It is remarkable how much building work and how many construction contracts are carried out without any written agreement. This type of ‘verbal’ contracting agreement is usually associated with residential occupiers having minor works carried out on their home, but in fact it remains quite commonplace on projects beyond £1m in value and even up to £10m in value on occasion. So what are the dangers really? What difference does it make? There will always be differing views, but the obvious question to ask is ‘how can you prove what was agreed?’ The contract document or written terms and conditions are the single piece of evidence as to what the two parties agreed at the time of entering into contract. Any person could ask themselves, ‘if I got into a dispute, and I was in court, how on earth would I be able to prove to the judge what was agreed?’ In any contractual dispute the courts would always look to that fundamental contractual basis of ‘what did the parties intend when they entered into contract’.
The opposing views are all well known; ‘what’s a contract? It only comes out when it goes wrong’, ‘we are protected by common law provisions anyway’ or those ever fatal words ‘we trust each other!’. The purpose of this paper is not to undermine trust in working relationships in the construction industry, as the ability to trust our contracting partners and supply chain is one of the essential catalysts of success, but raw trust, unsupported by a clear, simple, formal and binding document is extremely dangerous and could cause great problems later on. It is important not to take the old existentialist view, and perceive the risk of turmoil and dispute to be higher than it is, due to bitter personal experiences, but it would be equally negligent to ignore the dreadful history of disputes, credit control and cash flow difficulties, insolvencies and corruption that the construction and engineering industries have become so well known for, and the fact is that many of these issues arise as a result of poorly drafted or non-existent contractual agreements.
Always expect the unexpected in construction; who is going to pay when that wall collapses because the raking shores were improperly designed? Who is going to pay when the water table is a metre higher than we realised? Who is going to pay when that drill hits a power cable that we didn’t know was there? Or, ‘that wasn’t a provisional sum, it was an agreed lump sum’, or ‘no, we agreed woodchip, not gold leaf’. The difficulty with oral agreements, or those bound up by a series of random correspondences such as emails are that they lack clarity and key details are often missed. What is the agreed pricing mechanism? Who is going to carry design liability? Who will obtain planning permission? What are the dates of possession? What are the terms and quantum of delay damages? What is the expected programme? What is the agreed rectification period? The true list of items that could be agreed is almost endless, but they are all essential points for agreement. The introduction of the Local Democracy, Economic Development and Construction Act 2009 in 2011 brought about the right to statutory adjudication for the first time on oral contracts, and this further adds risk. The other party could refer a dispute to adjudication, and proceed ex-parte if necessary (i.e. without your co-operation or participation), and the responding party could be left with no evidence to fight the claim, facing an unfavourable legally binding decision (which has potentially been reached within the bounds of the ‘rough justice’ for which adjudication is famed for) and could become lumbered with the cost of resolving a disputed formation as a preliminary matter to the adjudication and be left as the old proverb states ‘up creek without a paddle’. A further point that is often missed is that the Construction (Design and Management) Regulations 2007 require all appointees on a notifiable project to be appointed in writing.
So how do parties get a contract written up? Both residential and commercial clients should involve a professional project manager, surveyor or architect well versed in contract administration to advise them on the most appropriate document and it is so important to remember to execute the document properly; so many projects begin without the documents in place due to time constraints, or documents are not fully executed or issued until half way through the project, or even afterwards. All too frequently issues such as obtaining collateral warranties are still being argued over at final account stage. It is important the would-be construction employers and their professionals exercise all due diligence in executing written contract documents in the proper manner, otherwise the consequences could be disastrous.