“Contracts are just ways for lawyers to make money
”
Constructive Construction
by EMELITA ROBBINS, MANAGING ASSOCIATE, DISPUTE RESOLUTION, OGIER
I have spent many years advising on construction projects and I’m passionate about good architecture, so it’s not unusual for me to find myself talking to people about building projects. A perhaps surprisingly common theme to such conversations is the attitude of parties towards the use of contracts, which at best might be described as indifferent. I hear explanations for not entering into formal contracts such as “we know our customers”, “our builder came recommended” or “contracts are just ways for lawyers to make money”. This sort of talk conflates the use of an agreement to record the parties’ expectations and promises, with the use of the law to enforce obligations agreed between the parties. The fact is a well-run project governed by a well drafted contract rarely necessitates the intervention of lawyers to enforce the agreement.
Why enter into a construction contract? Construction projects are complex and construction contracts are different from most other types of contracts in that they have to deal with a number of difficult factors. Parties usually agree at the outset a price, together with the required quality and time for completion of
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the works, but projects often suffer from complications, unforeseen matters arise, additional works are necessary, delays occur and the works frequently cost more than anticipated. A construction contract can allocate the associated risks for each of these matters in advance. Consequently, most parties do enter into construction contracts, and most use one of the published standard forms (‘Standard Form Contract’). Notwithstanding this, employers are often keen to see works start on site before any formal contract has been prepared. How the risks of a premature start on site can be addressed, along with other commonly encountered issues are discussed below.
Starting works before a contract is agreed A contractor normally submits a tender, by reference to a Standard Form Contract, drawings and a specification for the works. If everybody is in agreement the architect can issue a ‘letter of acceptance’ of the tender, which enables the works to commence before the formal contract is entered into a few days later.
If there are unresolved issues which preclude the issue of such a letter,
for example the tender price is too high, a ‘letter of intent’ might be issued. Its purpose is straightforward. It states the employer is not in a position to enter into the formal contract until the outstanding matters are resolved, but the works can begin on site on specified terms.
Unfortunately, it is not uncommon for parties to then forget that a formal contract has not been entered into. This can mean that the works are undertaken and even completed without agreement as to certain key terms such as price. If payment terms are not clear, the law provides that the contractor may claim payment on a quantum meruit basis, that is, payment of a reasonable sum for his services. In this situation both parties bear the risk that the price paid will be different to that which they anticipated.
One way to guard against such a risk is for provision to be made in the letter for works to be carried out up to a maximum value. The presumption is that the formal contract will be entered into when or before this financial limit is reached. If the contractor proceeds with works in excess of the stated value,
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