This article defines what a contract entails within the context of professional engineering services, the components of a contract, and how a contract may be formed in engineering.
Contracts in the context of engineering are crucial for defining the scope, responsibilities, and expectations of all parties involved in a project. These legally binding agreements detail every aspect of the work, from design specifications and material requirements to timelines and payment schedules. In the context of AEC, they ensure that the engineer, client, contractors, and other stakeholders have a clear understanding of their roles and obligations, which is essential for the successful execution of a project.
The importance of contracts in structural engineering cannot be overstated. Given the complexity and technical nature of structural engineering projects, contracts serve as a critical tool for maintaining quality control and safety standards. They provide a legal foundation that supports adherence to building codes, regulatory requirements, and industry best practices. Additionally, contracts protect the interests of all parties by delineating liability and ensuring that there is recourse in the event of non-compliance or substandard performance.
This article gives a concise overview of contract formation within the context of professional services. It serves as an introductory guide to the topic. For more comprehensive information, readers should consult the referenced text in the sources and citations aspect of the article.
What is a Contract?
Before we discuss the steps required to follow when developing a contract. It is important that we understand what a contract entails. What are the various components? What in fact, leads to the formation of a contract?
A contract is a legally binding agreement between two parties where one party (‘the Engineer’) agrees to perform a service for a consideration, usually payment of a sum of money. If the service is not performed adequately, as defined in the contract, the other party (‘the Client’) will be legally entitled to some form of compensation.
Components of a Contract
For a contract to be valid and enforceable, it must cover the following six essential elements:
Offer and Acceptance: A contract is formed when one party makes an offer, and the other party accepts it. The offer must be clear, definite, and communicated to the offeree. Acceptance, on the other hand, must be unequivocal and communicated to the offeror. In the context of engineering services, an offer might be a proposal to provide design or construction services, and acceptance would be the agreement to receive and pay for those services.
Intention to Create Legal Relations: The parties must intend for their agreement to have legal consequences. In engineering services, this intention is usually clear, as parties enter into contracts expecting their terms to be legally binding.
Consideration: Consideration refers to something of value exchanged between the parties. It can be in the form of money, services, or goods. In engineering services, consideration typically involves payment for services rendered. The consideration must be lawful and not illusory.
Capacity to Contract: Parties must have the legal capacity to enter into a contract. This means they must be of legal age, sound mind, and not disqualified by law. Companies and other legal entities must act within their legal powers and authority.
Lawful Purpose: The contract’s purpose must be legal and not contrary to public policy. Contracts for illegal activities or purposes are void and unenforceable.
Certainty and Possibility of Performance: The terms of the contract must be certain and unambiguous. Additionally, the contract must be capable of being performed. Uncertain or impossible contracts are not enforceable.
Developing a Contract
Except for contracts of guarantee and contracts affecting interests in land, which must be in writing, a contract can be legally formed either through a written agreement or an oral agreement. Both methods hold equal legal force. The challenge, however, lies in proving the terms of an oral contract. Email exchanges are considered oral contracts that effectively document the agreement. A formal signed agreement is not always necessary to create legal obligations.
To form a legally binding contract, there must be an offer accepted by the other party and consideration for that offer. In contracts for engineering services, the offer is typically a fee proposal by the Engineer, which must be accepted by the Client. The agreed payment for services is the consideration. Both parties must also intend to enter a legal agreement. Fee proposals have been discoursed in a previous article (See: Engineering Ethics – Developing a Fee Proposal).
Contract formation hinges on two things: offer and acceptance. A binding contract requires an unconditional offer to be unconditionally accepted. If the Engineer’s offer is not accepted by the Client, the Client may make a counteroffer with different terms. This counteroffer can be accepted or rejected. If accepted, the contract is based on the counteroffer terms. If further proposals are made, they constitute a counter-counteroffer, which can also be accepted or rejected. This exchange continues until unconditional acceptance is reached.
A test for establishing whether a contract exists is the intention of the parties to enter a legal agreement. The law assumes in business contracts that parties are reasonable business people, and the agreement will be evaluated based on what reasonable business people can be assumed to have thought and known. Therefore, reasonable business people are generally assumed to have intended to form a legal agreement.
Agreement can also be inferred from conduct or adherence to written terms. If an Engineer starts work or the Client makes a payment according to the Engineer’s offer, a contract may be formed. Engineers should thus be cautious about starting work before the contract is formally agreed.
Contracts can be simple, such as a straightforward offer to perform defined work for a fixed fee. Professional services agreements for larger projects are usually more complex, with detailed provisions regarding the rights and obligations of the parties. Appointments often rely on standard conditions published by professional bodies in the jurisdiction under consideration or the Client may use its own non-standard conditions of engagement.
Tenders
Clients may invite engineers to tender for specific work. This invitation to tender usually acts as an ‘invitation to treat’ rather than an offer of appointment. The Engineer’s tender then becomes the ‘offer,’ which the Client can choose to accept or reject. Since a contract form only when an offer is accepted, it is unnecessary for the Client to specify that they do not have to accept the lowest or any tender. The tender documents typically also outline the form of agreement to be used between the Client and the Engineer.
