Category Archives: Construction Contracts

Should I insist on a Formal Building Contract for a small project?

I often get asked what size does a project need to be before the use of a formal contract. And my advice particularly, for working with private clients, is basically any size needs a formal contract if you want to avoid the headaches. Likewise when friends have having building work done I give them exactly the same advice that they should not employ a builder without any standard form of contract in place.

I am amazed at the number of “professional” contractors and builders who undertake works of many tens of thousands of pounds with private clients and don’t insist on a signed contract. At the end of the day they are putting their business at risk. It should go without saying that private clients, do not know or understand the construction industry and can act in a non-professional manner through ignorance, and quite often this is by withholding payment. As a industry professional i.e. a builder or contractor,  you should lead the contractual arrangements and ensure that the paperwork is correct to cover both parties interests.

The last thing a contractor or a client needs when they have a problem with the project is first to have to determine the contractual arrangements and therefore what have to take to remedy the problem. Just establishing what terms and conditions, if any, apply can be more than the cost of the dispute in the first instance and is therefore not helpful to either party. To make matters worse the adjudicator, magistrate etc is likely to take the opinion that they industry expert is the one who should have ensured that we contractual arrangements were in order and that therefore the cost of both parties in determining same on likely to be borne by the contractor. Again making it very difficult to deal with the most popular type of dispute in this area which is payment or more accurately non-payment.

In the UK any building work that is completed without formal contract conditions but it is evidenced in writing in some manner, (and this can be e-mail faxes with a simple offer and acceptance letter i.e. please complete the work as your quotation) will then come under the Housing Grants, Construction and Regeneration Act 1996 which states the minimum conditions for the contract in a document called The Scheme. This was a great move by the government and one of the provisions in “The Scheme” is the right to go to adjudication in the case of a dispute. So all is not lost providing the agreement is in writing in some form.

Better still the Joint Contracts Tribunal or JCT the short produce a wide range of contracts for all sizes of projects for a relatively small sum of money of £12.95 plus VAT, the JCT Minor Works Contract is likely to be the one required. All you have to do is fill in the blanks. These contracts, while some might consider them not perfect, are drawn up by the industry professionals with the intention of being impartial. The advantage of using a contract is that should a dispute occur then at the least there is a starting point as to who should be doing what and what each parties rights are. The contract incorporates all the requirements of The Scheme including adjudication. Do not be tempted to think you know better and start altering the contract through, just fill in the blanks!

Adjudication is designed to be a cheap and quick fix and anyone can apply for the appointment of adjudicator and run the process themselves. However this may not be advisable because although these are relatively informal procedures, the adjudicator is bound to apply the law and in this case contract law and the last thing you want to do is lose your case on a technicality which could have been avoided with professional assistance.

So to conclude if you are a individual wishing to carry out a small extension or alteration to your house or office or if you are a small contractor undertaking such work then always insist on a signed contract or at the very least do not allow the work to commence until both parties have signed bits of paper agreeing for the work to be carried out. And remember it does not matter how friendly everyone is at the beginning things can do and unfortunately frequently, do go wrong, so the professional buy two copies of the JCT Minor Works Contract, both parties sign and both parties keep a copy. Don’t be embarrassed or intimidated into thinking that you are in some way not trusting the other party by insisting on a contract. Its well worth it.

Letters of Intent

A Letter of Intent can take many forms but all attempt to express an intention to enter into a contract and a request for work to commence before the contract is concluded. It may be the letter states there is an intention to enter into a contract but without obligation or liability at the time of issue. Therefore anything done on the strength of such wording by a contractor may well be at its risk or the letter may perhaps require some work to be commenced (perhaps to meet a tight programme) e.g. design, placing orders, mobilisation etc. This type of letter can create obligations in that the contractor may recover monies for work carried out even of the contract is not finalised or even if the works do not proceed.

Care must therefore be exercised in the use of letters of intent – it is always far better to finalise the contract details including the governing terms and conditions if at all possible. Frequently such letters are poorly drafted and ambiguous resulting in the parties being uncertain whether or not there is a binding contract. On the other hand it may be that a binding contract has been created when that was not the intention at the time of issue.

Of course in the real world sometimes the overriding necessity is to ‘get the job started’ but even where the use of a letter of intent is unavoidable strenuous efforts should be made to complete the contractual niceties as soon as possible after a start on site. One important reason for this is to ensure both parties know the terms on which they working together. As a Judge said recently in a case:

“It is part of the folklore of the construction industry that there exists a mythical beast ‘the letter of intent’, the effect of which is that it entitles a contractor to payment but does not expose him to any risk, because it imposes no contractual obligations on him.”

Such ‘beasts’ are rare. The case in question involved the construction of a supermarket where the employer (the supermarket) surprisingly did not send out the contract documents which included the supermarket’s own terms and conditions – despite being requested to by the design and build contractor. For this reason the Judge had no difficulty deciding that the supermarket terms and conditions did not apply.

However on the facts of the case he did find that a simple contract had been concluded between the parties and that it imposed obligations on both parties. This was not the outcome either parry sought but the result was that the contractor did have various contractual obligations to the supermarket, most notably those implied in respect of workmanship.

The following is a judicial direction or suggestion as to when it may be proper to use a letter of intent.

(i)         the scope of work and the price are either agreed or there is a clear                          mechanism in place for such work and price to be agreed;

(ii)         the contract terms are (or are likely to be) agreed;

(iii)         the start and the finish dates and the contract programme are generally       agreed;

(iv)         there are good reasons to start work in advance of the contract        documents.

Finally be warned that where work starts on the basis of a letter of intent the parties can ‘drift’ unknowingly into a concluded contract by the very fact that all the elements for the existence of a contract are finalised.

If in doubt contact us for advice.