called ratio decidendi)

SOURCES OF LAW (6 OF 10) - Judicial Precedent

decision binds parties in particular dispute but ratio decidendi binds others in similar disputes in future

in the course of judgement the judge makes a number of comments, but not all of which form ratio decidendi (not binding and called obiter dicta (things said by the way)

SOURCES OF LAW (7 OF 10) - Judicial Precedent or Case Law

Binding and Persuasive Precedents

ratio decidendi - binding precedent followed only by certain courts (lower ranking)

judges in subsequent cases may be persuaded to follow an argument that is not binding (persuasive precedents)


Binding and Persuasive Precedents

the following are particularly important:

obiter dicta –things said by the wayforeign decisions - similar legal systemsdissenting judgments from other cases


Law Reports

system of recording casesdecisions made in courts must be recorded

and publishedreports referred to in shortened hand e.g.

SOURCES OF LAW (10 OF 10) - Case Law (Law Reports)

HEDLEY BYRNE & CO LTD v HELLER 7 PARTNERS LTD 1964 AC 465 was a House of Lords Appeal Case, and is found on page 465 of 1964 reports

the first named party brings an action against the second,

“R v Someone” indicates the Crown (state) brought the case, and

“Re Someone” means the other party’s name is being

withheld

Note that Tribunal system including Arbitration, Adjudication Cases are not reported, so no precedent is or can be set by Arbitration

Application of Contract Law in Construction

This is the source of most Conditions of Contract (FIDC;ICE: JBCC)

Knowledge of Contract Law is Essential in Contract Procedures

The Structure of Contract Law

Creation of a Contract

Defects in a Contract

Discharge of a Contract

The Parties to a Contract

Creation of a Contract

Introduction

A contract is an agreement that the parties have voluntarily entered into and which is legally binding and enforceable in law providing certain requirements have been complied with.

Creation of a Contract –Requirements (1 of 4)

Offer - contractor offers a price against a proposal drafted by

engineers (client’s agent). You need to understand that which is offered.

Communication MediaPostal rulesTelegramTelephone/TelexFax

Creation of a Contract -Requirements (2 of 4)

Acceptance - Client accepts a price quoted against a schedule of pricing

(e.g. BOQ). Sufficiency & Correctness of Tender Price & Rates is crucial at this stage; agree upon scope of contract and expectations.

Consideration - Elements of value (contractor expects payment for work that meets input specification & client expects product that is fit for purpose - shall be real & sufficient)

Executed Consideration - exchange at time of agreement

Executory Consideration - promise to give in future


Intention to create legal relations - agree to sue each other under the contract

Capacity - Finance, Expertise, Plant & Equipment, Reputation, human resources (contracts with incapacitated parties are voidable – the other party may rescind at a future date)

Avoid contracting with impecunious contractors by employing a systematic tender evaluation and contractor selection strategies


Purpose - Validity of the contract (legality and observation of public policy) Illegal contracts are void (deemed to have never existed)

TERMS, CONDITIONS, WARRANTIES AND REPRESENTATIONS

Terms

Expressed Terms - stated in some way (contract documents - Form of Contract,

Specs, Drawings, etc)

Implied Terms - (implied by fact, law, or custom) - has to be there for the contract to work (e.g. Health and Safety at work)

CONDITIONS

Conditions - when express terms are of fundamental importance to the purpose of the contract (e.g. time for contract completion, cost and quality); some conditions are implied by e.g. legislation, i.e., protection of environment, HSW

Breach of conditions (repudiatory breach) –

a breach of a condition of contract entitles the injured party to repudiate/terminate the contract

WARRANTIES

Warranties - when express terms are less important (or subsidiary) to the purpose of the contract (e.g. employment of local labour, design requirement for contractor – these are called secondary objectives)

o However, some subsidiary terms are Government Policies that have to be implemented (citizen contractor preference)

Breach of warranties - claim for damages only

DEFECTS IN CONTRACTS


MISTAKE AND MISREPRESENTATION (Consensus Ad Idem (Real Agreement)

Sometimes a contract may appear valid in that there is an offer, which is accepted, consideration ,and an intention to create legal relations but in reality there is no real agreement between the parties

This is often because one party is induced to enter into the agreement by a misrepresentation

At times one or both parties are mistaken about some essential element relating to the contract.


Mistake

The general rule is that mistake does not make a contract invalid.

This rule even applies where the seller is aware of the buyer’s mistake providing the seller has not misrepresented the truth of the buyer


Categories of Mistake

Mistake as to the Existence of the Subject MatterWhere both parties contract in the mistaken belief

that a particular thing is in existence when in fact it has ceased to exist (fundamental mistake)

Mistake as to the Identity of the other PartyIt is sometimes pleaded by one party that there is no

valid contract because he was mistaken as to the identity of the other party to the agreement and he would never have entered into the contract if he had been aware of the other party’s true identity.


Mistake as to the Identity of the other Party (conti.)

