CONTRACTS

Definition
Treitel defined Contract as an agreement giving raise to obligations which are enforced or
organized by law. The factor which distinguishes Contractual from other legal obligation is that
are based on the agreement of the Contracting parties.
Anson defined Contract as a branch of law which determines the circumstances in which a
promise shall become legally binding on the person making it.
Yerokun defined a contract as a promise or set of promises, which the law will enforce.
American Restatement (2nd) of the law of Contract 1978 defines it as … a promise or set of
promises for the breach of which the law gives a remedy or the performance of which the law in
some way recognizes as a duty.
Okany defined a Contract as an agreement in which is legally binding on the parties to it and
which it broken may be enforced by action in court against defaulting parties.
Also Okonkwo and Ilegun, defines Contract as an agreement which is legally binding on the
parties to its and which if broken, any be enforced by an action in count against the defaulting
party.
Chitty, defined Contract as a promise or set of promises which law enforce.

Elements of a Contract
It is important for the engineer in business to understand the essential elements of a
contract. For a contract to be binding and enforceable, five elements must be
present:
1. an offer made and accepted;
2. mutual intent to enter into the contract;
3. consideration;
4. capacity to contract; and
5. lawful purpose.
Within the framework of these essential elements and in accordance with the
contract rules the courts have developed, parties choose terms and conditions to
define the nature of the agreement between them. The private nature of the law of
contracts thus becomes most evident. Contracts consist of benefits to and
obligations of the contracting parties. Agreements are generally arrived at by
choice or through negotiation. The law will enforce the provisions of a valid
contract; the law will not intervene to impose contract terms more favourable than
those negotiated between the parties. In certain circumstances the law may
intervene to declare a contract void, voidable, or unenforceable.
However, the engineer must be aware of one basic premise: if a "bad business
deal" is negotiated, the courts will not impose more favourable terms. Parties can,
however, always alter an existing contractual arrangement by mutual agreement,
provided the amendment is effected within the framework of the essential contract
elements.
Good Faith in Contracting
When an engineer assumes responsibility in an organisation, the engineer is
required to act honestly and in good faith with a view to the best interests of the
organisation. Our legal system attached great importance to honesty. To illustrate
this, in 2014, the Supreme Court of Canada decided Bhasin v Hrynew, a
commercial contracting case involving dishonest and misleading business dealings.
In its landmark decision the court identified that there is a general organizing
principle of good faith that recognizes a common-law duty to perform contracts
honestly. This duty of good faith is essentially a common-law requirement not to
lie or mislead the other party by acting dishonestly in the performance of contracts.

This simply means that parties must not lie or otherwise knowingly mislead each
other about matters directly linked to the performance of the contract. This does
not impose a duty of loyalty or of disclosure or require a party to forego
advantages flowing from the contract; it is a simple requirement not to lie or
mislead the other party about one's contractual performance.

Offer and Acceptance

An offer is a promise made by one person—the offeror—to another—the offeree.
It may involve a promise to supply certain goods or services on certain terms. Not
all contracts must be in writing. The offer may be communicated orally. For the
purpose of evidence, however, it is preferable to effect communications in writing.
As sophisticated business parties are well aware, it is most advisable to maintain a
careful "paper trail." Until it is accepted, the offer may be withdrawn by the offeror
unless it is made expressly and effectively irrevocable by its terms. The offer will
lapse if it is not accepted within a reasonable period of time. If the offeree does not
accept all the terms of the offer but purports to accept the offer subject to variation
in its terms, no contract is formed. Rather, a counter-offer has been made by the
offeree, who thereby becomes the offeror. Acceptance of an offer must be clearly
communicated.
Business offers are usually made subject to express terms. For example, a business
might offer to supply a specified machine at a quoted price. The offer might
contain a proviso—that acceptance of the offer can be made during a limited time
period. The offer might also state that acceptance must be communicated in
accordance with the terms of the quotation.

Irrevocable Offers
An offeree might want to ensure that an offer will not be revoked by the offeror
before the offeree can accept it. This normally occurs in the tendering process, for
example. Upon instructions from the owner, bidders submit offers or tenders that
have been made irrevocable for a specific period of time. At any point during that
period, the offer may be accepted and a contract will be formed. For reasons that
will be noted, "contract consideration" is necessary where such irrevocable offers
are submitted or such bids must be submitted under seal, in order to be binding.

