ELEMENTS OF CONTRACT

9-1 Explanation and Definition of Contracts

A contract is an agreement between two or more parties for certain acts to be performed or
refrained from which has been arrived at in such a manner, set forth in such form, and is of such content
that it has enforceable legal effect.

It should be understood from the beginning that contracts are not, as might appear at first, formal
legal documents, in writing; for there are thousands of contracts executed every day where there is not
a line of writing, a scrap paper, or anything but the spoken word or implication of action to evidence the
contract.

Practically, every business transaction is a contract, and whenever money or any other things
of value are exchanged for some article of everyday use, such as a pencil, a bar of soap, etc., a contract
is entered into and executed by the person making the purchase with the with the person from whom
the purchase is made. Contracts are therefore not necessarily solemn and complicated legal
documents but may be very simple everyday affairs.

9-2 Classifications of Contracts

Each contract may be classified in six ways as follows:

1. As to origin
A contract may be express, implied or a quasi-contract.
a. An express contract is a bilateral or multilateral contract in which the promises and assent
of each party are expressed in speech or in writing.
b. An implied contract is a unilateral contract where either the act of acceptance or both the
act of acceptance and the promise are inferred as a matter of fact from the conduct or acts
of the parties.
c. Quasi contracts are implied by law on the theory that it would be unjust to allow one person
to accept the benefits of the labor or anything of value which belongs to another without
refunding it or paying him for it.

2. As to participants
A contract may be two-party, joint, several, joint and several, or third-party beneficiary.
a. A two-party contract is the common type in which only two parties are involved.
b. A joint contract is one in which two or more parties merge, to a greater or less extent,
their interests to enter into a contract with another party or parties.
c. A several contract is one in which two or more persons enter into a contract as promisors
or promises but keep their liability more or less separate.
d. A joint and several contract has some of the nature of each of the two preceding types.
A plaintiff may sue the promisors either jointly or severally. If he elects to sue jointly,
however, he must sue all the promisors together in the same suit.
e. A third-party beneficiary contract is one in which two parties enter into a contract for the
protection of the interests of a third person who is not a party to the contract.

3. As to obligation status
A contract may be bilateral or unilateral
a. A bilateral contract is one in which one party agrees to perform or refrain from performing
some certain acts in return for which the other party agrees to perform or refrain from
performing such certain acts.
b. A unilateral contract is one in which there is a promise by one party to perform certain acts
provided the other party does certain things, the acceptance to be accomplished by the act.

4. As to completion status
A contract may be executory or executed
 a. An executory contract is one in which an obligation is assumed by one or both parties to do
or refrain from doing certain acts at some time in the future.
b. An executed contract is one in which everything is done at the time of making the contract
and no obligation for future acts is assumed by either party.
5. As to form
A contract may be a contract under seal, a contract of record, a simple or parol contract.
a. A contract under seal is one with a seal attached.
b. Contracts of record are those which exist as a consequence of court judgment.
c. A simple or parol contract is one which is less formal than a sealed contract, which may
be required to be in some specified form, required to be in writing but not in any special
form, or without requirement as to form of writing.
6. As to legal status
A contract may be valid, void, voidable or unenforceable.
a. A valid contract is one which is in full force and enforceable by court action.
b. A void contract is one which has no status at law and is therefore not enforceable by court
action.
c. A voidable contract is one which is binding on one party but may be either binding or
nonbinding on the other party at his option.
d. An unenforceable contract is one which is valid in all respects except that it is unenforceable
through court action.
9-3 Essentials of a Contract
The essential elements of a contract are briefly as follows:

1. There must be two or more competent contracting parties.

2. There must be a mutual agreement on the part of all parties to the contract to assume new
obligations which each party understands and which are possible for the parties to form.
3. There must be a valuable consideration for each of the parties to the contract, and the
considerations must be reasonably equal in value.
4. The obligations which the parties to the contract undertake must be for legal acts which are
not contrary to sound public policy.
5. The contract must be set forth according to the form and executed in the manner prescribed
by law.
9-4 Competency of Contracting Parties

Every contract must have two or more parties, all of whom are legally competent to enter into
contractual relations. These parties may be either natural persons or bodies created by law and
authorized to enter into contractual relations. Such authorization is almost never unlimited, and even
with natural persons there are restrictions as to competency to contract. The question of competency
may under certain conditions be raised in the case of contracts where one of the parties falls into any
one of the following classifications:

