CONTRACT LAW

By
Babulayi 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 System
Understand Framework for Contract Law
Understand 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

Different Categories (Two

Considered)
1. Criminal Law
2. Civil Law

(1OF 5)

CLASSIFICATION OF THE LAW

(2OF 5)

Criminal Law Characteristics

the offence is against society
the state prosecutes
the trial is in a Magistrate Court
the offender is found guilty or not guilty,
and
the offender is punished
Complainant 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 Defendant
the trial is in a High Court
the 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 Sources

Legislation
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 considered
the 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
Precedent

(6 OF 10)

Judicial

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
Precedent or Case Law

(7 OF 10) -

Judicial

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)

SOURCES OF LAW
or Case Law

(8 OF 10) -

Judicial Precedent

Binding and Persuasive Precedents

the following are particularly
important:
obiter dicta things said by the way
foreign decisions - similar legal systems
dissenting judgments from other cases

SOURCES OF LAW
or Case Law

(9 OF 10) -

Judicial Precedent

Law Reports
system of recording cases
decisions made in courts must be recorded
and published
reports referred to in shortened hand e.g.

SOURCES OF LAW
Reports)

(10 OF 10)

- Case Law (Law

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 partys 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 (clients
agent). You need to understand that
which is offered.
Communication Media
Postal rules
Telegram
Telephone/Telex
Fax

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

Creation of a Contract
-Requirements
(3 of 4)

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

Creation of a Contract
-Requirements
(1 of 3)

Purpose and
Illegal
to have

Validity of the contract (legality

observation of public policy)
contracts are void (deemed
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 damages only

claim for

DEFECTS IN CONTRACTS

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 .

DEFECTS IN CONTRACTS
Mistake

The general rule is that mistake does not

make a contract invalid.
This rule even applies where the seller is
aware of the buyers mistake providing the
seller has not misrepresented the truth of
the buyer

DEFECTS IN CONTRACTS
Categories of Mistake
Mistake as to the Existence of the Subject Matter
Where 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 Party

It 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 partys true identity.

DEFECTS IN CONTRACTS
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
partys 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 .

DEFECTS IN CONTRACTS
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

DEFECTS IN CONTRACTS
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.

DEFECTS IN CONTRACTS

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.

DEFECTS IN CONTRACTS

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 OF A CONTRACT
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 OF A CONTRACT
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 contractors 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 contractors 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 OF A CONTRACT
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 OF A CONTRACT
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

DISCHARGE OF A CONTRACT
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 Ys car from behind, the
insurance company will make good damages
and then sue X an equivalent amount)

Giving Third party Rights

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

PARTIES TO THE CONTRACT

(1 OF 3)

Collateral Contracts
Doctrine of Privity bars clients from suing
both domestic and nominated subcontractors
nor pay them directly
Two particular situations may arise when a
sub-contractors 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)

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

If

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 Actions
Debt: 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. engineeremployer 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 Agreement
express agency - oral writtten or by deed
implied 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)

The parties to the

Contract Cont.
Agency without Agreement
Apparent agency - acted as an agent
before
Usual agency
Agency by Ratification - act without
initial authority or exceeds his authority
(principal not bound)

The parties to the

Contract Cont.
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

SUMMARY
Characteristics 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 Contract
Defects are often undesirable; you always have to know who is the main contractor, subcontractor, and a stranger to the contract.
Always determine Facts from False Statements that may induce you to enter into a
contract
Dont admit strangers into the contract at a later stage (Privity)
Clients & 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 PRESENTATION