The Option Contract

The option contract is another means of keeping an offer open for a certain period
of time. The right to accept the offer is preserved until the offeree chooses to
exercise the option. The offeror is thus precluded from revoking the offer.
Something of value—for example, a payment of a nominal amount—must be made
at the time of entering into the option agreement in order to make the option
contract enforceable. An option agreement may be advantageous in many business
situations. For example, an individual might want to purchase a particular business,
but may be unwilling to make a firm offer until having completed a review of its
financial and other business records. To prevent the owner from selling the
business until completion of the investigation, the prospective purchaser may be
able to persuade the owner to enter into an option agreement. For an agreed price
(which is usually substantially less than the total purchase price of the business),
the owner of the business becomes obligated to sell only to the prospective
purchaser, during a specified period. And the owner can sell only upon the terms
set out in the option agreement. A specific time limit is stipulated in the option to
purchase agreement. If not exercised by the specified time, the exclusive option to
purchase will expire. Option agreements are particularly common in mining
contracts. The party purchasing the option might wish to carry out exploration
work before deciding to expend a large sum in acquiring property rights, for
example. Purchasing options might also be desirable in land development. A
prospective purchaser might want to find out if it is possible to acquire various
pieces of land from various owners in a particular area before making a large
expenditure on an overall land purchase for development purposes.

Manner of Communication
Accepting an Offer
The law has developed certain general "rules" to specify when communications are
effective. There are several different ways to communicate. For example, suppose
the parties establish the mail as the means of communication between them. If one
party decides to accept an offer, the acceptance is effected when posted. Another
example: the parties might establish the telegram as the means of communication.
The "rule": a communication is effected at the time the message is delivered to the
telegraph operator. Unless the two parties agree to communicate by post or
telegram, the communication of the acceptance of an offer is effected only when it
is actually received by the offeror.

Revoking an Offer
Similar rules, however, do not apply to the timing of the revocation of an offer.
Notwithstanding what means of communication is used, the general rule is that
revocation is not effective until the offeree actually receives notice of the
revocation. Complications can arise. For example, an offeror might decide to
revoke his offer. He communicates the revocation through the mails, but his letter
takes a few days to reach the offeree. In the meantime, the offeree has written,
effecting the acceptance of the offer by mailing her acceptance. The acceptance is
valid. Thus, any offeror who intends to revoke an offer should do so as
expeditiously as possible, by telephone for example..

Mutual Intent
The engineer should make sure that any contract document specifies the agreement
between the parties on all essential terms. Contract documents relating to
engineering services and projects quickly become complex, particularly on major
infrastructure projects, and software and equipment supply transactions. Legal
advice on complicated business transactions is important. The engineer, as a
contracting party or as a contract administrator, needs to be very clear on the
contract terms, no matter where, or subject to what law, the contract is to be
performed.

Letters of Intent
The use of "letters of intent" in business is a very common practice. Businesses use
the letter of intent format to express interest in proceeding with a particular
transaction, usually on the basis of further negotiation and subsequent agreement.
Sometimes letters of intent are clearly agreements to agree, rather than well-
defined agreements. The agreements to agree do not constitute enforceable
contracts: the courts will not enforce an agreement to agree. It is, in fact, no
agreement at all.

