Contract and the Law

Lecture 3
Learning Objectives
• Understanding the major conceptual steps and requirements of
contract formation, from agreement to consideration and formality
requirements.
• Highlighting possible defects in contract formation.
• Acknowledging that some contracts end up with a breach by one or
both parties, and the pursuit of remedies.

2
 Standard Contracts
• What is the Purpose of a contract?
• Define duties and responsibilities of parties
• Distribute risk between parties
• A Contract is Not:
• A list of procedures
• Setting the stage for litigation
• One-sided – designed to give one party the advantage.
• Examples of Terms
• Scope
• Price
• Others??
 Standard Contracts
• Why we use • Advantages
standard contracts? • Cheaper
• Consistency • Common, well used terms

• Standard Industry • Tested in court

Terms • Useful as a checklist
• Proven in court
 Standard Contracts
• Disadvantages
• Nobody reads them
• Reluctance to change them by consultants

• Project Specific Requirements

• Defects in creating and enforcement

2023-05-24
Importance of Contracts
• Since contracts are so important in defining the rules by
which the construction industry operates, it should be
obvious that when two parties enter into a contractual
relationship, each would know and acknowledge that fact.
• However, this is not always the case.
• When one of the parties denies that a contract exists, it
becomes important to understand when, and how, legally
binding contracts are formed.
• Three elements for contract formation are necessary: an offer, an
acceptance, and consideration.

© 2015 Cengage Learning Engineering. All Rights Reserved. 6

A Contract by definition
• A contract is an enforceable voluntary agreement between
two or more parties.
• The terms contract and agreement are interchangeable.
• An enforceable contract is one that a court upholds.
• Contracts take many forms:
• they may be written
• oral
• partly written and partly oral.

© 2015 Cengage Learning Engineering. All Rights Reserved. 7

Offer and Acceptance
• What is an offer? What is its essential nature?
• One legal authority has defined an offer as a manifestation of
interest or willingness to enter into a bargain made in such a way that
the receiving party will realize that furnishing unqualified acceptance
will seal the bargain.
• For example, a house painter who declares, “I’ll paint your house for a price
of $3,000 during the third week of September, provided my other work will
let me,” or words to that effect, has not made a binding legal offer because
the manifestation of willingness is qualified.

© 2015 Cengage Learning Engineering. All Rights Reserved. 8

Offer and Acceptance, continued..
• What about the format of the offer? Is any particular format
required?
• In the general case, no format is required as long as the offer meets
reasonable standards of completeness and clarity.
• However, there are exceptions, the most prominent being the particular kind
of offer occurring in construction that we refer to as a bid or a proposal.
• Bids and proposals are usually made in response to an advertised
notice called an invitation for bid (IFB) or a request for proposals
(RFP).
• Both an IFB and an RFP by their written terms usually require that the bid or
proposal be in a specific format; if it is not, it is considered a “nonconforming”
offer and will be rejected. Other than in situations where a format is
specified, no mandatory format is required for an offer to be legally sufficient.

