Understanding Contract Law

Contract Law

• Contract law is an area of law that concerns agreements between two or more parties where there is a duty to perform.
• Knowledge of contract law is vital to business people, as most commercial transactions are built on contractual relationships.

Contracts

• A contract is a voluntary exchange of promises that create obligations.
• These obligations, if defaulted on, can be enforced and remedied by the courts.
• Contracts set forth the terms and conditions of agreements.
• Contracts protect the parties involved.
• Contracts protect parties when there is a default.
• Contracts help determine who is in breach.
• Difficulties in contracts arise due to interpretation, which can be due to vague terms, unclean contract clauses, or a lack of familiarity with contracts.

Elements of a Contract

• If a contract is to be enforceable, the law requires performance of the contract's promises, and a remedy if they are not performed.
• Every contract must satisfy five conditions to be enforceable:
  • Consensus
  • Legality
  • Consideration
  • Capacity
  • Compliance

Consensus

• There must be a real agreement between the parties, consensus ad idem, which means "meeting of the minds" on the subject matter.
• All parties to the contract must understand the terms of the contract and what they must do and are obligated to perform if it is signed.
• The process by which a contract is formed involves an offer and an acceptance.

Legality

• Freedom of contract dictates people can enter into almost any kind of contractual agreement that they want to.
• The subject matter of the contract must be lawful for a contract to be legally valid.
• A contract to commit a crime would be void.

Consideration

• There must be a commitment by each party to do something, or not to do something.
• Valid consideration is the price one is willing to pay for that commitment.
• Valid consideration is anything that has some sort of value under the law.
• Business contracts need to include an exchange of valuable considerations to be legally binding.

Promissory Estoppel

• A promise made without the exchange of consideration is binding and enforceable if:
  • The defendant made a clear and unambiguous promise.
  • The plaintiff acted in reliance of the defendant’s promise.
  • The plaintiff’s reliance was reasonable and foreseeable.
  • The plaintiff suffered an injury due to reliance on the defendant’s promise.

Capacity

• Parties to a contract must be legally capable of understanding and entering into the agreement.
• Fraud is intentional deception of someone used to form a contract.
• The defrauded party is allowed to void the contract and may be able to recover some of the funds that were paid to the party who committed fraud.
• Duress and undue influence occur when someone is forced to sign a contract because of excessive pressure or economic circumstances.

Compliance

• There must be compliance with legal requirements regarding the form of the contract, i.e., some contracts must be in writing.
• Statute of Frauds requires contracts to be in writing if:
  • Contracts are for a purchase or product that cost more than $500.
  • Contracts are assuming someone's debt.
  • Contracts are required by law if they will not be performed within one year.
  • Contracts have to be in writing for the purchase of land or interest in land.

Parties to a Contract

• Each contracting party is required to comply with the general principles of contract formation, besides specific obligations.
• Parties to a contract are obligated to deal truthfully and fairly with one another and refrain from coercion or forcing the other party to establish the agreement.
• Depending on the type of project construction Industry project team members include:
  • Owners
  • Designers (Architects & Engineers)
  • Consultants
  • Contractors
  • Subcontractors
  • Construction Managers
  • Suppliers
  • Sureties.

Contract Termination

• Contract termination can occur when both parties perform their contractual obligations.
• This can occur under a mutual agreement to terminate the contract.
• It can occur when it is no longer possible to perform the work due to an act of God that destroys the project, or a legal system could terminate it if one party files for bankruptcy
• A breach of contract, defined as a violation of any of the agreed upon terms and conditions of the contract can bring about termination.

Breach of Contract

• Involves failure of the breaching party to properly perform its contractual obligations.
• A breach can take place in two ways:
  • Improper or incomplete performance of the obligations of the contract.
  • Refusal to perform.
• In construction contracts, a breach may occur if:
  • The contractor fails to complete the job described in the contract on time or at all.
  • The contractor uses more substandard materials than what was promised in the contract.
  • The contractor deviates from the project plan agreed upon in the contract.
  • The client fails to pay the contractor on time.
  • The client fires or replaces the contractor without warning or justifiable cause.

Breach by Other Party

• Parties are obligated to not interfere with the work of the other party.
• If there is a “prevention by other” clause, this relieves the party that was interfered with from performing their part of the contract.
• The person who interfered has breached the contract and could be liable for damages.

Total Breach

• Is considered the most serious breach.
• Occurs when one party failed to perform the duties detailed in the contract.
• the purpose of the agreement is determined to be completely broken.

