PROFESSIONAL LIABILITY (CONTRACT LAW)
Lecture 7 1
Dr. Ismaeel Al Ridhawi
PROFESSIONAL LIABILITY AND LAW
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PROFESSIONAL LIABILITY AND LAW
▪ Professional liability arises when an engineer
gives a client negligent or incompetent service,
product or advice.
▪ E.g. If the client follows the advice and suffers a loss or
damage, then the professional (and/or their employer
or insurance company) may be sued and ordered to
pay damages.
▪ A professional who designs an unsafe product may
also be sued to pay damages.
▪ Lawsuits may be based on several legal sources:
▪ Contract Law,
▪ Tort Law, or
▪ Consumer Legislation.
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CONTRACT LAW
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CONTRACT LAW
▪ Properly negotiated contracts usually run smoothly,
but disagreements, misinterpretations, and
breaches may sometimes occur.
▪ If they cannot be solved by negotiation, any party to
the contract may sue for damages.
▪ The contract document is examined in a court of
law, and the judge decides whether the contract has
been fulfilled or not, and what damages should be
paid.
▪ It is wise to study how a contract could go wrong and
to predict the damages that could result.
▪ Contracts may also include clauses to set limits on
liability.
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CONTRACT LAW
▪ Privity of Contract
▪ A contractual relationship between two parties who
have entered into an agreement.
▪ This allows one party to file a lawsuit involving that
contract, since there is another company involved.
▪ Example: On a construction contract, the owner and the
general contractor would have privity of contract, not
the owner and the sub-contractor.
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CONTRACT LAW
▪ Not all contracts are valid and enforceable in the
eyes of the court.
▪ For a contract to be valid/enforceable, the following
essential elements must be present:
1. An offer has been made by one party of the contract
and accepted by the other party.
2. There should be mutual intent to enter into the
contract.
3. Consideration: something of value is to be
exchanged.
4. Capacity to contract: the legal competence of a
person to enter into contract. E.g. can’t be a minor.
5. Lawful purpose: e.g. can’t enforce a contract to have a
party smuggle illegal drugs into a country.
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CONTRACT LAW
▪ A contract is considered void if one of the following
is proven:
1. Fraudulent Misrepresentation
2. Duress
3. Unconscionable terms
4. Frustration
5. Mistake in contract
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CONTRACT LAW
1. Fraudulent Misrepresentation:
▪ A misrepresentation is an untrue statement or assertion
of fact.
▪ It is fraudulent when the party knowingly or recklessly
uses it to induce another party to enter into a contract.
▪ The misled party is usually entitled to the following:
▪ Rescind the contract (i.e. revoke, cancel, etc.)
▪ Claim compensation for costs incurred as a result of
entering into the contract, and
▪ Sue for damages for deceit.
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CONTRACT LAW
2. Duress:
▪ A contract is considered void if one party
persuades another party to enter into
contract by threatened violence or
imprisonment.
3. Unconscionable:
▪ An unconscionable contract is one that is so
one-sided that it is unfair to one party.
▪ It is a type of contract that leaves one party
with no real, meaningful choice, usually due
to major differences in bargaining power
between the parties.
▪ Usually courts today rarely intervene in
such situations. 10
CONTRACT LAW
4. Frustration:
▪ Contracts are void when an unforeseen
event either renders contractual
obligations impossible, or radically
changes the party's principal purpose
for entering into the contract.
▪ E.g. war, environmental catastrophe like
floods or earthquakes, etc.
5. Mistake:
▪ A mistake made by one party to a
contract.
▪ Happens sometimes in tenders.
▪ Usually courts today rarely intervene in
such situations 11
CONTRACT LAW
▪ The following are some contract law rules:
▪ Gratuitous Promise:
▪ Sometimes a party makes a verbal promise to neglect
certain parts of a contract as sign of leniency.
▪ A gratuitous promise is a promise that a party makes
without consideration (i.e. something of value
exchanged).