© 2015 Cengage Learning Engineering. All Rights Reserved. 9

Offer and Acceptance, example
• In every case, whether written or oral, a legally binding offer must be
clear.
• It must define or describe that which is being offered. In the previous
simplistic example, there is a lot of difference between
• “I’ll paint your house for a price of $3,000 during the third week of September
provided my other work will let me.”
• and
• “I’ll paint your house for a price of $3,000. My price includes scraping off all
existing loose, flaking paint to bare wood, priming bare wood with Sherwin-
Williams exterior primer, and applying two coats of Sherwin-Williams exterior
house enamel, colors of your choice, one for the body of the house and one
for the trim. Glazing work or repair of downspouts and drains is not included.
The work will commence the third week in September and be completed that
week, weather permitting.”
© 2015 Cengage Learning Engineering. All Rights Reserved. 10
Acceptance
• The acceptance, the second element that must exist to form a
contract, a number of points are important.
• Obviously, for the acceptance to have any relevance and legal meaning, it
must be an acceptance of whatever was offered.
• A form of acceptance that changes the offer in any significant respect
is not an acceptance at all but a counteroffer.
• An exchange of offers and counter offers between two parties constitutes a
negotiation.
• In a negotiation, only the final offer and acceptance matter in respect
to contract formation.
• A contract between two parties cannot be legally binding until and unless
there is meeting of the minds—that is, the mutual agreement is not made
under duress—at the time the contract is formed.
Consideration
• The third and final element necessary for contract formation is the
consideration.
• In construction, the consideration may be money, but not always. It
can just as well be some other “cash good” thing, such as the
discharge of an obligation that has a value.
• The value may not be great.
• The main point is that consideration for both parties to the contract
must always be present in one form or another in order for a contract
to be formed
Reasonable Certainty of Terms
• Express terms are words, phrases, or conditions that have been
discussed and agreed to by the parties, whether in writing or
orally.
• Implied terms are those terms that have never been discussed or
agreed to between the parties, but which are taken for granted.
• Certain essential terms must be reasonably clear to the parties
and to judges.
• For example:
• Price;
• Scope of work;
• Completion timeframe.
14
Contract Enforceability
• Enforceability refers to the likelihood that a court would enforce the
rights of a party or award a remedy in the event of a dispute.
• Some agreements are unenforceable because of a flaw in the contract or in
its formation, and some become unenforceable due to events that occur
after the creation of the contract.
• Two key principles determine whether an enforceable contract exists:
• contract formation consisting of an offer and an acceptance, and
consideration.
• the parties must have legal capacity to contract and an intention to create
legal obligations, and the contract must have a lawful purpose.

15
Voidable Contracts
• Contracts may become voidable because of events such as:
• Duress
• Frustration
• Impossibility
• Mistakes
• Misrepresentation
• Unconscionability
• A voidable contract can be terminated or ended by a party that is not
in breach of the contract, but that party may also choose to continue
with the contract.
• Parties sometimes raise these events as defences to claims that arise
during or following the performance of a contract.

© 2015 Cengage Learning Engineering. All Rights Reserved. 16

Example:
• In one case, a contractor was contracted by a builder to deliver and
install windows by a certain date.
• As the date approached, the contractor refused to install the
windows on time unless the owner agreed to increase the contract
price.
• The owner reluctantly agreed in order to avoid a delay to the final
completion date.
• Once the work was completed, the owner refused to pay the
additional money, arguing that there had been no consideration.
• What do you think?
Defects in Contract Formation
• Certain defects may make a contract unenforceable
(voidable)
• Defects affecting mutual assent
• Fraud, misrepresentation and duty to disclose
• Mistake
• Unconscionability
• Economic duress
• Frustration
• Impossibility
© 2015 Cengage Learning Engineering. All Rights Reserved. 23
Fraud, Misrepresentation and Duty to
Disclose
• Misrepresentation: an untrue factual statement that is made
by one party that induces the other party to enter into the
contract.
• It fall into three categories:
• Fraudulent (intentional false statement, most serious)
• Negligent (statement carelessly made)
• Innocent (difficult to obtain a remedy)

© 2015 Cengage Learning Engineering. All Rights Reserved. 24

Fraud, Misrepresentation and Duty to
Disclose
• Contracts are often made after promises and representations by the
parties.
• Actions that can create defects:
• False or deceiving material statements;
• Failure to disclose important facts that the other party could not have
ascertained.
• Duty to disclose for public entities.
• Remedy: Right to cancel the contract and possibly receive monetary
compensation.

© 2015 Cengage Learning Engineering. All Rights Reserved. 25

Mistake
• Most common defect.
• Includes mistakes in the terms of the contract, basic facts and underlying
assumptions.
• Courts evaluate several factors when parties claim there has been a
mistake.
• Generally, the greater the carelessness, the less likely that relief will
be given (cancelling the contract).
• Three prerequisites to void a contract for mistake
• The mistake must be material (significant)
• The mistake must be mutual (both parties must have been mistaken)
• Mistake must have been made at the time the agreement was made
• There is no remedy for a mistaken party if the mistake was not mutual