1. Infants (minors)
2. Persons of unsound mind
3. Drunken persons
4. Persons under legal guardianship
5. Corporations
6. Convicts
7. Enemy aliens
8. Federal and state governments
9. Foreign countries and their sovereigns
10. Professional persons who are required by law to register and to be licensed

Infants. By the word “infant” or “minor” is meant any person who is below the age at which one assumes
certain legal obligations and privileges such as voting and competency to contract. Infants are
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competent to sign contracts for necessities, although exactly what constitutes a necessity may be
subject to question. The term usually includes anything which is reasonably needed for the infant’s
subsistence, health, comfort, and education, taking into consideration his age and condition in life.

Persons of Unsound Mind. A contract entered into by an insane person or a person of unsound mindis
not a void contract but is voidable at the option of the insane person, or the person of unsound mind or
at the option of his legally appointed guardian. In most jurisdictions, contracts made by a person who
has been legally declared insane and placed under guardianship are void. As a general rule, contracts
entered into by an insane person from necessaries are held to be valid. Contracts made with an insane
person during an interval when he is sane are held to be binding.

Drunken Persons. Contracts made by a drunken person when in such a state of intoxication as to be
entirely unable to understand its nature and effect are voidable in his favor except that he is liable on
contracts created or implied by law. If he is in a mild state of intoxication and is capable of
understanding, the same contract is valid unless the circumstances surrounding the execution of the
contract are such as to raise the inference that it was obtained by fraud. The rules relative to the
ratification of a contract entered into by drunken persons are the same as those applying to a person
of unsound mind.

Persons Under Legal Guardianship. Persons under legal guardianship by reason of feeble-
mindedness, their being habitually drunkards or spendthrifts, or by reason of idleness or debauchery
are limited in their ability to enter into contracts in a manner similar to minors, persons of unsound mind,
and drunken persons.

Corporation. A corporation is an artificial person created by law and is limited in its ability to enter into
contracts by its articles of incorporation and by-laws and by general statutes limiting the powers of
corporations. A contract with a corporation must be a contract which it is authorized to make and which
is within the scope of its corporate powers as set forth in its articles of incorporation.

Convicts. In some jurisdictions those serving a penitentiary sentence have their competency to
contract suspended and have a trustee appointed to supervise their property. In some other jurisdictions
a convict retains his full competency to contract, to sue, and to be sued.

Enemy Aliens. In general, enemy aliens cannot contract or sue under existing contracts without the
permission of the government; but they may be sued on existing contracts, and in this case have a right
to answer the suit.

Federal and State Governments. These governments may, with certain restrictions, enter into
contracts. The procedures to be used and frequently even the form of the contract are rigidly specified
by law. The project covered by the contract must be authorized by specific legislation, and an
appropriation of funds for the project must be available.

Foreign Countries and Their Sovereigns. These sovereign and countries and their representatives
may make contracts and may enter suit under these contracts in our domestic courts, but they may not
be sued in such courts without their consent.

Professional Persons. In most states persons practicing the skilled professions where the health,
safety or welfare of the public is involved are required by law to register and obtain a license as a
prerequisite to the practice of their profession. In states where such registration is required, no person
without such registration and license is competent to enter into a contract for such professional services.
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9-5. AGENCY

Closely related to the question of competency is that of the making and performing of contracts
through the function of agency. In a complex society the individual cannot always be present at the
many places necessary to make numerous bargains required in modern business and modern living.

An example of this is power of attorney. Power of attorney is a written authorization to

represent or act on another’s behalf in private affairs, business, or some other legal matter. The
person authorizing the other to act is principal, grantor or donor (of the power). The authorized to act
is the agent or, some common law jurisdictions, the attorney-in-fact.

Depending on the jurisdiction, a power of attorney may be oral and, whether witnessed, will
hold up in court, the same as it is writing. For some purposes, the law requires a power of attorney to
be in writing.

9-6 MUTUAL AGREEMENT

It is essential to the validity of a contract that the parties to the contract agree, and they must
agree to the same thing. There must be an actual agreement and not simply an apparent agreement.
Where there is a mistake as to the nature of transactions, in the absence of negligence on the part of
the parties to the contract, or as to the existence or identity of the subject matter of the contract, the
parties have not agreed to the same thing, and the contract is not binding and can be avoided on the
ground that a person was mistaken as to the law, for the laws are accessible to all, and they can
ascertain what they are.