▪ E.g., when an owner allows a contractor an extension to
finish a bridge without imposing the penalty outlined in
the contract.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Equitable Estoppel:
▪ A legal term that describes an action that the courts can
use to prevent a party from enforcing the strict wording
of the contract when that party has extended a
gratuitous promise that puts the other party at a
disadvantage.
▪ Such contract clauses will not be enforced by courts.
▪ Example of precedent court case: Conwest Exploration
Co. Ltd. vs. Letain
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PRECEDENT COURT CASES
Gratuitous Promise and Equitable Estoppel
▪ Inthe 1963 Supreme Court of Canada case Conwest
Exploration Co. Ltd. vs. Letain:
▪ Letain, owned mining claims and Conwest Exploration Co. Ltd.
had to take certain steps including incorporation by a given
date in order to receive certain benefits. Before that date, Letain
implied that the deadline could be extended. Upon this
gratuitous promise (as it was offered without consideration),
Conwest continued to take the steps towards incorporation.
Afterwards, Letain attempted to revert to the strict date
provided in the contract. Conwest applied for relief on the
grounds of equitability. The court found that that it would be
inequitable to revert to the strict interpretation of the contract
and therefore estopped Letain from enforcing the date
specified in the contract. 14
CONTRACT LAW
▪ The following are some contract law rules:
▪ Direct vs. Indirect Damages:
▪ Direct damages occur as a result of directly
neglecting certain parts of a contract.
▪ E.g. a contract states that a party is obliged to pay $10,000
for each day missed to handover a project.
▪ Indirect damages are damages that occurred beyond
direct damages that can be anticipated by someone
with specialized or more intimate knowledge of the
project or contract duties.
▪ E.g. loss of profit from not completing a project such as a
hotel.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Liquidated Damages:
▪ A contract clause used to minimize risks associated
with performance.
▪ Liquidated damages are pre-estimates of the damages
that may result from a non-performance under the
contract.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Fundamental Breach of Contract:
▪ A failure of contract duty so fundamental that it allows
the distressed party to terminate performance of the
contract, in addition to permitting that party to sue for
damages that may exceed the limited liability stated in
the contract.
▪ Example of old precedent court case that rewarded
plaintiff more than the limited liability: Harbutt's
"Plasticine" Ltd vs. Wayne Tank and Pump Co Ltd.
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PRECEDENT COURT CASES
Fundemantal Breach
▪ Harbutt's "Plasticine" Ltd vs. Wayne Tank and Pump Co Ltd
▪ Harbutt's "Plasticine" Ltd asked Wayne Tank and Pump to design
and install in their factory, a pipe system to store hot molten wax
used in the production of Plasticine. Wayne unwisely chose to use
plastic piping. The system had a faulty thermostat and molten wax
overheated. The plastic pipes melted and the molten wax escaped
and caught fire, causing a huge fire. By the morning, the entire
factory was destroyed. This led to one of the biggest-ever claims
for damages in England.
▪ Wayne sought to rely on a clause in the contract that limited their
liability for breach of contract.
▪ The Court of Appeal held that the breach was so significant as to
be "fundamental breach", and that the exemption clause thereby
"automatically" became ineffective, so that the defendants were
liable in full.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Fundamental Brach of Contract:
▪ Newer court cases show that court outcomes tend to
respect contracts between parties but a “true
construction approach” will be used for limitation
clauses.
▪ Example of precedent court case that rewarded plaintiff
only the limited liability: Hunter Engineering vs.
Syncrude Ltd.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ True Construction Approach:
▪ An exemption clause (which is a contract provision
used to limit liability or protect a party from being
sued) will be scrutinized by a strict construction of its
wording.
▪ If the clause is clear and direct it will be upheld unless
it is unconscionable.
▪ Looking at the wording of the clause is said to be the
true construction test or approach.
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PRECEDENT COURT CASES
Fundemantal Breach
▪ Hunter Engineering vs. Syncrude Ltd
▪ Syncrude contracted with Hunter Engineering to design gear
boxes to be used for a machine. Due to design flaws, the gear
boxes were not usable for their intended purpose. Syncrude
spent over $1 million to repair the boxes (more than the
liability clause in the contract). Syncrude filed for fundamental
breach but was turned down. Hunter was protected under a
limitation of liability clause within the contract.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Parole Evidence:
▪ A contract law rule that prohibits evidence that
contradicts or adds to the contract terms that make up
an agreement.