26
Unconscionability
• Unconscionable: so unfair, oppressive, and one-sided that the courts
won't enforce it
• Generally, requires extreme inequality of bargaining power at the time of
contract formation.
• A clause or contract that is particularly harsh toward one party may be
evidence of an inequality of bargaining power.
• Commercial contracts rarely unconscionable
• Court may refuse to enforce the contract at all, or interpret it very
leniently
• Courts examine several aspects:
• Contracts of adhesion;
• Absence of true negotiation or meaningful choice;
• Objectionable term hidden in small print;
• Unfair or one-sided. 27
Duress
• Duress: improper pressure and threats used to induce a party to enter
into a contract
• Must be extreme pressure: "coercion of will so as to vitiate consent"
• Fine line between legitimate business pressure, and duress
• What is acceptable depends on the context: the law protects vulnerable
people
• Economic duress: One party exerts excessive pressure beyond normal
bargaining and the other party has no real choice.

© 2015 Cengage Learning Engineering. All Rights Reserved. 28

Frustration
• Frustration, or impossibility, occurs when an unforeseen event
occurs that makes the performance of the contract either impossible
or of no value.
• In such cases, a party may be able to claim that he or she does not have to
perform the contract.
• For the courts to agree, the risk of the event must not be a risk that was originally
allocated to one of the parties.
• Frustration occurs when an unforeseen event makes performance
impossible, or of no value
• Event must not be a risk that was anticipated by the parties
• Force majeure clauses: prescribe the consequences of unlikely events
• Modern force majeure clauses are exhaustive, and so frustration is rare
Agreements to Agree
• An agreement to make an agreement in the future is not an
enforceable contract.
• Parties often sign a letter of intent, or a term sheet, which is
a document that sets out the basic terms of a business
arrangement in advance of agreeing to all of the detailed
contractual terms.
• The parties then commence to negotiate the detailed terms.
• But if such negotiations fail, there is no binding contractual
obligation.
Agreements to Agree
• However, such agreements create some problems.
• First, not all parties may be clear that the preliminary agreement is
unenforceable.
• Second, and more likely, both parties may commence
performance without creating a formal contract.
• On the urging of one of the parties, it may be interpreted by the court
as an enforceable contract.
• Agreements to agree are not enforceable
• Letter of intent: expression of intention to form a contract in the
future
 Estoppel and waiver
• Estoppel: "to be stopped"; a party is • Some ways that an estoppel can arise
are as follows:
estopped from enforcing rights that it • Mutual assumption about existing facts –
has waived Where parties mutually adopt an
assumption as to the existence of a state
• It requires a clear expression that the of affairs and where they conduct
waiving party intended to waive its themselves in reliance on that
assumption.
rights, and reliance by the party • Inducement to believe existing facts –
benefiting. Where one party makes a representation
• Is a legal mechanism which prevents a party of fact about an existing state of affairs,
which has the effect of inducing another
from departing from a promise or party to rely on that representation, to
representation they have made to another their detriment.
party where to do so would cause that • Promise about the future – Where a
other party to suffer detriment. party makes a promise about the future
to another party which is relied upon by
• The concept embraces notions of fairness that other party to their detriment.
and reasonableness, is focused towards • Promise to obtain interest in property –
protecting a person who has relied upon an Where a person represents to another
party that that they will obtain an interest
assumption or representation to either in the first person’s property, where that
exist, or to come into existence. other party proceeds upon this basis.
© 2015 Cengage Learning Engineering. All Rights Reserved. 33
Estoppel and waiver
• Waiver by election involves the unilateral abandonment of a
right or claim, and may occur where one party elects between
two alternatives and inconsistent rights.
• when a party, by words or conduct, relieves the other party of the duty to
perform
• Where one of those rights are satisfied, the other becomes no
longer available for the party to assert.
• For waiver in this context to occur, there needs to be
unequivocal words or conduct and knowledge of the right that is
being waived.

© 2015 Cengage Learning Engineering. All Rights Reserved. 34

Estoppel and waiver
How and when a waiver can occur?
• Where by word or by conduct, a party to a contract causes
another party to reasonably believe that certain rights will not
be enforced, and where subsequent enforcement of those
rights would be unfair, Canadian courts generally rule that a
waiver has occurred.

