Law relating to contracting

Executive Summary

“The law states that a contract shall be deemed legal if it is drawn up between consenting parties who accept it as complete and unconditional and some external manifestation of assent communicates the acceptance of an offer.”(Burrows, Finn, & Todd, 2202, p. 60)

In the routine of a construction site almost everything happens under the direction of a contract.
Companies go to tender, and Construction companies, fill them in understanding the conditions of application. When tender is awarded, parties are bound on both sides by the terms of the contract. Sometimes, as in the contract desribed below, contracts are subcontracted out further. It then becomes the responsibility of the Contractor to make sure that the subcontractors can fulfil the obligations of the original contract.

Many companies and their agents become involved in these complex activities, and correcting the errors and dealing with the issues that arise becomes a daily activity.
In the acceptance of tender submission, a contract is set up, the price agreed upon, details finalized and under mutual consent the contract signed.
In this matter one would assume that both parties given their history in the construction industry would be aware if there were any issues preventing them from fulfilling their contractual obligations. It is however clear that from the resulting observations that this was not the case.
This case illustrates there are risks involved for all in making any assumptions on a construction site that could give rise to liability. The following issues are discussed:

  1. Electronic Communication
  2. Ostensible authority
  3. Mistakes in the Contract
  4. Remedies to the Contract.

Background information
Participants 

  • National Government- Financing of State Highways
  • Tulip Co. Responsible for the building and maintenance of the State Highways
  • Vermont Co: Responsible by contract of National Government to supply and build cabling for energy pathways into the Auckland region
  • Eclipse: Australian subsidiary -Sub contractor of Vermont Co. Maintenance contract for all City lights in Auckland City.
  • Finite contractors: Civil Engineering company contracted by Tulip Co under tender to upgrade the national grid on Auckland SH 99 motorway.
  • ConT: subcontractor to Finite contractors utilized for the installation of the Street lighting and cabling.
  • Auckland City Council: responsible for the local roads in the city, and share costs when upgrades to the national grid affect local roads.

The Facts as represented by a participant
During a tender process by Tulip Co for the SH 20 motorway Finite contractors was awarded the contract to build the new State highway 20, and upgrade existing roads affected. The tender included the roads, and all services associated (lights and cabling).
The Cost of these services to the highway is split between Tulip Co and Vermont Co.
Finite contractors put out to tender the supply for lights and cabling to the market and awarded the contract to ConT. (Eclipse a contractor for Vermont Co had also tendered on this part of the subcontract.) At completion, streetlights become the property of Auckland City Council (ACC) and the cabling and maintenance becomes the property of Vermont Co as by Government directive.
As part of the initial tender process with Tulip Co, Finite contractors were required by Vermont Co, to have Vermont Co approved contractors install the lights. ConT at time of submission had received and submitted an email letter from Vermont Co.s’ Safety Manager stating that so long as the employees had the necessary qualification set up by Vermont Co that permission was granted to the do the work. ConT complied with this requirement. This letter was e-mailed to ConT in a word document with letterhead attachment.
The original email was submitted to Vermont Co as an email so that they could see it.
Post award of the contract (in 2004), to Finite contractors by Tulip Co it became apparent that Vermont Co had changed their approval system to allow for a select 6 contractors only; ConT was not one of them. Because of this Vermont Co refused to sign off the installations completed by ConT, and Finite contractors were not able to start complying with safety issues around the supply of streetlights. ConT applied to Vermont Co to be included, but received only “Maintenance of existing Network” Status- they had filled in the wrong paper work- subsequently they have reapplied and approval is still pending.
At a further meeting the following was tabled.
To take over the Maintenance of the lines Vermont Co wanted a 3-year warranty. Not previously specified in the contract.
Installation would have to be by a qualified contractor:- ConT was not Vermont Co qualified.