Partial Breach

• A minor breach occurs when one party violates a portion of the contract but not the whole thing.
• The infraction must be so insignificant that all parties involved in the contract can still meet any outstanding obligations.

Anticipatory Breach

• Occurs when one party knows the other party won't fulfill the terms of the contract on time.
• It allows the non-breaching party to claim a breach of contract.

Legal Remedies for Breach of Contract

• When a contract has been breached, the non-breaching party who has been injured may be entitled to certain legal remedies, including:
  • Nominal damages
  • Compensatory damages
  • Liquidated damages
  • Punitive damages
  • Restitution

Nominal Damages

• A legal remedy wherein a breach of contract occurred but there was no harm.

Compensatory Damages

• Are meant to compensate the aggrieved party for any actual damages or injuries that may have been incurred.

Liquidated Damages

• Provide compensation to the owner at the end of construction projects for each day the project is not completed, but the losses must be proven

Punitive Damages

• Penalize the breaching party if their breach was intentional or vindictive.

Restitution

• Often determined by evaluating the gains of the defendant, who is required to give up those gains obtained illegally to the plaintiff.
• The goal is to put the injured party (plaintiff) back in the same position they would have been able to achieve if the contract had been completed.

Tort Liability

• The area of the law that is related to intentional or unintentional acts that result in injuries to individuals, deaths, or property damage resulting from the action or inaction of an individual or individuals not in direct contract.

Torts

• A wrong done by one person to another for which the law will force the wrongdoer to compensate the other person.
• There are two categories of torts:
  • Intentional: Deliberate acts that cause injury or loss.
  • Unintentional: Careless or negligent acts that cause injury or loss.

Tort Lawsuits

• The plaintiff is the person suing.
• The defendant is the person being sued.
• The plaintiff must prove that the defendant committed a tort to get compensation.
• There are several elements to a tort, and the plaintiff must also prove that these elements existed.
• If the evidence supports the plaintiff, the plaintiff wins and if the evidence supports the defendant, the defendant wins.
• If it is a tie, the defendant wins because it is the plaintiff who sued and who must prove the case.
• The plaintiff may be able to provide proof, but the defendant can avoid having to pay compensation by showing that one of the “defenses” of a tort was present.

Torts - Elements and Defenses

• Every type of tort has elements and defenses.
• The defenses are what can relieve the defendant from having to pay compensation.

Intentional Torts

• The term “intentional” does not mean that the wrongdoer intended to harm, only that their actions were intentional and therefore caused the harm.
• Examples of intentional torts include: -Assault and Battery/ “Trespass to Person” -Trespass to Land -Nuisance -Defamation

Assault and Battery

• Involves the intentional physical interference with another person.
• Assault is conduct that makes a person think they are about to be struck.
• Battery occurs when someone intentionally makes unwanted physical contact with another person.
• Defenses include: consent.
• People who consent to a conduct that would otherwise constitute an assault or battery loses the right to sue, i.e., doctors, boxers.
• Self-defense entitles people who are being attacked to use necessary, reasonable, force to defend themselves.

Trespass to Land

• Involves going onto another person's property without having either the lawful right or the owner's permission to do so, even if no damage or injury takes place.
• Postal workers, meter readers, etc., have the right to come onto private property and are not trespassing.

Nuisance

• A private nuisance occurs when an individual or business uses property in such a way that it interferes with a neighbor's use or enjoyment of their property.
• A public nuisance occurs when some public property is interfered with.
• Examples include protestors blocking a road, or a mill polluting a river.

Defamation

• A false statement that is to a person's detriment.
• The statement must be derogatory, false, published and must refer to the plaintiff.
• Slander is spoken defamation.
• Libel is written defamation.

Unintentional Torts

• Negligence involves inadvertent or unintentional, careless conduct causing injury or damage to another person or property.
• Four elements must be established by the plaintiff: -A. Duty to exercise care must exist. -B. Breach of the standard of care. -C. Causation -D. Damages

Duty to Exercise Care

• Negligence involves a failure by someone to live up to a duty of care to be careful to someone else.
• The court must determine whether the defendant owed a duty of care to the plaintiff using the Reasonable Foreseeability Test.
• If it was reasonably foreseeable that the conduct would cause harm, a duty to be careful exists.
• There is a duty only to those who might be foreseeably hurt by actions.

Breach of Standard of Care

• The existence of a duty to be careful is usually apparent, and the court must determine just how careful the defendant should have been using the Reasonable Person Test.
• A standard of care is determined by what the courts think a “reasonable person" would do in the situation.
• If a person causes damage because they were not as careful as the reasonable person would have been, they may be liable for the damage.