© 2015 Cengage Learning Engineering. All Rights Reserved. 35

Quasi-Contract
Is defined as an obligation of one party to another imposed by law
independently of an agreement between the parties.
• Courts may decide that contracts are inappropriate for determining
compensation as a result of fundamentally changed conditions,
mutual mistake, or abandonment of a contract by one party.
• Yet if the other party has received the benefit of the work, the law
says that such party should pay something for it.
Quasi-Contract Example
• A person orders some perishable items online by providing his
address and paying for the same.
• At the time of the delivery of the goods, the delivery man
delivers them to the wrong address.
• Instead of denying the delivery, the receiving party accepts the
order and consumes the same.
• The case went to the court, and the court then ordered to issue
a quasi-contract according to which the recipient has to pay
back the cost of the item to the party who paid for the item
initially.
• So, in this case, the benefits of the goods have been enjoyed by
the receiving party, so such a receiving party is bound to
compensate the former party.
Quasi-Contract VS. Contracts
• The contract refers to an agreement that is enforceable by
law.
• Quasi-Contract is one that is not exactly an agreement, but it is
similar to an agreement.
• Both parties give their consent voluntarily and freely.
• None of the parties gives their consent voluntarily
quantum meruit
• Quantum meruit: “the amount it is worth”; when it is not appropriate
for the remainder of the contract to be enforced, but compensation is
given for the work already done
• Requires that there be no valid contract in place for the work in issue
• May be used to compensate for constructive changes that are not within the contract.
• The principle of quantum meruit applies when one party should
compensate the other party that performed the work.
• Quantum meruit simply means “the amount it is worth.”
• The party that performed the work must receive pay that approximates the value of the
work, including a reasonable profit.
• But for quantum meruit to apply, there must be no valid contract in
place that applies to the work.
quantum meruit
• In the construction industry, this principle applies most frequently to
changes in circumstances.
• If the change is one that is covered by the change order provisions of
the contract, then quantum meruit does not apply.
• However, if the changes are such that they fundamentally alter the
nature of the contract and are therefore beyond the scope of the
change order provisions, quantum meruit may be the best way to
deal with compensation.
 Promissory Estoppel
• Promissory estoppel is based on the concept of equity and requires that
one who has placed another in a changed and untenable position by
promising a certain performance is “estopped” from denying the
performance.
• One who denies performance must make good the damage caused by
failure to perform as promised.
• Although involving the common law principle of damages for breach of
contract, promissory estoppel does not depend on the existence of a
contract between the general contractor and the subcontractor or material
supplier.
• It is the refusal or failure of the subcontractor or material supplier to enter
into a contract based on the price quotation that triggers the application of
promissory estoppel.
© 2015 Cengage Learning Engineering. All Rights Reserved. 41
 Promissory Estoppel
• One of example of this in construction is that If a subcontractor or material
supplier refuses or otherwise fails to honor the quotation, the general
contractor who is determined to be the low bidder and awarded the prime
contract usually is forced to obtain the subcontract work or materials from
others whose price quotation was higher.
• Since the price differential would not have been included in the prime
contract bid to the owner, the general contractor has been damaged.
• These damages can be recovered under the doctrine of promissory
estoppel.

© 2015 Cengage Learning Engineering. All Rights Reserved. 42

Contract Breach
• Failure to perform in the manner and time required by a
contract.
• A breach allows an aggrieved party to pursue a claim for damages.
• Unless the breach is material (serious) and not cured, the
aggrieved party must still perform its promises under the
contract.
• Balancing factors for characterizing a breach as material:
• Extent of injury
• Extent to which the aggrieved party can be compensated
• Extent of loss by breaching party
• Likelihood the breaching party will cure
• Reason for breach.

© 2015 Cengage Learning Engineering. All Rights Reserved. 44

Summary

• The system of contract law relies on judicial enforcement of promises

between contracting parties.
• Even if the basic requirements are fulfilled, some contracts may be
deemed unenforceable because of defects in formation.
• For contracts that are enforceable, a breach of obligations leads to a
claim for damages.

© 2015 Cengage Learning Engineering. All Rights Reserved. 45