Vermont Co had tried to insist the Finite contractors engage Eclipse, at Finite contractors cost, to manage and sign off ConT work prior to the “light up” connection.
Finite contractors have declined both due to its variation to the original contract in, and at the time of the award, ConT were approved as a Vermont Co agent.
Finite contractors’ contract with ConT binds them financially. Termination of this contract with ConT would result in Finite contractors having to pay profits and loss of earnings to ConT.
In the interest of public safety, the Finite contractors Project manager and Safety officer onsite have negotiated with Vermont Co for granting, “Light up” of the streets lights.
ConT continue to install lights under the supervision of Eclipse at a cost to Vermont Co.
(A query remains as to whether they are also billing Tulip Co for this currently)
All the streetlights pending approval of ConT are considered temporary.
The resolution for this issue has been well dealt with by all accounts in that Finite contractors are able to honour their agreement with ConT, who are able to continue to do the work. Vermont Co to satisfy their safety regulations to have a qualified agent, have contracted Eclipse at their expense to supervise ConT and in switching the lights on the public safety needs are being met

1:  Electronic mail as communication of acceptance.

One of the main issues that have arisen in this instance has been that of an e-mail sent to ConT by a Vermont Co agent (Safety Manager) setting out the conditions for acceptance of work.
At a meeting between the parties, Finite contractors presented the Word document received from the safety officer. This word document was auto dated, and unsigned. Managers at Vermont Co had contended that the letter was by no means valid or legal, and so invalidated ConT’s legitimacy as an agent of Vermont Co to install the Cabling and lights.  Due to the delay between signing of the contract (2004) and this issue arising (2006), Vermont Co maintained that they had no history of this letter, and placed the onus on Finite contractors to come up with the original e-mail to prove its existence.  They would still question as to whether it was valid.

Once ConT and Finite contractors had located the original email, The “Electronic Transactions Act 2002” deals very effectively with this issue.
Unless otherwise stated by parties electronic communication shall be considered valid correspondence. Vermont Co had used this method to communicate with ConT and so the assumption is made that it is acceptable:
Part 18 states: legal requirement that information be in writing, is met by information that is in electronic form if the information is readily accessible so as to be useable for subsequent reference. (“Electronic Transactions Act 2002,” 2003)

Further with regards to the Date, Information shall be considered sent if:

  • It is sent from the senders’ place of business.
  • When communication first enters an information system outside senders’ control.

This dealt effectively with the fact that it did not have a date on the printed version; the date it was sent electronically shall suffice.
With regards to the concerns about the origins, proof that it originated at the senders desks is sufficient (senders e-mail address with service provider).
The onus for preventing illegal access to someone’s electronic mail lies with the business. Vermont Co would have a hard time disputing that someone other than the Safety officer sent the e-mail. They have a responsibility to secure their mailing system.
Email is a daily reality in business, and the speed at which the world is changing in the face of globalisation makes it a necessity that we facilitate this change in technology and accommodate it with legislation.
This legislation does this(“Electronic Transactions Act 2002,” 2003). It is however important that business take all steps possible to secure their mailing system, as this electronic communication is vulnerable to criminal behaviour and intent.

2:   Ostensible Authority

Further to Vermont Co seeking to question validity of the authorization given by the Safety officer:
If Vermont Co could prove that this in fact was not the case they could apply for relief from obligations to acceptance of this part of the contract and have the letter revoked. One however has to recognize the relevant principles of the law as to apparent or ostensible authority as stated in the 28th ed. of Chitty on Contract at paragraph 32-057. (“NEW ZEALAND MARITIME LAW Transpac Express Ltd v Malaysian Airlines,” 2002)The text reads in part as follows:
The applicable rules may be divided as follows.

  1. A representation must be made by words or conduct…
  2. The representation must be made by the principal or someone authorized in accordance with the law of agency to act for him. A representation by the agent as to his authority cannot of itself create apparent authority…
  3. On general principles the representation must be of fact and not of law.
  4. The party must act on the representation… .