TYPES AND FORMS OF CONSTRUCTION CONTRACTS

Under common law, parties have the right to choose their contract terms and
conditions; there is no prescribed format for construction contracts. There are,
however, certain types of contractual arrangements and contract formats that are
being used in the industry. Some of these formats have been reduced to standard
forms that are widely accepted. However, the engineer should adopt a critical
approach to the use of standard-form construction contracts (or the use of any
standard-form contract). The parties should closely examine a proposed standard
form to determine if it reasonably reflects the agreement they wish to express. Any
modifications to the contract should be clearly and appropriately drafted
(preferably by a lawyer) and incorporated into the wording of the contract prior to
its execution.
Some examples of different types of contracts currently in use in the construction
industry are listed below.
Stipulated-Price or Lump-Sum Contract
This type of contract gives the owner the benefit of knowing the total price that
will have to be paid to the contractor for the completion of the construction
(subject to additions or deductions to or from the work as the course of
construction proceeds) in accordance with the terms of the contract documents.
When the stipulated-price contract form is used, it is essential that detailed plans
and specifications form the basis of the contractor's price. The engineer should
carefully define and fully detail the work involved at the outset. If the details are
provided after the price has been tendered, the contractor may claim that the work
is beyond the scope of the contract as the contractor understood it at the time of
bidding; the contractor may claim that additional compensation is warranted. The
stipulated-price contract may involve a considerable degree of risk for the
contractor. For example, extra costs may be incurred if subsurface, dewatering, or
weather problems arise. The contractor should set the initial price accordingly. The
stipulated-price contract does provide the owner with the advantage of a reasonable
approximation of the total cost of the construction. But a word of warning: if the
contractor has submitted an unrealistically low price for the work, the contractor
may conceivably try to cut costs and look for opportunities to claim extra
compensation. Insufficiently detailed specifications may well assist a contractor in
such attempts.
Unit-Price Contract
This type of contract is often used for projects where it is difficult to predetermine
quantities. For example, in an excavation project, the extent of varying subsurface
conditions might not be determinable in advance. Bids are submitted on the basis
of price per unit of item. In preparing specifications, the engineer should ensure
that the quantity units on which prices will be based are clearly spelled out and
should also list alternatives. In excavation projects, for example, the engineer
should request prices for removal of either rock or earth.
Cost-Plus Contracts
(i) Cost Plus Percentage This type of contract provides compensation to the
contractor for its costs incurred; as well, it provides a reasonable percentage to
cover the contractor's overhead and profit. The cost-plus approach is often used on
large-scale projects where there is not enough time to finalize detailed plans and
specifications; to take the time may not be practicable in light of the urgency to
proceed with construction. In large-scale projects, there is also the likelihood of
changes in the work that the owner may wish to effect from time to time. Note that
the cost-plus contract provides no incentive to the contractor to reduce costs; the
contractor is being paid a percentage of the total construction costs. The engineer
administrator should closely monitor the progress that the work is performed at a
reasonable cost. It is advisable for the owner to be expressly entitled to access all
of the contractor's project records. This will facilitate the extensive, detailed
administration that is usually necessary.
(ii) Cost Plus Lump-Sum Fee This contract approach is much like the cost-plus-
percentage arrangement. But the contractor does not receive a percentage of the
project costs; instead, the contractor is paid a fixed amount. This may be to the
owner's advantage. However, although the contractor receives no incentive to
increase the total cost of the contract, there is also no incentive to reduce costs. As
with the cost-plus-percentage arrangement, the engineer-administrator should
closely monitor the work to ensure that the contractor is not being careless in
coordinating and scrutinizing work that is performed by the
various trades.
(iii) Cost Plus Lump-Sum Fee Plus Bonus In this type of arrangement, the
contractor is provided with an incentive to reduce costs; for every dollar saved on
an agreed estimated total cost, the contractor may receive an additional
compensation in the form of an agreed-upon percentage of the saving. This
approach makes good sense for the owner, as long as the agreed estimate is a
reasonable one. Usually, the owner will expect the engineer to advise the owner on
the reasonableness of the contractor's estimate. An inflated estimate would
obviously increase the contractor's likelihood of benefiting from the bonus
arrangement.
Guaranteed Maximum Price Plus Bonus
Like the cost-plus-bonus contract, the guaranteed-maximum-price (GMP) contract
incorporates an incentive to the contractor to effect savings on a cost-plus project.
The contractor receives a fixed fee as well as an agreed-upon percentage of
savings. The guaranteed-maximum- price contract offers the owner a further
advantage over a basic cost-plus contract: the GMP feature. The amount of the
guaranteed maximum price should be determined on the basis of detailed plans and
specifications rather than on the basis of a reasonable estimate. Again, the owner
usually expects the engineer to advise on the reasonableness of the contractor's
maximum price.
Design-Build Contracts
With this type of contract it is normally the contractor—rather than the owner—
who arranges to obtain the necessary engineering design services, to finalize the
design detail. The detailed design is often finalized as the construction work
proceeds. The construction may proceed promptly; detailed plans and
specifications for subsequent phases are finalized at a later date. The work often
proceeds on a cost-plus-bonus basis; this appeals to owners who wish to avoid
retaining professionals. In design-build contracts, the engineer is usually the agent
of the contractor. But the contract normally entitles the owner to retain, at its
option, its own engineering representative. The owner's engineer will double-check
the sufficiency of the design services provided; the engineer will also be expected
to ensure that construction proceeds in compliance with the agreed-upon plans and
specifications.

Arbitration and Alternative Dispute Resolution (ADR)

A lawsuit is not always the best way to resolve a dispute between contracting
parties, particularly disputes of a "technical" engineering nature. The dispute may
also be resolved by a somewhat less formal procedure called "arbitration."
Arbitration has developed to provide an alternative that is intended to be less
costly, less protracted, and less public than litigation. Arbitration is also part of the
leading edge focus on developing approaches to alternative dispute resolution
("ADR") on engineering projects that are developing in many corners of the globe.
The engineer is often involved in arbitrations. An engineer who acts as an
arbitrator is expected to act entirely impartially and independently of the parties to
the dispute.
Arbitration of disputes of a technical (engineering) nature is very sensible,
particularly as it provides an opportunity to bring the dispute before an arbitrator
who is already familiar, generally at least, with the technical nature of the subject
matter in dispute. An arbitration provision is usually included in engineering and
construction contracts. The wording of the arbitration provision may indicate that
arbitration is mandatory—that is, the parties must submit disputes to arbitration;
they may not proceed to resolve the dispute by way of a lawsuit.
But not all arbitration provisions indicate mandatory arbitration; the clause might
provide that disputes will be submitted to arbitration if both parties agree to so
arbitrate upon the request of one of the parties. Such a clause is simply notice that
arbitration is available as a means of resolving a dispute.
Appointment of Arbitrator
Some contracts describe the manner in which an arbitrator is to be appointed and
detail the general procedure that will govern the arbitration. For example, an
arbitration clause may provide that each party to the dispute shall appoint a
representative arbitrator, and that the two representative arbitrators shall then
appoint a chair, thereby creating a three-person arbitration board. The contract may
also provide that, if the two representative arbitrators cannot agree upon the
selection of the chair, the chair will be appointed by a court.