1. Offer and Acceptance Identical

In order to create contractual relations, there must be an offer on the part of one of the parties to
the contract and an acceptance by the other party. This offer must be accepted without qualification
and without change, or there is no contract.

2. Time of acceptance

The offer must be accepted within a reasonable time, and where a time limit is fixed in such offer,
it must be accepted before such time limit expires.

3. Method of acceptance

If a method of acceptance is specified in the offer, the acceptance must be by a specified method.
If an offer of a contract is made and specifies that the acceptance must be by wire, an acceptance in
person or by letter does not constitute a contract; and if the offer specifies a place of acceptance,
acceptance at any other place is not sufficient.

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 4. Revocation

An offer is revoked by the death or insanity of the person making the offer; but if the offer is
accepted prior to the death or insanity of the person making the same, this constitutes a contract
which is binding on the executors, administrators, guardians, or heirs of such person, provided the
contract was not for personal services.

5. Misinterpretation

If one party to a contract makes a statement which in fact untrue but which he believes to be true,
and this fact is a material fact or element in the contract, and the other party, believing the statement
to be true and relying on the truth of it, enters into the contract, it may be avoided on the ground of
misrepresentation.

6. Fraud

Fraud is false representation of a material fact or nondisclosure of a material fact under such
circumstances that it amounts to a false representation, made with the knowledge of its falsity or in
reckless disregard of whether it is true or false, or as a personal knowledge, with the intention that it
shall be acted upon by him to his injury.

7. Duress

If a person is compelled to a sign a contract at the point of a gun or through threats of violence to
him or someone whom he holds dear, he cannot be said to have consented to the contract, but has
been caused to enter into it by duress.

8. Undue influence

Undue influence consists in taking advantage of a special trust or confidence which is reposed in
one to cause or induce the person so trusting or having confidence in him to enter into a contract
which Is unfair to such person, in taking advantage of the weaknesses, superstition, or necessities,
and distress of another.

9-7 THERE MUST BE A LAWFUL AND SUFFICIENT VALUABLE CONSIDERATION

1. Definition

Consideration are of two kinds, “good” and “valuable”. A good consideration is one based on
love, affection, or blood relationship, and is founded on generosity or natural duty; a good
consideration has been held not sufficient to support an executory contract.

A valuable consideration in one where the law holds that there has been something equivalent
given for the act or promise , such as money, labor, a deed to land, exchange of promises to do
something of value,etc.

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 2. What constitutes a valuable consideration?

A promise to do what one is already bound to do, or a promise founded on a thing already
done, a past consideration, will not as a rule be a valuable consideration. To constitute a valuable
consideration a person must give or promise to give something of value, or he must give up, or
promise to give up some legal right, as a promise not to sue or a promise to extend the time of
payment of a note, in exchange for some other thing of value.

3. Gift

A mere promise of a thing of value is simply a promise of a gift as it is not founded on the
valuable consideration unless there is something of value given in return; but if the promise is carried
out and completed by the delivery of the thing, this amounts to a gifts which, as between the parties,
cannot be reclaimed.

4. Sufficiency of Consideration

When a contract is founded on a valuable consideration, the courts will not inquire into the
sufficiency of the consideration. That is, it is not necessary to the validity of the contract that the
exchange which constitutes the consideration should be things, acts or promises of equal value,
excepting where a contract is for the exchange of sums of money. In such a case the courts will
require that the exchanges be practically equivalent.

9-8 THE SUBJECT MATTER MUST BE LAWFUL AND NOT CONTRARY TO THE SOUND PUBLIC
POLICY.

If a contract is to be enforceable at law, the thing sought to be accomplished by the contract

must be lawful and not contrary to sound public policy. The courts refuse to enforce a contract to do
something that is unlawful. The principal classes of contracts opposed to law or to public policy are:

1. Contracts for the sale of public office, public contracts, or for the bribing of public officials.
2. Contracts which tend to deprive the court of jurisdiction or to compound a crime.
3. Contracts which tend to encourage litigation.
4. Contracts for the committing of a crime or tort.
5. Agreements tending to promote fraud and breach of trust.
6. Contracts which unduly affect the freedom or security of marriage.
7. Contracts in unreasonable restraint of trade and which tend to suppress competition at letting
or sale by auction.
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 8. To pay a usurious rate of interest.
9. Any agreement the object of which is to injure the public health or safety.
10. Agreements to establish unlawful monopolies,trust, etc.

