Time and cost are significant driving forces in construction. Situations often arise whereby these pressures dictate that clients or contractors issue contracts and start works before they are formally executed. Alternatively, they issue letters of intent, but due to ongoing issues or changing timelines, the terms relied upon come into question.
Where do you stand in this eventuality? Is the contract enforceable or are you subject to different terms and conditions? How do you establish the terms you are working to and does the passage of time have a part to play? What if a dispute has arisen after many months of work continuing and payment being made?
Establishing the facts
It’s not necessarily the case that if a contract has not been executed, it is not a binding agreement. If you can demonstrate that an offer was made and the other party subsequently started works following receipt of this offer, you can make a case that the terms of contract are in force by virtue of the parties conduct i.e. it is clear that both parties have conducted themselves as if a binding contract was in existence.
In the eventuality that one party later seeks to raise the issue with the fact the contract is not executed, and therefore claim the terms of agreement are at large, this will be difficult to pursue on the basis that they have accepted the terms, including payment, up to the point of dispute. If the unexecuted contract is complete and operable, the terms are sufficiently certain, and that it was drawn up to create a legal intention, then in the event it was brought before a court they are likely to enforce it’s terms irrespective of whether it had been executed or not.
There are ways around entering into a contract by conduct through the use of the words ‘subject to contract’ being issued atop correspondence, so if you are a client or main contractor undertaking procurement and you see this on tender returns, it would be best to challenge this and establish if the tenderer accepts your terms, assuming they have been issued with the tender pack, or if their offer is based purely on their own terms and conditions against which they are not prepared to deviate.
Even in circumstances whereby there are key components lacking that would produce a contact, the courts have the power to add these on the basis of reasonableness in order to make the agreement workable if the intent was always to produce a workable agreement. However, the courts will only do so if the agreement becomes clearer and operable, as they will not want to add ambiguity to the situation.
Establishing the timing of events is critical. For example, you have issued your proposed terms to your tenderers, but upon providing a quotation they attached their own terms, with no acknowledgement in regards to the terms that you have issued. The tenderer could argue that upon receiving your invitation to tender, based on your proposed contract terms, they submitted a counter offer, which was to undertake the works for the tendered price using the terms and conditions they submitted with the price.
In many instances, clients or contractors prepare a contract that sets aside the tenderers supplied terms and conditions before issuing a contract to them for execution. Tenderers believe that if they stay silent on this contract, start works, then claim they have done so on their own terms, they can navigate around the contract issued to them. However, after receiving a contract and then starting of works, this would be deemed as an acceptance of a counteroffer in the eyes of the court.
If no agreement is established, what terms are you working under?
If a situation arises where you have issued conditions, a party has started works, then after a while you receive the contract conditions back but they are amended, are you railroaded into accepting these terms? The answer is probably not if the works have started before the contract alterations were issued. The courts will likely find that a binding agreement existing before the alterations came about and therefore, they can set them aside.
However, if the amended terms were reasonable, for example to remove an ambiguity, then it may be permissible. If on the other hand the alterations seek to fundamentally alter the terms by changing the payment provisions, striking clauses out, etc. then a court will seek to establish the original unamended terms and may even correct ambiguity themselves to perfect the agreement.
In terms of payment, if no contract or prescribed method of payment is established, a claim could be made for the works to be assessed on a ‘quantum meruit’ basis, which essentially means a reasonable sum of money to be paid for work done. Claims made for payment on this basis are generally done so on an actual cost basis.
Valuing the works on this basis is fraught with issues, firstly because the claim is made based on a level of reasonableness, which is clearly open to interpretation. Secondly, it’s likely to suit one party more than the other, which could lead to a dispute, For example, a contractor may argue that no contract is in place and present its actual costs on a quantum meruit basis which are higher than original contract rates that were proposed and accepted by the client.
Can you retrospectively agree terms and conditions?