Such a claim will only succeed if it can be shown that:-

o The identity of the other party was of crucial importance; and

o Reasonable steps were taken to verify the other party’s identity before the contract was entered into.

Where the parties are in a face to face situation the identity of the other party is unimportant

It is presumed that each party intended to contract with the person in front of them, irrespective of their identity.


NON EST FACTUM

written document mistakenly signed by one party Possible only if the signed document is radically

different from what the party intended sign the party concerned may be able to avoid the contract

by pleading ‘non est factum’ ,i.e. , not my document. Such a plea will only be successful however if it can be

shown that:The document is radically different from the

document that was intended to be signed; and The mistake was not due to the carelessness of the

party signing the document


Misrepresentation - a false statement made by one party to another, which induces the second party to enter into a contract.

A false statement will only amount to misrepresentation if a party to the contract or his/her agent makes it.

If a third party makes the statement it will not be actionable

Silence A misrepresentation may be made orally or in writing

but the general rue is that silence cannot constitute misrepresentation.


“Opinion” against “Fact” Statements of opinion do not amount to

misrepresentation if they turn out to be inaccurate

Only statements of fact will amount misrepresentations if untrue

Types of Misrepresentation Innocent Misrepresentation – this is where the

maker of the statement honestly believes the statement to be true although in reality it is not.


Types of Misrepresentation

Fraudulent Misrepresentation – if the party making the statement knows that what he is saying is false or if he make the statement without caring whether it is true or false then the misrepresentation is said to be fraudulent.

Negligent Misrepresentation – until 1967 a misrepresentation was either fraudulent if it was made dishonestly or in all other cases innocent. The Misrepresentation Act 1967 introduced a new category of misrepresentation where a false statement is made carelessly

Statements which Subsequently become Untrue

Where one party makes a statement which was true when made but which subsequently becomes untrue before the contract is entered into then it is his duty to inform the other party of the change of circumstances (see notes on ubberrimae fidei in insurance contracts).

MISREPRESENTATION

Remedies for Misrepresentation The remedies for misrepresentation are found in common

law, equity and the provisions of the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977

Successful proof of misrepresentation makes the contract voidable at the opinion of the party misled

The injured party for fraudulent misrepresentation is entitled to recession (cancellation of the contract) and damages for any loss that has been suffered as a result

A successful claim for innocent or negligent misrepresentation entitles the plaintiff to rescind the contract

Ironically, if the contract is rescinded there is no automatic entitlement to damages

MISREPRESENTATION

Remedies of misrepresentation

Recession sets aside the contract as if it had never existed

Parties are then returned to their original positions

Damages are intended to put the innocent party into the same financial position, as he would have been in had he not been misled, that is, if he had not entered into the contract

MISREPRESENTATION

The court may refuse recession and award damages instead, for example where:

The court is unable to restore the parties to their original position. This could be where goods have been consumed, or inextricably mixed with other goods.

The injured party has affirmed the contract. This means that the injured party is fully aware of the false statement but has shown himself prepared to go on with the contract.

The injured party has delayed too long in seeking recession. There is no precisely defined time limit, but a long delay once all the facts are known may in itself be affirmation of the contract.

The party rights’ have intervened. The court decides to exercise its discretion under the

Misrepresentation Act to award damages in lieu of rescission.

DISCHARGE OF CONTRACT

DISCHARGE OF A CONTRACT

Introduction

A contract is said to be discharged when neither party has any further legal responsibilities to perform


Discharge by Performance - each party has fulfilled his/her obligations under the contract (Issue of Defects Correction Certificate)

Complete Performance - do everything (Part performance is no performance – has been amended as indicated below). This is the origin of the Certificate of “Defects Correction” or “

Substantial completion - currently courts introduced the doctrine of substantial completion (but it is difficult to define what is “substantial”). This is the origin of the certificate of “Substantial Completion” or “Practical Completion”


Discharge by Breach - if the party fail or will not perform

Actual Breach - injured party sues for breach of contract and discharge the other party from performing

Anticipatory Breach - a party gives notice of intention not to perform at a future date (other party commence legal proceedings immediately); in construction, the “default clause” empowers the client to terminate the contractor’s employment forthwith to avoid delays (Forfeiture Clause)”.

DISCHARGE OF A CONTRACT Remedies for Breach of Contract

Recession – court order returning parties to a contract to their original position. However, in construction contracts a Forfeiture Clause is inserted to empower the employer to terminate the contractor’s employment forthwith ( without due process of the law required under recession). Contractor should have been warned before termination of employment.

