Contracts

• Contract law is part of private law because it does not

involve or bind the state or persons that are not parties to
the contract
• Purpose of a contract is to set out the rights,
responsibilities, and liabilities of the parties to the contract.
• Allocation of risk!
• Consensus Ad Idem
– Contract law is based on Latin legal principles, such as consensus
ad idem, which means agreement to the same thing between
the parties or, a clear understanding, offering and acceptance of
each person's contribution. Lawyers say that it is from the
moment of "consensus ad idem" that a contract is formed and
may be enforced by the courts. So a contract requires an
agreement between the parties
• Meeting of the minds
– “consensus ad idem”
– Is the foundation of contract law in common law.
• Terms contract and agreement are interchangeable.
• Forms of contract
– Written
– Oral
– Partly written
– Partly oral
• Contract, how made
– 4. Subject to this Act and any statute in that behalf, a contract of sale may be made in writing, either with or
without seal, or by word of mouth or partly in writing and partly by word of mouth, or may be implied from the
conduct of the parties, but nothing in this section affects the law relating to corporations. R.S.O. 1990, c. S.1, s. 4.
– Sale of Goods Act – Ontario
– https://www.ontario.ca/laws/statute/90s01
– https://www.ontario.ca/laws/statute/90s19

• Courts will recognize all contracts regardless of the above form.