▪ The idea is that parties have summarized their
agreement into a single contract and other terms
should not be enforced without making an amendment
to the contract.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Rule of Contra Proferentem:
▪ A contract term that is ambiguous will be interpreted
against the party that drafted that provision.
▪ The reasoning behind this rule is to encourage the
drafter of a contract to be as clear and explicit as
possible and to take into account as many foreseeable
situations as it can.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Quantum Meruit:
▪ When services have been requested and performed
without a payment agreement in place.
▪ In such a situation, the courts will award an amount
based on a quantum meruit – "as much as is reasonably
deserved" for the time spent and materials supplied.
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DUTY TO MITIGATE DAMAGES
▪ Following a contract breach, the party suffering loss
must take reasonable steps to minimize the loss.
▪ Damages that result from not taking minimization
steps will not be upheld in court.
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TENDERING CONTRACTS
▪ Two contracts arise from tenders.
▪ Contract A
▪ Deals with the 'tendering phase' of a contract.
▪ Contract A is made when the owner's offer is accepted by the
bidder(s) upon the submission of each compliant bid.
▪ Several Contracts A can be formed; the number will equal the
amount of compliant tenders submitted.
▪ Contract B
▪ Contract B is the second contract that is formed on award of
the contract.
▪ The landmark court case of Ron Engineering established this
distinction of contracts.
▪ All bidders should be treated fairly and equally.
▪ Contract B should be awarded to the lowest bidders that has
met all needed requirements.
▪ If the lowest bidder is not awarded the contract, then they
may sue for all bid expensed, lost profits and legal fees. 26
PRECEDENT COURT CASES
Contract A/B – Treat all bidders fairly
▪ Chinook Aggregates Ltd. v. Abbotsford (District)
▪ The case involved a municipal tender call for a gravel crushing
contract. The municipality had adopted an undisclosed local
preference policy and awarded contracts to local bidders who
were within 10 per cent of the lowest bid. The plaintiff
challenged the contract award made on the basis of the hidden
preference. The Court ruled that if an owner wants to rely on
specific evaluation factors other than price, then those factors
should be disclosed in the tender call taking into consideration
that all bidders must be treated fairly and equally.
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Limitation Period and Discoverability:
▪ From the time that a damage occurs, the party that
suffered has a time frame to when they can pursue
litigation, action or a claim against a professional
engineer.
▪ The limitation periods vary, but usually are:
▪ Basic limitation period of 2 years
▪ Ultimate limitation period of 15 years
▪ Contracting parties are allowed to agree to shorten or
extend the basic limitation period and to shorten,
extend or suspend the ultimate limitation period..
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CONTRACT LAW
▪ The following are some contract law rules:
▪ Discoverability:
▪ A claim, lawsuit or action for a breach of contract must
be commenced within a certain timeframe (Limitation
Period) for it to be considered by the courts.
▪ The discoverability concept defines that the limitation
period commences when a claim is discovered; an
injury, loss or damage occurs; or the date on which a
reasonable person would have discovered the
loss/damage.
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PRECEDENT COURT CASES
Limitation Period and Discoverability
▪ City of Kamloops vs. Neilson
▪ A house in Kamloops, British Columbia, had insufficient
foundations which were discovered upon inspection by the city.
Stop work orders were issued but not enforced. The house was
sold to the Nielsens. On discovering the construction
deficiencies, the Nielsens sued the city for negligent
performance of inspection. The vendor of the house, Hughes,
assumed liability as well. Seventy-five percent of the liability
was delegated to Hughes and twenty-five percent was
delegated to the city.
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PROFESSIONAL LIABILITY
How can a professional limit liability?
▪ By adding a contract clause that limits his/her liability to
an amount acceptable by the client.
▪ This may be extended to the amount of his/her
professional liability coverage (e.g. Professional liability
insurance).
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ALTERNATIVE DISPUTE RESOLUTION
How to avoid courts?