Due to the nature of the Safety Officers job description, as an agent acting on behalf of Vermont Co, he would have had the authority to act on their behalf in this matter. Vermont Co would have a difficult time introducing the argument that he acted out of his scope of practice.

3: Mistakes to the Contract

If Vermont Co set out to prove however that the safety officer had acted in mistake, they would need to prove it on these grounds(Eagles, Longdin, Grantham, & others, 2001, p. 360)

  • A unilateral Mistake- when the party seeking to back out from the contract was mistaken and the other party was aware of the mistake
  • Common Mistake – both parties to the contract were under the same mistake.
  • Mutual Mistake – both parties are under a mistake but the mistakes relate to different things

This was clearly not the case in this instance, and therefore would need to be treated as a variation to the contract, which would have to be offered and accepted to come into the contract.
Also, Vermont Co having changed the criteria for qualifications needed should have communicated this to Tulip Co, ConT and Finite contractors in writing.  Contractual law requires that if you for some reason wish to change criteria to acceptance of a contract, you need to do it in writing. It is not good enough to assume that there is acceptance of this either.  This too would need to go through the process of offer and acceptance to become a variation to the contract.
No evidence has been offered to substantiate that this was done.  Therefore Vermont Co could not prove that failure of a condition subject to which the offer was made was an issue. Conditions were clearly met by Finite contractors and ConT, and without a letter from Vermont Co they are not able to revoke on this basis.

4: Remedies to the Contract

The Contractual Remedies Act 1979 Section 6 does however offer part solution to this issue for Vermont Co.
If Vermont Co is insistent that they cannot allow for ConT to continue with installations then ConT shall be entitled to damages in the same manner and to the same extent as if the representation were a term of the contract that has been broken.  The only question is who would be liable for these damages.
The only other issue left unattended is the request for a 3-year guarantee on the work done. The original contract agreed upon one year, and for the 3 year warranty to come into effect, it would have to be offered and accepted, which it was not, and so no variation comes into affect in the contract.

Conclusion

While the context of Contract law is very complex, the application is quite simple. An offer shall be made and accepted by mutual agreement without duress for it to become binding.  It is evident that in the negotiation process leading up to the signing of the contract in order to ensure the best outcome, you should be acutely aware of all the issue at hand and how they are intimately related and to what affect they will become legally binding.

Electronic communication is a reality in business today, and it is with rapid pace taking the place of written paper communication. While the Electronic transactions Act of 2002 has in effect been aimed at creating a smooth transition for this change from Paper to Computer in light of legal correspondence it should also bring to awareness that fact that business remains liable and responsible for the communication of its employees and agents.

It is evident in this instance that Finite Construction was well versed in the legalities surrounding Contract law and that being party to this contract has not had negative financial affect on them. In this instance it safe to say that the scope of the law has protected their interests and those of their subcontractor ConT. 

What was evident in the discussion with parties with regards to this story was that there was definitely a break down in communication within some of the companies, unfortunately for some the scope of the laws discussed here do not allow for compensation for negligence on the basis of company intelligence, or lack there of.

References

Burrows, J., Finn, J., & Todd, S. (2202). The Phenomena of Agreement. In The law of Contract in New Zealand (pp. 33-131). Wellington.
Eagles, I., Longdin, L., Grantham, R., & others, p. (2001). Law in Business and Government in New Zealand (3 ed.): Palatine Press.
Electronic Transactions Act 2002, PART 2 – Improving certainty in relations to electronic information and electronic communications    and PART 3 – Application of legal requirements to electronic transactions (2003).
NEW ZEALAND MARITIME LAW Transpac Express Ltd v Malaysian Airlines (AUCKLAND REGISTRY 2002).

Acknowledgements

Many thanks to an Engineer (to remain nameless) involved in this contract who disclosed the details of the issue to me on a confidential basis;

A Barrister of Auckland – with whom I had discussions on contract law, the appropriate and acknowledged application and presentation of information “as posies of other people’s flowers” and for the loan of his valuable book “Law in Business and Government in New Zealand” for me to reference from.