Rectification – where the contract does not reflect intentions of the parties, the court will impose the missing terms

Specific performance – where damages can not be an adequate remedy, court will order parties to discharge their contractual obligations by performance

Quantum Meruit – as much as he deserves (where damages may be insufficient or no payment provision is made)


Discharge by Death

contracts involving performance of personal services, e.g. Architectural Design of a House, will be discharged if the person performing the personal services dies

In all other contracts personal representatives will be required to complete the deal


Discharge by frustration

Occurrence of events that will make it impossible for one or both parties to perform their obligations (force majaure)

Impossible to perform - occurrence of unforeseeable events

Illegal to perform - change in the law


Radically different from what was agreed

Contract may be discharged if Performance of a Contract was based upon happening of some event (e.g. steel columns erection when the substructure is completed; non completion of substructure would make it impossible to erect steel columns)

THE PARTIES TO THE CONTRACT

PARTIES TO THE CONTRACT

Doctrine of Privity

Principles

A Third Party cannot be subject to a burden by a contract

A Third Party cannot claim a benefit under a contract even if the purpose of the contract was to benefit him

PARTIES TO THE CONTRACT

Doctrine of Privity v Common Law

Subrogation - under common law, the insurer has the right to stand in place of the insured and sue the third party who caused the loss

(e.g. when X hit Y’s car from behind, the insurance company will make good damages and then sue X an equivalent amount)

Trusts - beneficiary under a contract, can sue for breach if parties fail to meet their obligations

Giving Third party Rights

PARTIES TO THE CONTRACT (1 OF 3)

Collateral ContractsDoctrine of Privity bars clients from suing

both domestic and nominated subcontractors nor pay them directly

Two particular situations may arise when a sub-contractor’s work proves defective and employer seeks to recover loss

Main contractor goes into liquidation – business law rule is that recovered damages should go towards satisfying all the creditors according their preferences

PARTIES TO THE CONTRACT (2 OF 3)

If the sub-contractor has design responsibility that is not contained in the main contract – there will be nothing to sue the main contractor for but the sub-contractor

Above situations may be Overcome by getting the subcontractor to enter into a Collateral Contract (“by the side”)

COLLATERAL CONTRACT (3 OF 3)

GIVING THIRD PARTY RIGHTS

Other ActionsDebt: if a debt is assigned to a third

party, that person may sue the original debtor (Power of Attorney)

Bills of Exchange: document instructing a third party to pay a stated sum at a designated date or on demand

Transfer of land - benefits attached to land may be transferred to future owners

GIVING THIRD PARTY RIGHTS

Agency - conferring of authority (authority is dependent upon the instructions of principal.

E.g. Engineer is an Agent of the Client for Design)

A person may require someone else to act for him in the negotiation and formation of a contract

Subsequently that person should supervise the performance of the contract (e.g. engineer-employer arrangement)

Agency requires a clause in the conditions of the contract that authorizes the agent – without it the contractor treats the engineer as stranger and takes no instruction from him

The parties to the Contract Cont.

Agency with Agreementexpress agency - oral writtten or by deedimplied agency - by law

Each partner in a business - implied authority to act on behalf of firm

Agency of necessity - act in an emergency when the owner can not be contacted

Auctioneers may sign a memorandum of sale (Law of Property, 1925)


Agency without AgreementApparent agency - acted as an agent

beforeUsual agencyAgency by Ratification - act without

initial authority or exceeds his authority (principal not bound)


Assignment Transfer to another of rights and duties

under a contract (by operation of law [e.g. in the event of death or bankruptcy])

Main contractor sub-lets some work to subcontractors through the doctrine of assignment

SUMMARYCharacteristics of Construction Contracts

Creation of a Contract – Tender Evaluation is Crucial; it is at this stage that you assess the contractors competence, resources, experience, finances, bonds, sureties; non of the parties should misrepresent but the contractor is required to assess the Sufficiency of Tender etc

Defects in a ContractDefects are often undesirable; you always have to know who is the main contractor,

sub-contractor, and a stranger to the contract. Always determine Facts from False Statements that may induce you to enter into a

contract Don’t’ admit strangers into the contract at a later stage (Privity)Client’s & contractors may only give third party rights through AGENCY or

ASSIGNMENT – specific clauses empowering third parties have to be included in the Conditions of Contract

The Parties to a Contract

COMMETNARY (1)

Performance – contractors and clients should strive to fulfill their obligations

Clients should avoid contracting with sole traders; there is nothing to recover should the trader default or die

Where parties experience unforeseen difficulties they shall agree to terminate their contract.

To avoid completion of projects outside time for completion , specific time limit clauses have to be included in the conditions

Always distinguish frustration from breach of either contract conditions or warranties.

COMMETNARY (2)

Avoid disputes & subsequent litigation by using a Standard Form of Contract.

Ensure that Standard Form of Contract clauses are not irrelevant to the environment of use; it is a piece of Legislation ,therefore , check compatibility with Statutes of Country of Application

Clients shall anticipate contractual defects and then put appropriate security measures in place

Contract Administration requires knowledge of Contract Procedures, that is, Contract Law, Law of Arbitration, Law of Tort, Business Law, Employment Law, Consultancy Contracts, Law of Insurance, Engineering Project Management, Law of Agency, Standard Forms of Contract, etc

END OF PRESENTATIONEND OF PRESENTATION