▪ Mediation
▪ It’s a process where a neutral third party assists disputing
parties in resolving conflict through the use of specialized
communication and negotiation techniques.
▪ Arbitration
▪ The dispute will be decided by one or more persons, which
renders the "arbitration award".
▪ An arbitration award is legally binding on both sides and
enforceable in the courts.
▪ How arbitration awards are enforced internationally?
▪ Arbitration awards are enforced internationally under the New
York Convention if the countries involved have ratified the
convention (over 160 countries have ratified the convention).
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PUBLIC PRIVATE PARTNERSHIP
▪ Public Private Partnership (PPP) – giving private
companies a long-term contract to generate profit if
they provide some or all of the capital on a project.
E.g., charging tolls for building the highway.
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CASE STUDY QUESTIONS
Lecture 7 – Cont’d 34
Dr. Ismaeel Al Ridhawi
LAW QUESTION #1
An owner and a contractor entered into a contract to build an airplane hangar
that is to be finished by July 1st. halfway through the project the owner decides
she is going on summer vacation and verbally tells the contractor that he can
finish by September 1st. On June 20th the owner misses her flight and decides
not to go on vacation and demands that the hangar be built by their contract
deadline of July 1st. The contractor refuses since after being given the verbal
extension he re-scheduled his material and labour for mid-August. On July 2nd
the owner terminated the contract citing that the contractor did not deliver on
time as per the contractual agreement.
(a) Is the owner entitled to rely on the strict wording of the contract under these
circumstances? In giving reasons for your answer, identify and explain the
relevant legal principle and how it would apply.
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LAW QUESTION #1
Answer:
(a) The owner is not entitled to rely on the strict wording of the contract. The
contractor was extended a “gratuitous promise” from the owner to extend
the delivery date. Since the promise was not amended in the contract and
because consideration (e.g. money) was not exchanged, it is a gratuitous
promise. The contractor was clearly depending on the promise and would be
at a loss if it had to revert back to the original contract. If the owner insisted
on the wording of the contract, the contractor could request and “equitable
estoppel” from the court. The court would likely make it equitable for the
contractor and set the completion date to be September 1st.
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LAW QUESTION #2
PLAYCO, a supplier of playground equipment for restaurant chains, submitted a
fixed price bid on a major renovation project for a large restaurant chain, in
response to the project tender request. PLAYCO included with the tender, as
required, a cheque for $50,000. The request for tenders clearly indicated that if
the tender was accepted by the chain and the successful bidder did not execute
the contract, the chain would keep the deposit for its own use and accept
another tender.
PLAYCO made an error in their calculation omitting $500,000 from its tender
price of $3,000,000. PLAYCO notified the chain of this error before all bids have
been submitted. PLAYCO requested to withdraw their bid, but the chain refused
and awarded the contract to PLAYCO since it was the lowest bidder.
(a) Was PLAYCO entitled to withdraw their bid? Was the chain entitled to keep
the tender deposit? Provide your reasons.
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LAW QUESTION #2
Answer:
(a) PLAYCO was not entitled to withdraw its bid since it entered into a Contract
A with the owner upon the submission of its bid. The contract clearly stated
that the tender deposit would be kept under these circumstances. The chain
was entitled to keep the tender deposit as per the provision in the contract
that allows them to do so, since PLAYCO did not execute the contract.
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LAW QUESTION #3
A telecommunications company rented an underground pipe system from a city.
The developer’s purpose in renting the pipe was to use it for installing a fiver
optic cable. The telecommunications company then entered into another
contract with a contractor for a price of $4,000,000 to complete the installation
by a specified date. The contract specified that if the contractor fails to complete
the installation on time then the contractor is responsible to pay a penalty of
$50,000 a day with a maximum liability of $1,000,000.
The contractor failed to meet the specified deadline. Moreover, during
installation, the contractor has damaged significant amount of the fiber optic
cable, with the result that the telecommunication company incurring additional
expenses to fix the damaged cable. The total cost of supplying and installing the
replacement cable plus the amount of incurred penalties for which the
contractor is responsible of totaled $1,800,000
(a) Explain and discuss what the telecommunications company could sue the
contractor for?