The answer to this entirely depends on the circumstances. Generally speaking, it’s not best practice to retrospectively agree terms and conditions. Once the works have started and you have the benefit of factoring in the progress to date, each party will seek to agree terms most favourable to them to maximise their outcome.
It is the job of the courts to look back over correspondence leading up to starting and whether a contract can be established. The test the courts will use in this scenario is to examine the intent of the parties and if a reasonable person would consider the terms to be legally binding.
The courts will also try to establish that if the intent were to create a legally binding agreement, but then for whatever reason the parties sought to back out of this agreement, was there an agreement up to this point? For this reason, when you are corresponding with suppliers, it’s important to be clear you’re not entering into contract at that point in time etc, hence the use of the ‘subject to contract’ as noted above.
What can you do to avoid the situation from occurring?
To avoid the issue of differing terms and conditions, it’s good practice to issue those you wish to use as part of the tender pack and make it clear that you will not consider bids that are returned with alternative terms and conditions. However, this approach can sometimes limit your price returns so you could invite reasonable amendments to be suggested by your tenderers for your consideration.
If you believe that one party will not sign up to the conditions presented, or will present a counter offer with their own conditions late in the process and attempt to hijack the bidding process, then hold discussions at the earliest point possible to avoid the situation materialising.
Plan your procurement in good time to allow for the execution of contracts so that you’re not faced with rushing someone onto site before they have executed contracts. Also, when drafting contracts, you should have a list of correspondence on file i.e. tender issued, price return received, written confirmation, etc.. In the event of any dispute arising you, will have documented evidence of considered offer and acceptance to call upon.
Relevant Case Law
It’s generally held that letters of intent do not contain the conditions such that the scope can be well defined. They are open ended, and being a letter, it’s questionable if they are even legally binding.
In the case of Harvey Shopfitters Ltd vs ADI Limited, Harvey offered to carry out works for £339,000 which was followed by a letter of intent issued by ADI to facilitate the works starting early. In the letter it stated a contract was being prepared and the intent was to enter into JCT Intermediate Form of Contract.
As the works proceeded, payments were made as though the JCT contract was in use until the final account whereby Harvey then claimed there was no contract in force and they were continuing to operate on the letter of intent, therefore claimed costs on a quantum meruit basis. They cited a clause in the letter of intent that stated if a contract should fail to proceed then any reasonable expenditure would be reimbursed ‘on a quantum meruit basis’. Harvey sought to adjudicate on the basis that the contract was never signed and therefore only the letter of intent could be relied upon.
The subsequent legal proceedings determined that a contract was acted upon and the quantum meruit scenario was only for use if the contract did not go ahead as planned, but as it clearly did, it would be wrong to value the works on a quantum meruit basis. As the parties had carried out the contract as if the JCT contract was in force, they had by conduct utilised these conditions.
In ACT Construction Ltd vs E Clarke & Sons (Coaches) Ltd, the case was brought about on the principle of whether a contract existed. The works were to provide design services in relation to a development, but as there was no scope or price agreed, then following a dispute about payment the issue arose as to whether there a contract in place at all. The contract was claimed to be an oral one, but the judge decided that as there was no formal contract, correspondence, or price agreement, a contract did not exist. However, once heard at the Court of Appeal, they decided that as long as there was an instruction to carry out service and deemed acceptance of that instruction as evidenced by the completed works, then where no formal contract existed payment must be made on a quantum meruit basis.
If you find yourself in the unfortunate position whereby a claimant raises the issue of an unexecuted contract after the works have commenced, with the intention of pushing alternative payment provisions or substantively changing the contract terms, the claimant is unlikely to be successful if you are able to demonstrate acceptance of the terms in play either through conduct or previous correspondence.
At the point the works have started, it’s unrealistic to suggest alternative contract models or mechanisms and expect to have these accepted. Avoid letters of intent wherever possible and be vigilant around counter offers with revised terms and conditions, ensuring you correspond to document their withdrawal in the event of a dispute later down the line.
Header photo by Micaela Parente on Unsplash
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.