– Except by the Statute of Frauds (CA, AU, NZ, GBR) which states that certain contracts must be
in writing such as: for land, leases exceeding 3 years.
• Privy – parties to a contract are said to be in privy – private. Only parties to the
contract can enforce the contract.
• An Enforceable contract is one that the courts would uphold.
• Express contracts
– A legally enforceable agreement that arises from
words, phrases or conditions that have been
discussed and agreed to by the parties to the
contract – usually written.
• Implied contracts
– A legally enforceable agreement that arises from
conduct, from assumed intentions, from some
relationship among the immediate parties, or
from the application of the legal principle of
equity.
• Formation of Contracts
– 5 Key elements divided into 2 groups
• Group 1
• Basic Agreement
– Offer – A proposal by an offeror to an offeree, containing the
essential terms of a proposed contract.
– Acceptance – the unequivocal agreement to an offer.
• Consideration
– Something of value that flows both ways
• Group 2
– Legal Capacity – Must be legal age of majority, must have
authority to bind company
– Genuine Consent (intent) – contract entered into voluntarily, was
not under duress, undue influence, had every intention of
following through with contract.
– Legality – the contract must be for a lawful purpose – murder for
hire is not a lawful purpose.
• Basic Agreement – The offer and Acceptance
– The offer
• What constitutes an offer?
– A vague statement that does not define essential terms,
contracting parties, price, time, scope?
» Not capable of acceptance – therefore not a valid offer
– A tender call?
» No – a tender call is an invitation to treat and cannot be
accepted in a purest legal sense
» However The Queen (Ont) v Ron Engineering changed this
in Canada by establishing the Contract ‘A’ / Contract ‘B’
model
– An offer must be clear, concise, showing the scope, time, cost
and must be able to be accepted by the other party.
• Counter offer
– Contracts are typically formed through negotiations
» This is an area later discussed in the course but during a
tendering process the negotiations need to follow certain
rules – Contract ‘A’ / Contract ‘B’ model.
– During the negotiations one party may counter offer – qualifying
the previous offer by differing one of the elements, time, scope,
cost, etc.
– Once a counter offer is made all previous offers are deemed
rejected and can only be accepted if the original offeror revives
the offer.
• Rejection of an offer
– Must be communicated to the offeror and is the express or
implied refusal to accept the offer.
• Revocation of an offer
– An offer can be revoked at any time prior to acceptance
– Must be communicated to offeree
– Offers are generally open for a specified period of time
– If not then a commercially reasonable time frame is used
» Could be 14, 30, 60, 90 days
– Acceptance
• What constitutes acceptance?
– Performance?
» Sometimes, specifically in the case of a unilateral contract
where the promise is made only by the offeror.
– Typically an offer must be accepted by the means / mode
indicated in the offer;
» Fax transmission
» E-mail
» Registered mail
» In person
» Verbal
» Regular Mail – (postal acceptance rule – the contract is
said to be formed at the place where acceptance had
been communicated)
• Unilateral Agreement
• A contract in which only one party makes an express promise, or undertakes a
performance without first securing a reciprocal agreement from the other party.
• In a unilateral, or one-sided, contract, one party, known as the offeror, makes a
promise in exchange for an act (or abstention from acting) by another party, known
as the offeree. If the offeree acts on the offeror's promise, the offeror is legally
obligated to fulfill the contract, but an offeree cannot be forced to act (or not act),
because no return promise has been made to the offeror. After an offeree has
performed, only one enforceable promise exists, that of the offeror.
• A unilateral contract differs from a Bilateral Contract, in which the parties exchange
mutual promises. Bilateral contracts are commonly used in business transactions; a
sale of goods is a type of bilateral contract.
• Reward offers are usually unilateral contracts. The offeror (the party offering the
reward) cannot impel anyone to fulfill the reward offer. An offeree can sue for
breach of contract, however, if the offeror does not provide the reward after the
offeree has fulfilled the contract's requirements
• unilateral contract involves a promise that is made by only one party. The offeror
(i.e., a person who makes a proposal) promises to do a certain thing if the offeree
performs a requested act that he or she knows is the basis of a legally enforceable
contract. The performance constitutes an acceptance of the offer, and the contract
then becomes executed. Acceptance of the offer may be revoked, however, until
the performance has been completed. This is a one-sided type of contract because
only the offeror, who makes the promise, will be legally bound. The offeree may act
as requested, or may refrain from acting, but may not be sued for failing to
perform, or even for abandoning performance once it has begun, because he or
she did not make any promises
– Consideration
• Something of value exchanged between all parties to
the contract
• The values do not have to be equal – courts rarely care
as long as consideration flows both ways
• A promise without consideration is a gift and is not an
enforceable contract
– Unless affixed with a seal
• Does not have to be promise to perform or for $
– Can be the forfeiture of a legal right.
• Changes to the original contract must contain
consideration
– Change order – A formal document that alters some condtions
of the contract documents. The change order may alter the
contract price, time, schedule of payments, scope etc. But
each change must have value flowing both ways.
• Letter of Intent
– Is not an enforceable contract
• Voiding a Contract
– Rescinding or voiding a contract can be difficult and
lengthy process. You have to be careful when rescinding a
contract because it would be as if the contract never
existed
– Mistake
• A misunderstanding with respect to the terms of a contract
– Significant
– Mutual – however unilateral mistakes have given rise to the termination
of contracts
» The error was apparent on the face of the contract and unilateral –
patent mistake
– Must have been present at time of agreement
– Latent (hidden) mistakes give no rise to voiding a contract
» Laws of equity will step in and provide for remedies but not
automatically void the contract.
 – Recall the case of the mistaken bidder (Ron Engineering) who submitted a tender which
contained a $750,000 mistake that was “hidden”: it was not obvious on the face of the tender.
Ron had submitted a $150,000 tender deposit as bid security. Following the close of tenders,
Ron found that they were the lowest bidder by $629,000! So they checked their work; they
discovered their error and notified the owner, Ontario Water Resources Commission (OWRC).
In deciding whether the OWRC could keep the tender deposit, the Supreme Court of Canada
characterized the bidding process as a process that involves two contracts: Contract A, and
Contract B. (See Table 1 below) Contract A, the “Tender Contract” was formed when OWRC
made an offer (Invitation to tender) and Ron accepted by submitting their bid. Some of the
terms of Contract A were:
• (i) Ron agreed not to withdraw their bid after the close of tenders;
• (ii) Ron agreed that if they withdrew their bid after the close of tenders they would lose the $150,000
tender deposit;
• (iii) Ron agreed to enter into a written agreement if OWRC accepted their tender.
Contract B. The offer to enter into Contract B occurs when Ron submits their tender. Contract B is then
formed when the owner communicates acceptance of the tender to Ron… Of course, Contract B could
never come into existence once OWRC learned of the mistake, 1 and ½ hours after the close of tenders.
OFFER ACCEPTANCE
Contract A Owner Invites Contractor Submits
Tender Contract Tenders Tender