9-9 LEGAL REQUIREMENTS AS TO FORM

There are legal requirements to most jurisdictions as to the form which certain contracts must
take. Certain information which must be included may be specified, or to the requirement may only be
that the contract shall be in writing.

Negotiable instruments consists primarily of promissory notes, bills of exchange, bank drafts,
and bank checks. These in general must be in writing and must include the signature of the maker or
drawer and an unconditional promise to pay a fixed sum of money.

Certain other types of contracts that must be placed in writing includes any of the following:

1. A special promise by an executor or administrator to render himself personally liable for the
debts of the deceased.
2. Any special promise to answer for the debts, defaults, or miscarriages of another person.
3. Any agreement made upon the consideration of marriage.
4. Any contract the terms of which cannot be performed within one year.
5. Any contract for the sale of any interest in land or for the leasing of land for a period of
more than one year.
6. Contracts for the purchase of goods, wares, or merchandise for a price equal to or higher
than an amount fixed by statute.

9-10. Interpretation of the Contract

In general, contracts will be construed so as to give effect to the real intention of the parties. In
determining what such intention is, the following rules are used:

The intention will be gathered from the entire contract; and if there is a contradiction between printed
and written parts thereof, the written part will govern.

If the contract is capable of two interpretations, one of which would render it void or incapable of
performance and the other valid or capable of performance, the latter construction will be given it.

Words are given their plain or literal meaning except that evidence of local usage may vary their
meaning, and technical words will be given their technical meaning.

If there is doubt as to the meaning of the contract, the construction given it by the parties will be given
weight.

9-11. Penalties and Liquidated Damages

Contracts often provide that in case of a breach of the contract, the party aggrieved may collect
from the other party a certain specified amount as liquidated damages, or simply damages. The
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courts will give effect to the intention of the parties provided the amount stated is, as a matter of fact,
liquidated damages and not a penalty.

9-12. Discharge of Contracts

It is probably just as important for the engineer to understand how a contract may be discharged as
it is for him to know how to enter into a valid, binding, and legal contract. The ways in which the contract
may be discharged are many, and especially in engineering work is it important to have an
understanding of some of these ways of discharging a contract.

1. The Discharge by performance – the most common method of the discharge of a contract is
by performance of the contract in accordance with its terms. If the contract is fully performed by
all parties, all rights and all obligations under the contract cease to exist for the parties.

Tender of Performance.

Contracts are often discharged by a tender of performance on the part of the parties. In contracts
calling for money payment, the tender must be made in money. In such cases the person making the
tender is relieved from the provisions of the contract, provided the other party has failed or refuses to
do his part. If the tender is for a smaller amount than is actually due on the contract, the other party
may recover the amount actually due together with the costs.

In case of tender of services, where services only are contemplated in the contract, if the person to
whom the services are tendered refuses the same, then the person so tendering the services is entirely
relieved from any responsibility under the contract and may sue the other party and recover damages
for the failure of the of the other party to comply with his part of the contract.

2. Impossibility of Performance – perhaps no method of discharging the contract is of more

interest to the engineer than this one. The engineering contractor is continually running into
conditions of soil, streamflow, climate, and other conditions which could not have been and were
not foreseen prior to the undertaking of the work; and it is important that he understand the effect
of these unforeseen conditions on the contract before entering into such a contract.

If a contract is made for personal services and the person whose services were contracted
for died, then the contract is discharged by the death of the person because of the impossibility
of his rendering such services.

If the subject matter of the contract or the thing whose continued existence is essential to
the carrying out of the contract is destroyed through no fault of the promisor, as by an act of
God, then the contract is discharged.

Where the performance of a contract is rendered impossible by a change in the existing

law, then the contract is discharged.

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 3. Substantial Performance – another matter vital interest to the engineer and the engineering
contractor is the subject of substantial performance, for in most cases of engineering contracts
there is not an exact performance of the contract but a substantial performance.