Letters of Intent
Often, finalizing contract terms for complex projects takes time, prompting the use of ‘letters of intent’ to expedite a project start. The legal status of these letters depends on their wording concerning contract formation principles. They might simply indicate that both parties intend to sign a formal agreement later, without specifically requesting any work. However, they often create a legal obligation to pay for any work done based on them. In contract law, a letter of intent can act as an offer accepted by the other party’s actions in performing services or work.
Letters of intent can thus function like a contract, but only if it’s proven that both parties intended the letter to have legal standing. When entering a formal contract, it’s crucial to ensure it supersedes the letter of intent, nullifying its legal status. The Engineer must also ensure that all payments not covered under the letter of intent are included in the formal contract.
Incomplete Contracts
The courts cannot enforce incomplete contracts. If a contract lacks essential terms that make it enforceable, it is considered incomplete and void due to uncertainty.
For a contract to be enforceable, it must clearly outline all the key terms and conditions agreed upon by the parties involved. This includes details such as the scope of work, payment terms, timelines, and any specific obligations or responsibilities of each party. Without these essential terms, the contract fails to provide a clear framework for performance and resolution of disputes.
When a contract is deemed incomplete, the courts cannot determine the intentions and agreements of the parties, making it impossible to enforce. For example, in a contract for engineering services, if the agreement does not specify the exact services to be provided, the duration of the project, or the fee structure, it leaves too much ambiguity. This ambiguity prevents the courts from upholding the contract, as there is no clear basis to determine whether the parties have fulfilled their obligations.
To avoid the pitfalls of an incomplete contract, it is crucial for all parties to thoroughly discuss and document every aspect of the agreement. This includes defining the scope of work, setting clear timelines, agreeing on payment terms, and including any other relevant details that contribute to the overall understanding of the contract. Ensuring that all essential terms doesn’t just make the contract enforceable but also provides a solid foundation for a successful and dispute-free professional relationship.
Implied Terms
The courts are sometimes prepared to imply terms into a contract when they have not been expressly stated. The justification is that the parties must have intended these terms to be included, as the contract would otherwise be incomplete. Often, these are terms that would typically be included in a similar trade contract.
Implied terms are inferred by the courts to fill in gaps and ensure the contract functions as the parties likely intended. These terms can arise from various sources, such as common law, statutory provisions, or established trade practices. For example, in a contract for engineering services, if the agreement does not explicitly state a standard of quality for the work, the court might imply a term requiring the engineer to perform the services with reasonable skill and care, based on industry standards.
The courts use implied terms to reflect the presumed intentions of the parties, ensuring the contract remains workable and fair. These implied terms are essential for maintaining the integrity of agreements, particularly when unforeseen gaps or ambiguities arise.
To prevent reliance on implied terms, it is advisable for parties to clearly articulate all relevant terms and conditions in the contract. This practice not only reduces the risk of disputes but also provides greater certainty and predictability in the contractual relationship.
Misrepresentation
Misrepresentation occurs when both parties during appointment negotiations make statements regarding how the project or services will be executed, or the basis for fulfilling their obligations. A statement of fact, distinct from opinions, intentions, or legal statements, is termed a ‘representation’. A misrepresentation refers to a false representation.
An aggrieved party can legally pursue a misrepresentation claim only if it proves that the statement induced them to enter the contract, and that without the misrepresentation, they would not have agreed to the contract. However, if the party knew the statement was false or learned of its falsity after entering the contract, they cannot bring a legal claim for misrepresentation.
Payment on A Quantum Meruit Basis
If work is performed without a pre-agreed fee, the law may impose an obligation to pay based on a ‘quantum meruit’ basis, which means a reasonable remuneration for the services rendered. However, it must be demonstrated that the work was undertaken with the expectation of payment. This principle also extends to services rendered in anticipation of formal contract negotiations, as long as these services were requested by the party receiving them. In such cases, the law recognizes the need to compensate for services performed under the reasonable assumption that negotiations would result in a formal agreement.
Trading Conditions and Purchase Orders
Clients sometimes attempt to procure professional services using standard purchase order forms. These forms often include standard terms and conditions originally designed for material supply or contractor appointments, rather than the provision of professional services.
When an Engineer submits a proposal that includes terms of engagement, and the Client confirms acceptance using a purchase order with attached trading conditions, this action constitutes a counteroffer. Typically, the Engineer accepts this counteroffer by initiating work. To prevent this scenario, it is advisable not to accept the trading conditions and refrain from commencing work until an appropriate form of appointment has been mutually agreed upon. This ensures clarity and alignment in the contractual relationship, preventing potential misunderstandings or disputes arising from conflicting terms and conditions.
Also See: Engineering Ethics: Communicating Effectively in Engineering
Sources & Citation
- Adriaanse J. (2016) Construction Contract Law (4th ed.), London: Palgrave
- Association for Consultancy and Engineering (2017) ACE Agreements [Online] Available at: www.acenet. co.uk/publications (Accessed: June 2024)
- Royal Institute of British Architects (s.d.) RIBA Agreements and Guides [Online] Available at: www.ribabookshops.com/ (Accessed: June 2024)
- Shields D. (2017) ‘Business Practice Note No. 1: Forming a Contract’, The Structural Engineer, 95 (3), pp. 22–23