Reasonable Person

• Someone of normal intelligence who is always careful and who does not take or create unreasonable risks.
• Exceptions to the definition of a "reasonable person" include children, who are not judged by the same standard as adults unless they were engaged in adult activity, i.e., driving a car.
• Professionals, i.e., doctors, are held to a higher standard of care.

Causation and Damages

• There is no liability for careless acts if they cause no harm, i.e., some sort of loss to person or property must be suffered.
• The relationship between the action and the damage must be such that the damage would not have occurred without the action.
• But For Test: “But for” the careless conduct of the plaintiff, no injury would have resulted.

Unintentional Torts - Defenses

• Voluntary assumption of Risk: The plaintiff knew of the risk from the defendants' actions.
• Illegality of the Plaintiffs Actions: The plaintiff's claim arises because of illegal actions.
• Contributory Negligence: The plaintiff was careless and the proximate cause of the injury.

Dispute Arbitration

• Concerns resolutions techniques for contract claims.
• Contract claims are court cases that result from a breach of contract.
• This occurs when a party breaches a contract, and another party files a claim.
• Contract claims can occur at any stage in the execution of construction contracts and If disputes are not settled one of the parties can file a claim.

Typical Causes of Contract Claims

• Differing site conditions
• Delays
• Design errors or changes
• Interpretation differences
• Acceleration or suspension of work
• Construction failures
• Additional work
• Deleted work

Contract Negotiation

• Requires both parties to compromise to settle a claim.
• In construction, 90% to 95% of construction claims are settled through negotiations.
• Negotiators try to persuade opposing parties to relinquish one or several claims if awarded another large claim
• Requires bargaining with opposing parties and Saves time and money if claims are settled using negotiations.

Contract Mediation

• Inserts a neutral third party, the mediator, into the negotiating process to help reach a settlement.
• Mediation involves no formal court procedures or rules of evidence, and the mediator does not have the power to render a binding decision or force an agreement on the parties.

Contract Arbitration

• A neutral third party is involved in the decision-making process, selected from certified professionals with expertise in the subject matter of dispute.
• Arbitration may be agreed upon before any dispute arises or parties may agree to arbitrate after a dispute arises.
• Parties can stipulate in their contract the requirement for arbitration.

Arbitration : Binding or Nonbinding

• In binding arbitration, disputing parties waive their right to a trial and agree that they will be bound by the arbitrator's final decision.
• In nonbinding arbitration, either party could sue if not satisfied with the results of arbitration, with a neutral third party hired to evaluate evidence, listen to arguments of both parties, and provide a decision and settlement award.

Advantages of Arbitration

• Less time than litigation
• Less expensive than litigation
• Lawyers not required
• Private proceedings helps preserve reputations
• Location, time, and arbitrators all selected by disputing parties not the court system
• Rules of evidence do not apply
• Does not follow precedent law
• At the conclusion of the arbitration proceedings, the decision must be made in thirty days.
• If award is not paid, the party files a petition with the courts, and if there is no response to the petition within ten days, it becomes a judgment.
• Sureties are not bound by arbitration awards.

Dispute Resolution Techniques

• Mediation/Arbitration is a hybrid technique where the mediator switches roles to be the arbitrator if no agreement is reached during mediation.
• Early neutral evaluation is where the mediator provides an evaluation on the merits of the case to each party.
• Rent a judge involves hiring a lawyer or former judge to arbitrate a case.
• Court-annexed arbitration is a court-run dispute resolution process to which cases that meet some specified criteria are involuntarily assigned.

Litigation

• Litigation involves one party suing another in the court system.
• Reasons NOT to use litigation:
• The results of lawsuits become part of the public record, which could be viewed by anyone.
  • This could be damaging to the reputation of a firm or produce unwanted publicity in newspapers, on television, or on the internet.
• The cost of litigation could be prohibitive since there are filing fees, court costs, and legal fees.
• Lawsuits could take years before they reach the court docket.
• Lawsuits may be tried in courtrooms where it is difficult to demonstrate engineering or construction concepts without being able to see the actual items being described in court cases.
• Court proceedings require that cases follow rules of evidence where items may only be introduced as evidence if they are first introduced during the testimony of witnesses.

Dispute Review Boards

• Also known as Dispute Resolution Board, Dispute Board, Dispute Avoidance Board or DRB.
• These are often found in large construction projects to assist the parties to minimize, resolve or avoid disputes and mitigate adverse impacts to projects.