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LAW QUESTION #3
Answer:
(a) The facts of this case demonstrate a fundamental breach of contract. The
telecommunications company could sue the contractor for the total amount
of $1,800,000 (failure to meet deadline + damages). Since the contract
included a an exemption clause (i.e. liability limitation clause), then the
court will look at the exemption clause and will be scrutinized by its wording
and a “true construction approach” will be considered. If the clause is
clear and direct it will be enforceable unless it is unconscionable. Thus, if the
court believed that the clause is clear and direct, then the contractor would
only be required t pay $1,000,000 (i.e. the maximum liability).
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LAW QUESTION #4
A local government decided to renew and expand its water treatment facilities. As a result,
they invited competitive tenders from contractors for the construction of a new water
treatment facility. A consultant (P. Eng) was hired to prepare the tenders and recommend
one of the bidders to the local government. Tenders were submitted by 5 bidders. All bids
were considered to be compliant with the tender documents. The lowest bid was well
within the Owner’s budget.
Before the consultant had made a recommendation, the consultant was called into a
meeting with a highly ranked member of the local government who mentioned that the
lowest bidder was not a “local bidder” from within the city. The council member
emphasized his view that the contract should be awarded to a local bidder. He also
pointed out that had one requirement have been deleted from the specifications, the bid
award would be going to the lowest “local contractor” which was preferred by the local
government council. There was no clause or reference in the Tendering Instruction to any
preference being shown to local contractors.
(a) How should the consultant deal with the political pressure being applied by the
Council members?
(b) If the contract is awarded to the lowest local bidder what potential liabilities in
contract law may arise?
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LAW QUESTION #4
Answer:
(a) The consultant should stand up to the council and politely decline his
invitation to break the law. He should inform the council that when
contractors submit their bids, they for a Contract A with the local
government, which is legally binding. Since there were 5 compliant bids, 5
contract A’s were formed.
(b) If the contract is awarded to the lowest local bidder, the potential liability in
contract law that may arise is breach of Contract A. the actual lowest
bidder may sue the local government for not treating all bidder fairly and
equally. That contractor would claim for bid expenses, lost profits, as
well as legal fees.
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LAW QUESTION #5
An IT company submitted a bid to design software and hardware for an electronic
technology process to control the operation of a baggage handling and related security
facility for a major airline. The IT company won the bid and the contract was awarded to it.
The contract conditions entitled the IT company to terminate the contract if the airline did
not pay monthly payments within 15 days following a progress payment due date. The
contract work was to be performed over an 8-month period.
The IT company later found out that they made a mistake in their tender calculation and
that they would lose money rather than make profit. The project started off smoothly as
the first 3 monthly progress payments were paid by the airline on time. However, after the
4th monthly progress payment, the airline company asked the IT firm's representative on
the project for information to be provided to them prior to 4th payment. The representative
from the IT company did verbally accept and indicate that the additional information would
be provided before the deadline. 16 days after the 4th progress payment due date, the IT
firm notified the airline in writing that it was terminating the contract because the airline
was in default for not honouring its obligations to make payment within 15 days of the
month.
a) Was the IT firm entitled to terminate the contract in these circumstances? In giving
reasons for your answer, identify and explain the relevant legal principle, its purpose,
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how it arises, and how it would apply to the facts.
LAW QUESTION #5
Answer:
a) The IT firm was not entitled to terminate the contract under these
circumstances. The employee of the IT firm extended a “gratuitous
promise” to the airline company by verbally indicating that more information
would be provided. Since the promise was not amended in the contract and
because consideration (e.g. money) was not exchanged, it is a gratuitous
promise. The IT firm was simply using the late payment as a way of
escaping their contract. If the IT firm takes the airline company to court on
the strict wording of the contract, the court would see that the promise
made by the IT firm made a gratuitous promise that the airline company was
relying on and that terminating the contract would result in an inequitable
result for the airline company. The court would likely enforce an “equitable
estoppel” to prevent the IT firm from relying on the strict wording of the
contract.
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