Contract Acceptance by Commencement

The Scenario

We put forward the following scenario to Jason Farnell, Adjudicator and CEDR Accredited Mediator.

I’m a Main Contractor working on a JCT Standard Building Contract (2016).

I’ve agreed a price and programme with a Subcontractor following receipt of their quotation and having held a meeting with them and have confirmed our agreement (in headline i.e. payment, programme, price) on an email. I need them to start on site in the next few days but haven’t yet issued their formal Subcontract and will not be able to do this before I need them on site.

We asked Jason the following questions:

1. Where do I stand contractually if the Subcontractor starts on site without receiving/signing the Subcontract? Are we deemed to have accepted their quote or are they deemed to have accepted our tender documents, or neither?
2. If we don’t start the Subcontractor on site urgently, we’re at risk of being in delay with our client which is a major problem. What are the risks of issuing their Notice to Commence ahead of the Subcontractor signing the Subcontract so we can understand the pros/cons of both options?
3. What is your advice in this situation? Could I issue a Notice to Commence which states, “You’re hereby given Notice to Commence the Subcontract Works based on the terms included in our Tender Document and our agreements confirmed in email dated …”?
4. What happens/what are the major risks if the Subcontractor refuses to sign the Subcontract after commencement on site? Is there any action we can take to make them sign the Subcontract?

The Answers

Oh dear, just reading the opening scene-setter fills me with dread – this is so like the background to many of the disputes that I have adjudicated upon. Getting a properly considered contract in place at the outset, before the works have started, on or off site, which fully articulates the agreements that have been reached between the contracting parties is of paramount importance. What is stopping this from happening? This ‘programme is king’ approach ‘getting work done first and we’ll agree the terms afterwards’ really is storing up potential problems for later!

It appears that at least some of the essential terms have been agreed (i.e. payment, price, programme) so I am at a loss as to why it would take a prohibitive amount of time to capture this in a contract and issue it before the works start on site.

1. Where do I stand contractually if the Subcontractor starts on site without receiving/signing the Subcontract? Are we deemed to have accepted their quote or are they deemed to have accepted our tender documents, or neither?

This really is a case of “well that depends…”. If the email refers to the sub-contractor’s quotation and nothing more, then yes quite possibly the contract may have been formed on the basis of accepting the Sub-contractor’s offer and any terms it may have included, without reading the detail of the email it is not possible to know what has been agreed.

2. If we don’t start the Subcontractor on site urgently, we are at risk of being in delay with our client which is a major problem. What are the risks of issuing their Notice to Commence ahead of the Subcontractor signing the Subcontract so we can understand the pros/ cons of both options?

The difficulty with the question is that there is no indication of the scale or complexity of the sub-contract or the Main Contract Works, nor how the Main Contractor comes to find itself in the unenviable position of having to start a sub-contractor on site without effectively having a contract in place, nor how long it would take to prepare and issue the sub-contract documents.

The price, payment terms and programme are significant steps towards agreeing the sub-contract terms but they are not the whole agreement. What is the design responsibility under the subcontract?   How will the sub-contract sum be adjusted? Are all attendances agreed? The answer would be different for an M&E sub-contractor whose works represent 40% of the Main Contract Value as opposed to a diamond drilling contractor who is required on site for one day to drill half a dozen holes through floor slabs. The potential for disagreements and disputes where the terms of a complex sub-contract package are not agreed prior to commencement on site are legion, leading to exposure to cost escalations due to changes in the Sub-Contract Value for a variety of reasons.

Clearly where there is a potential for the Main Contract programme to be delayed by a decision not to start a sub-contractor before the sub-contract terms are agreed would expose the Main Contractor to being in culpable delay and ultimately liable to sanctions from the Employer.

These are commercial considerations that need to be weighed against each other and for mitigation measures to be considered [e.g. is it possible to issue a discrete lump sum order for a small part of the sub-contractor’s works to avoid delaying the project, pending preparation and agreement of the sub-contract terms for the main body of the sub-contract works?].

3. What is your advice in this situation? Could I issue a Notice to Commence which states, “You are hereby given Notice to Commence the Subcontract Works based on the terms included in our Tender Document and our agreements confirmed in email dated…”?

In answer to your question, “yes you could”. The effect of this would probably mean that a contract will have been formed on the basis of what is set out in the Main Contractor’s Tender Documents and the email. If this refers to sub-contract conditions these may be incorporated.

In many instances Main Contractor’s and their sub-contractors manage to work together and deliver their respective works irrespective of the contract terms agreed between them; it is only usually where things do not go to plan that the shortcomings of poorly articulated agreements will be scrutinised and maybe exploited.

4. What happens/what are the major risks of the Subcontractor refusing to sign the Subcontract after commencement on site? Is there any action we can take to make them sign the Subcontract?

The major risks? – again, a difficult question to answer in an abstract situation. As a generality a company is unlikely to sign up to an obligation, requirement or risk that is not to its advantage, after the event and would therefore seek to avoid the offending obligations, requirements or risk. In my experience of such situations, there is little that can be done to compel a company to enter into a contract, especially where it has realised that it will either lose money or be compromised in some other way, until either the risk has been eliminated or a compromise, usually monetary, has been reached in respect of the obligation or requirement.

Without wishing to appear wise after the event, it would be far better to put your energies into ensuring that a properly considered sub-contract is in place prior to the sub-contractor commencing its works; rather than being compelled to expend time and resources dealing with the consequences of failing to do so afterwards.

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.