Contract B Contractor Submits Owner Accepts

Build Contract Tender Tender
– Misrepresentation
• An untrue factual statement that is made by one party and
induces the other party to enter into contract.
• Innocent – the misrepresentation was made by one party with no
intent to deceive or mislead
• Negligent – the misrepresentation was made by one party with no
intent to deceive or mislead but was done without care or skill
• Fraudulent – the misrepresentation was intentional to gain an
advantage
– Duress
• Improper pressure, threats, or coercion used to induce a party to
enter into a contact.
– Undue Influence
• The unconscientious use by one person of his/her power over
another in order to induce the other to compromise a property
right
– Unconscionable
• A contract that is so unfair, oppressive, or one-sided that it would
be offensive for the court to enforce
– Frustration
• Also referred to as impossibility
• Unforeseen events make the completion of the
contract impossible or of no value
• The risk of this unforeseen event must not have been
allocated at the outset of the contract
• Force majeure clauses
– Used to be for acts of God only
– Now include – fire, labour disputes, delivery delays by third
parties
– Amendments – change orders
• Are mini contracts and can take same forms – written,
oral, combination
• Waiver and Estoppel
– Waiver
• When by words or conduct a party ceases to enforce
certain of his or her contractual rights.
– Estoppel
• A rule of law that when person A, by act or words, gives
person B reason to believe a certain set of facts upon
which person B takes action, person A cannot later, to
his (or her) benefit, deny those facts or say that his (or
her) earlier act was improper
• When one party waives their rights under the contract
they cannot latter claim them, they will be estopped
• Quasi-contract
– When one party received the benefit of the work,
they must compensate the other party
– Quantum meruit – “The amount its worth”
– Change directives are quasi contracts – cost plus
• Breach of Contract
– The failure of one party to the contract to fulfill his /
her obligations.
• Inability of one party to perform
– One party is unable to perform its obligations due to reasons such
as insolvency
• Inadvertence
– One of the parties to the contract unintentionally did not perform
his / her obligations
• Disagreement
– Parties to the contract have different interpretations of the
obligations under the contract
– Performing work under protest
» When a disagreement arises over the scope of the work
under the contract yet continues to perform the disputed
work that will later be negotiated / mediated / arbitrated or
litigated
» This does not prejudice the right to recover costs at a later
date.
 • Lack of Profit
– It may be more advantages to walk away from a contract than
to complete it from a financial stand point.
– Bankruptcy / insolvency
– Damages
• Compensation the courts will award the injured party
• Essentially the court strives to put both parties back
into the same position they were in prior to the breach
• Specific Performance
– Courts will order one party to perform certain acts to remedy
the breach (not common for AEC contracts)
• Injunction
– Court will prohibit a party of a contract from doing something
• Declaratory order
– Court will clarify the rights of the parties – no damages paid
• Declaratory order
– Court will clarify the rights of the parties – no damages paid
• Three limitations to damages
– Mitigation – there is an obligation to the party that suffered the
breach / loss must take reasonable steps to mitigate the loss
– Speculative – the wronged party must be able to prove the loss is
real and not speculative
– Remoteness – there is a lack of connection between the loss and
the wrong – wasn’t foreseeable at the outset of the contract.
• Consequential damages
– Consequential damages are frequently excluded from contracts in
the construction and engineering fields
• Liquidated damages
– Common in construction projects
– Estimates of losses written into the contract at time of drafting
• Contract Termination
– Most common way is by performance – all obligations are
completed by both parties
– Parties can mutually agree to end the contract
– Unilateral termination of a contract – breach
– Fundamental breach
• Root of the contract – deprives one party of all or some of the benefits
of the contract
– Two remedies
» Continue with the contract and sue for damages
» Terminate the contract and sue for damages
– Simple breach
• Does not go to the root of the contract
– One remedy
» Continue with the contract and sue for damages
– Termination clause
• Most construction, A/E contracts have termination clauses
• Lists why a contract can be terminated
• Sets out how to terminate the contract
• Interpreting and drafting contracts
– Interpretation by courts
• Involves;
– The overriding principle of the objective intention of the parties
– Canons of contract construction
– Introduction of additional evidence
• Intentions of the parties
– Looks for the objective standard – what hypothetical reasonable
parties would have intended
– How the contract would appear to a ordinary reasonable person
looking from outside
• Canons of contract construction
– Plain and ordinary meaning
» The natural or literal meaning of the words set of in the
contract will be adopted
» Except when the words have a specific meaning within the
jargon or context of the industry in which the contract is
being used.
– Special Meaning
» where words have a customary meaning in the industry that
meaning is taken over the plain and ordinary meaning
– Reading the Contract as a whole
» Each clause is not separate but creates the contract as a whole and
should be read together.
» In case of conflict the court will look at the true intentions of the
parties
» Order of precedence of documents
– Giving effect to all part of a contract
» No part of the contract is meaningless
– Restriction by express provisions
» Special conditions / provisions take precedence over general
– Commercial purpose
» Courts look to see that the contract is interpreted within the
commercial business practices where drafted
– Context
» They look at the meaning of words based on the context within the
industry that the contract is used
– Contra Proferentem
» Latin phrase – the contract will be interpreted to the benefit of the
party that did not draft the contract
– Introduction of Additional Evidence
• Parol evidence rule