It is simply necessary to state that by substantial performance, in a general way, is meant

the practical completion of the work so that no material parts thereof remain to be done or so
that there have been no material alterations from the original contract.

Substantial performance is a question of fact for the jury and not a question of law; it
therefore follows that the question as to whether or not there has been substantial performance
depends in a great measure upon the character of the jury which may decide upon the particular
question. It is well for engineering contractors to keep in mind that there is the human element
to deal with in all matters of this kind, and in determining whether to bring a suit for collection on
the grounds that there has been substantial performance, this should be considered.

4. Discharged by Agreement – if the contract has not been performed by either party, it may be
discharged by the mutual agreement of the parties, the consideration for the discharge being the
mutual release of each party by the other. Contracts may also be discharged by agreement
between the parties to the old contract by making of a new contract. Contracts may also be
discharged by a release under seal which imports a consideration or a release founded upon a
sufficient consideration and signed by the parties to the contract or by changing the parties to
the contract whereby a new party is substituted for the previous one by agreement of all three
parties to the substitution while terms of the contract may remain the same.

5. Discharged by Operation of Law – contracts may be discharged by operation of law either by

the manager of one contract into another, alteration of the contract by one party thereto without
the consent of the other party, or by the bankruptcy, either voluntarily or involuntarily, of one of
the parties to the contract.

Alteration of a Written Instrument.

If one of the parties to a written contract alters, or causes to be altered, the material parts of the
contract without the consent of the other party, the other party to the contract will be discharged of all
liabilities under the contract but will be entitled to any benefit accruing therefrom. If the instrument
altered is a negotiable instrument and is altered by the party holding the same, the parties liable thereon
are relieved from all liabilities thereunder unless the instrument is later negotiated and gets into the
hands of an innocent purchaser for value, who may then enforce the original obligation of the contract.

Discharged by Bankruptcy.

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 Under the bankruptcy of the US any person who has been declared bankrupt and whose estate
has been administered and who has received s discharge in bankruptcy will be relieved from all
liabilities and all contracts of whatever nature which he has entered into prior to being declared
bankrupt.

6. Discharged by Breach of Contract – if either party to a contract announces his intentions not
to fulfill the terms of the contract or wholly or partly fails to perform some of the conditions of the
contract, there is a breach of the contract which gives rise to rights on the part of the injured
party either to give him a right of action against the other party or in some cases he may apply
to a court of equity for a specific performance of the contract. As a rule a breach of the contract
by either party thereto discharges the contract and relieves the other party to the contract from
all liabilities thereunder and gives him a right to sue the party so failing to fulfill the terms of the
contract for damages for such breach.

7. Discharged by Statute of Limitations – the laws of the states of the US also provide that
certain contracts must be sued upon within a given time after the right of action arising under
the contract has occurred or else all liability thereunder ceases.

9-13. Remedies for a Breach of Contract

Where there has been a breach of contract, certain rights are acquired by the injured party. He
may either sue or recover damages actually suffered by him, or he may enter into agreement with the
other parties of the contract to accept a certain amount of money in payment of the breach. This is
commonly known as an accord and satisfaction; and the usual method pursued then is for the injured
party, upon the payment agreed upon, to give a formal release of the contract and all liabilities and
rights arising because of the breach of the contract to the other party so paying the money.

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 QUESTIONS:
1. A __________________ consideration in one where the law holds that there has been
something equivalent given for the act or promise , such as money, labor, a deed to land,
exchange of promises to do something of value,etc.
a. good b. valuable c. bad d. valid

2. ________________ is false representation of a material fact or nondisclosure of a material

fact under such circumstances that it amounts to a false representation, made with the
knowledge of its falsity or in reckless disregard of whether it is true or false, or as a
personal knowledge, with the intention that it shall be acted upon by him to his injury.
a. fraud b.duress c. revocation d. misinterpretation

3. Contracts often provide that in case of a breach of the contract, the party aggrieved may
collect from the other party a certain specified amount as ____________.
a. Discharged by agreement b. liquidated damages c. discharge of contract d.
bankruptcy

4. There is a ___________ if either party to a contract either announces his intentions not to
fulfill the terms of the contract or wholly or partly fails to perform some of the conditions of
the contract.
a. Damages b. liquidated damages c. breach of contract d. tender of
performance

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